TNAG-0329-FCO40-365-Briefs-for-UK-officials--visits-to-Hong-Kong-1972 — Page 34

Thursday, March 16, 1972

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He recalled that an agreement was reached in June 1968 between

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the United Kingdom and Hong Kong whereby the U.K. was to issue Hong Kong Dollar bonds to protect the Hong Kong dollar value of the Colony's sterling funds in the United Kingdom.

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"This arrangement was, however, substituted in September 1968

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by a Sterling guarantee which gave protection to the official Sterling assets deposited by all Commonwealth countries in the United Kingdom that the value of Sterling would not be less than US$2.40," he added.

Mr. Lee pointed out that the advantages of putting a part of

Hong Kong's reserves in London was obvious because, besides that guarantee i

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that

attraction, London had a large money market capable of offering good

returns and sound investment opportunities for them.

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The yield from the Colony's United Kingdom investments was

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higher than that from Hong Kong, he added.

"Notwithstanding these advantages, however, we must always

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consider how safe are our reserves against future monetary crisis affecting

Sterling.

"I think the time has now come when we should re-appraise our situation seriously," he said.

Mr. Lee pointed out that since the re-alignment of all major currencies in the world in December last year, the parity of Sterling had

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been raised from US$2.40 to US$2.6057..

"This almost completely changes the character of the Sterling guarantee for it is only below this rate will Hong Kong be qualified for protection and therefore, for all intents and purposes, the United Kingdom Sterling guarantee now means very little to Hong Kong," he said.

He went