TNAG-0337-FCO40-373-Visit-of-the-Chancellor-of-the-Duchy-of-Lancaster--Sir-Geoff-1972 — Page 21

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CONFIDENTIAL

MR RIPPON'S TOUR OF ASIA AND AFRICA, AUTUMN 1972

BACKGROUND BRIEF: HONGKONG CURRENCY

1. Not surprisingly, in view of the difficulties set out below,

Hongkong has proved to be one of the few countries anxious to

press ahead with negotiating a modified and extended Sterling

Agreement with us. Given that most other Sterling Area countries

are less anxious for a rapid renegotiation, we may not be able

to meet Hongkong's wishes very far on this. We shall, however,

be discussing the matter, though probably not in great detail,

with the Governor in London during the week 4-8 September; and

Hongkong's Financial Secretary will be attending the Commonwealth

Finance Ministers' Meeting during the week beginning 18 September,

very soon after Mr Rippon's call there. The current background

however is as follows:-

CURRENCY

2. The Hongkong dollar is a non-metropolitan currency, historically

linked to sterling, although there is in fact no statutory link.

In November 1967, when sterling was devalued, the Hongkong

Government was allowed to decide the parity of the Hongkong dollar.

On the one hand, her banking and official reserves are almost all

held in sterling, so that a decision not to follow sterling in

devaluing or floating down would mean a loss in the value of these

reserves in terms of the Hongkong dollar; on the other hand,

devaluation would mean a rise in the cost of living because of the

heavy dependence of the colony on imports, particularly from China.

In the 1971 "Smithsonian" realignment, the Hongkong dollar main-

tained its link with sterling unchanged at the same parity, thus

/effectively

1. CONFIDENTIAL