CONFIDENTIAL
22
Sir Arthur Snelling
Yesterday we discussed briefly on the telephone the reaction in Hong Kong to the import deposit scheme which we are introducing. I told you that the banks in Hong Kong were at this time highly liquid and in a strong position to finance the deposits which will now become payable on Hong Kong imports into this country. If the Hong Kong banke are by one means or another able to finance thene deposits, then the impact upon the Colony'a trade with the United Kingdom will not be too severe, Of course the cost of products imported into this country will be increased by the cost of the necessary finance, but on the face of it that will be all. On the other hand, if the benka were debarred by Exchange Control Regulations from overseas financing of deposits, the effect on the Colony's trade would be very severe indeed,
The value to Hong Kong of a year's export trade to the United Kingdom is at present £95 million, 1.0.. 15% of her total export trade.
2. Among the first questions therefore, which Hong Kong asked us when the new measures were announced was whether this form of finance would be permitted. The Hong Kong banks in London had been alarmed by a Treasury notice to the affect that under Exchange Control Regulations prior approval would be required before overseas remittances could be used to pay the import deposit charges. But after consultation with the Treasury, at working level, we were able to tell the Hong Kong Government office that overseas finance could be used for this purpose "for the time being". This is reassuring,
but on the other hen there az may not be the end of it.
indications that it
3.
How long Hong Kong, and presumably other exporting countries, will be permitted to minimise the effect of our measures on their trade by these means, must depend,we suppose, on the purpose those measures are designed to serve, Ir they have bon
enacted to suppress import demand in the United Kingdom they will presumably not avail if the flow of imports continus s unabated. On the other hand, if the credit restrictions are vigorously applied to the banks in this country, but oversees finence continues to flow into the Treasury to pay the deposit charges, the balence of payments all clearly show a short term benefit. There are signe that ve have not made up our sinds which of these two purposes we wish to achievo. For the time being, I suppose, they are not necessarily contradictory, at least to any great extent. But to take other exʊmples than Hong Kong we see in the press that the Irish Government has moved to counteract our import deposit scheme by announcing that their clearing banks would provide special credit linee to Irish exporters, the Government, where necessary, directly compensating the banks. Une must suppose that in tim, if this sort of measure ie duplicated in other exporting countries, the firet of the purposes to which I have referred above will be frustrated, necessitating a harder approach on the part of the Treasury than they are at present adopting.
CONFIDENTIAL
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