TNAG-0126-FCO40-162-Sterling-balances-1970 — Page 39

Through this instrument the Hong Kong Government could

buy Sterling from the commercial banks and give them in

return Hong Kong dollar assets, the Sterling then being

held by the Government.

4.

Unfortunately no actual limit was set on the amount

of Sterling which might be bought from the commercial

banks. But it is nevertheless important to maintain one

Otherwise there would be a danger that the Sterling

holdings of the commercial banks might be swollen by

deposits made freely with them by residents of other

OSA countries including the UK. The Hong Kong Governmen

might then take in these increased deposits under the

ранно cover of the guarantee thus protecting private résidents

against a further Sterling devaluation.

5. The only control which we can exercise over the

Hong Kong Government is through the statutory limit on

their powers to borrow for the Exchange Fund.

bor

The

Exchange Fund ordinance

These

are fixed by Hong Kong legislation which under Royal

A

A

Instructions cannot be amended without HMG's approval.

6.

After the conclusion of the Sterling Agreement

Hong Kong asked for permission to increase the borrowing

limits of the Exchange Fund. This was agreed and after

the former cailure of

a further request the limit was raised to, HK$3,000 mil-

lion (about £200 million). At the same time Hong Kong alco

asked for permission to make further amendments by

resolution of legislative council to avoid the delays

involved in the normal legislative procedures. It is an unlucky to be

NOTHING TO BE WRITTEN IN THIS MARGIN

hut

within by

No dicision has been reached in the request

This

not beer agreed for the two reasons that such a loss

of control would probably be constitutionally unaccep-

table and also because in the absence of any other form

of control the Treasury would be unable to limit the

extent of HMG's liability under the Sterling guarantees.

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