On 6 July, 1972 the Hong Kong Government told the banks that whereas their 6 July sterling positions would remain covered, further accruals would not be accepted for cover.
that This meant exchange control having by then been ended -
the banks could place their excess liquidity in sterling or in
non-sterling assets.
9. When cover under the Sterling Agreements ends, there will be no necessity for the Hong Kong Government to renew or renegotiate the terms of the Exchange Fund Guarantee Scheme,
They although they may well be asked by the banks to do so. will therefore no longer be placed in the position they were in under the Scheme of maintaining the HK dollar value of the commercial banks sterling, whilst themselves receiving only a
US dollar value guarantee.
10. Alternatively, the Government might come under pressure
There 18 from the banks to establish a local money market.
no substantial reason why this should not be done although the Hong Kong Government have resisted the suggestion, and HMG have been arguing strongly in favour of this over the last year (Mr Keeble's letter of 16 February to the Governor). Hong Kong is a sophisticated financial centre and her institutions should
In the absence of such a keep pace with her financial status.
market and with no form of guarantee, the banks would be inclined to demand that they should be free to dispose of their
external assets to protect themselves as best they can.
This
would have serious implications for the Hong Kong authorities
in that they do not at present possess formal exchange control
powers.
/HONG
4 SECRET
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