TNAG-0308-FCO40-344-Contributions-of-Hong-Kong-for-costs-of-maintaining-military-1971 — Page 120

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be given two more points to make in discussion - first, prior to the negotiation of the Sterling Agreements of September 1968 with Hong Kong as with other Sterling Area countries, the UK had already recognised the problem caused by devaluation to Hong Kong and had made a special agreement with Hong Kong to provide a partial guarantee against a later devaluation. Secondly, whereas in November 1968 (shortly after the Sterling Agreement was signed) Hong Kong's sterling reserves stood at £358m (of which £322m was guaranteed) in January 1971 they stood at £554m of which £498m was guaranteed). Is this entirely irrelevant in assessing Hong Kong's ability to pay a defence contribution?

Hong Kong Budget Surplus

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I am advised that on 24 February 1971 (Financial Times report of the next day) Sir John Cowperthwaite estimated this year's budget surplus at £34.7m but said that the final figure might be £37.6m.

Changes in the Colony's Economic Situation

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14 You asked me to consider the last sentence of paragraph 7 of the draft. We now feel that it should be deleted entirely. For it to appear in any form, even if toned down, in the formal reply would create too great a hostage to fortune at this stage; the Unofficials would surely ask for this then to be carried into an actual agreement. This might be the cause of much friction and argument in the later stages of negotiation - eg on how to define a 'seriously adverse change". Any such clause could turn out to be highly restrictive on Furthermore if Hong Kong wished to have this in we would be entitled to say that the contribution should go up if Hong Kong's economic situation improved even more yet HMG is suggesting that for five years (subject to two defined qualifications) we are not going to ask for more: there is a long-term bargain here.

us.

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Thus we consider that the Governor should not give any indication at all that HMG would look favourably upon such a condition;

if you were to advocate this, we should need to report back to Treasury Ministers at this stage. But, assuming this is not in issue, we would not intend to submit the reply and the accompanying instructions to our Ministers since the intention is only to reiterate Ministerially agreed policy.

16 We shall be glad to see, and to discuss if necessary, the two new drafts as soon as they are ready. Thorp and to Smith.

I am copying this letter to

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Joves senceres.

Jerack

T J BRACK

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