TNAG-0377-FCO40-423-Defence-and-Oversea-Policy-Committee-review-of-UK-relations--1973 — Page 38

ANNEX

STERLING

1.

Many people in Hong Kong believe that the UK

manipulates Hong Kong's reserves to bolster sterling.

This is of course untrue. It is however true that the

floating of sterling resulted in loss to the Hong Kong

Government. This was largely because they chose to

guarantee their banks' holdings of sterling in terms

of Hong Kong dollars, while our guarantee to Hong Kong

was expressed in US dollars. The Hong Kong Government

and banks together had some £800 million protected by our sterling agreement which expired in September 1973.

The banks then withdrew. The Hong Kong Government

have about £300 million left of their own, and have

now accepted [are likely to accept the unilateral

guarantee offered by HMG for an interim period up to March 1974. Negotiations for this have been prolonged, because an adjustment of the Minimum Sterling

Proportion was needed to reflect the omission of the

banks' sterling. Many people in Hong Kong have

attributed this delay to further attempts to coerce

Hong Kong.

2.

The Hong Kong Government would like to be able

to stress the modifications made to suit Hong Kong's

needs. But the Treasury have to bear in mind the

reactions of other sterling holders.

The middle way

now agreed with the Hong Kong Government is to stress

that the new arrangement satisfies both sides within

the context of our unilateral offer. For the longer

term future after March 1974, we can say that disc

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