TNAG-0337-FCO40-373-Visit-of-the-Chancellor-of-the-Duchy-of-Lancaster--Sir-Geoff-1972 — Page 23

CONFIDENTIAL

provided by the UK's Sterling Agreement, the Hongkong Government

introduced its present guarantee scheme in February 1969. Under

this scheme, all banks are offered a guarantee against a change in

the parity of the Hongkong dollar in terms of sterling. The offer

applied to 100% of the eligible sterling assets of banks choosing

to participate. To implement this scheme the Hongkong Government

made use of the Exchange Fund, in effect to purchase for Hongkong

dollar obligations sterling accruing to the commercial banks, and

then redeposited the sterling with the banks, which retained the

use of it.

Since we

7. The operation of a guarantee scheme for commercial banks'

sterling has been a continuing source of difficulty.

cannot meet Hongkong's request made during the recent discussions

on sterling for a guarantee of her sterling in terms of the

Hongkong dollar, we have suggested that the problem could be

substantially eased by the Colonial Government selling marketable

Hongkong dollar paper to the banks against sterling.

Financial Policy & Aid Department

September 1972