TNAG-0126-FCO40-162-Sterling-balances-1970 — Page 51

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the exchange reserves of the commercial banks. The Fund's borrow- ing limit may thus soon be reached and Hong Kong has asked urgently to amend the limit to HK$3,500 million at least or preferably to HK$4,000 million. Because the normal legislative process might take too long the Governor said that he proposed to exceed the limit administratively. The Hong Kong authorities have commented

that an inability to take funds into the Exchange Fund would be damaging to confidence in sterling, while if it became known that

the UK were refusing to raise the limit this would also be damaging

politically.

10.

We have told Hong Kong that we are not prepared for the Exchange Fund limit to be exceeded administratively.

(Last November the Hong Kong authorities did in fact anticipate HMG's approval of the increase in the borrowing limit to HK$3,000 million and bought sterling from the commercial banks in excess of what was then their legal authority.) However we have emphasised that we will consider Hong Kong's request urgently. We are discussing proposals to limit the danger referred to in paragraph 5 above

with the Hong Kong authorities by telegram and it is probable

that Sir J. Cowperthwaite will come to London for discussions in the near future with the FCO and particularly the Treasury (who are in the lead in this matter).

11.

There the matter rests at present. Mr. Fogarty, Treasury

Representative in S.E. Asia, is due to pay Hong Kong a visit from 29 May to 6 June and will be there at the same time as the Minister.

He will no doubt be discussing this highly contentious question with the Hong Kong authorities if the Financial Secretary has not resolved it by a trip to London. It is suggested that you and the Minister

should avoid discussion of these very technical issues.

12. A further point. The Hong Kong commercial banks have recently

suspended dealing in the Hong Kong forward market. They have done this because they have not been able to maintain covered positions;

more people wished to sell than to buy sterling forward. The

problem was made greater by the fact that forward deals were done

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