TNAG-0126-FCO40-162-Sterling-balances-1970 — Page 54

NOTHING TO BE WRITTEN IN THIS MARGIN

W(8)L 51-7406

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had to be made because of the special

circumstances of certain countries).

We do

4. There is one important respect

in which the

stelling agreement with Along Kong pliffers from the generality:

foudd as thing with

Provided onder that there centring to hold them

in starting

not accept Hong Kong's case for a lower m.s.p.,

which has not been pressed since last

September. Hong Kong has no central bank.

The Colonial Government therefore relies on

the three main commercial banks to issue bank

notes and to buy and sell sterling on request

at official rates. Exchange control also

netand

obliges these note-issuing and the other

authorised banks to hold most of their reserves,

in sterling. In these circumstances, a good

part of the commercial banks' balances

represent what would elsewhere be regarded as

official reserves. For this reason we agreed

to a special arrangement by which the Hong

Kong authorities could take in the sterling

held by the commercial banks and the spcial

feature redeposit the sterling with the

which mag

them invest Mosse banks in Hong Kong which could then freely

sooo of it (most countries could only count

dispose

in their official reserves sterling held direc-

tly in London).

This was to be achieved by

means of the Hong Kong Exchange Fund (which

provides the sterling backing for the

currency). This arrangement ensured that

although the commercial banks' sterling

attracted a guarantee, this was under arrange-

ments made between the banks and the Hong Kong

Government; the UK guarantees in Hong Kong as

* elsewhere only sterling held in official

reserves.

There is one important respect in

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/which