TNAG-0126-FCO40-162-Sterling-balances-1970 — Page 40

Dd. 32855 Ed (4200)

NOTHING TO BE WRITTEN IN THIS MARGIN

However, if absolutely watertight financial

safeguards can be devised between the Treasury

and Hong Kong to ensure that the Sterling

acquired from the banks for Hong Kong Government

reserves comes properly within the scope of the

The

guarantee there would remain only e constitutional

unight

problem and this may not be insuperable.

7. At present the safeguards used by the Hong

Kong Government to prevent the intake of Sterling

into the reserves which originates outside Hong

Kong are not entirely satisfactory. One diffi-

culty arises from the fact that the Hong Kong

Government has offered the protection of the

guarantee not only to the three authorised banks

but to others including the Communist banks

(although the present indications are that the

latter will not take the offer up, being sus-

picious of its purpose): unfortunately during

the Sterling negotiations no clear distinction

was drawn between the commercial banks. Another

problem is that the machinery set up by the Hong

Kong Government to ensure that the commercial

banks report the balances of official Sterling

which they hold under the arrangements is inade-

quate. Some of the banks are not reporting

regularly and the Treasury take the view that

not only should the banks report to the Government

in Hong Kong but that their London branches should

also report to the Bank of England.

8.

In the mean time the Hong Kong Government

has borrowed for the Exchange Fund HK$2,992 million (as at 16 May) against the statutory

limit of HK$3,000 million.

It seems that the

3 -