CONFIDENTIAL
effectively revaluing against the US dollar by the same amount as
sterling.
3. When sterling floated on 23 June this year, Hongkong again
had the choice of following the pound or remaining with the US
dollar. After initially keeping with sterling, the Governor, after
seeking our agreement, pegged the Hongkong dollar on the US dollar
on 6 July. The Hongkong Government indicated its intention to refix
on the pound as soon as the latter ceased to float.
4.
Hongkong, as a colonial territory, has traditionally held its
official reserves in sterling, and most of the foreign assets of the
banks other than working balances, as well as sizeable private
balances, have also been kept in sterling. The 1967 devaluation
left a legacy of resentment against HMG: the Hongkong loss was
borne by the Exchange Fund, the currency cover account, which having
built up a healthy surplus was able to absorb its own losses and
compensate the banks for their net losses. The Hongkong Government's
obligation to compensate their commercial banks derived from the fact
that Hongkong has no central monetary institution, and thus relies
upon the main commercial banks to perform some of the functions of
reserves management and exchange market intervention normally carried
out by a Central Bank.
THE STERLING AGREEMENT
5. HMG's Sterling Agreement with Hongkong is itself comparatively
straight-forward, its only unusual feature being the provision that
official sterling balances deposited with banks in Hongkong could be
included in total official reserves and in official sterling balances. 6.
In order to bring the sterling holdings of commercial banks on to
official account, and thus within the scope of the guarantee
/provided
2. CONFIDENTIAL
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