TNAG-0379-FCO40-425-Sterling-assets-and-balance-of-payments-of-Hong-Kong-1973 — Page 157

CONFIDENTIAL

Ja

Mr Marshall

HONG KONG STERLING AGREEMENT

I have seen Hong Kong telno.728 of 6 July. In the past, we have always taken a firm line on Hong Kong's MSP, largely on the grounds that any formal change would be very difficult for m.f.n. reasons. But this was, of course, against the background of an assumption that we would be seeking to renegotiate the Agreements on an m.f.n. basis. This assumption is now in question. In the event that a decision is taken to allow the Agreements to lapse, it will (in Hong Kong eyes) look very unhelpful (to say the least) if we stick to the letter of the law now. Thus it might seem desirable to stall on Hong Kong's request until such time as a decision is reached; and indeed it might seem convenient to the FCO to use this request as a lever for expediting a decision. Against this, we have to weigh what seems to me the strong likelihood that any stalling on this request (on top of our long stall on the question of the future of the Agreements) will cause an irritation in Hong Kong quite out of proportion to this particular issue. And I do not think that it will be

in our interests to stimulate such irritation.

2

On balance, my judgment is that we should accede graciously, and perhaps more important, quickly, to Hong Kong's request that she should be able to breach MSP if this proves unavoidable. (of course, Hong Kong's presentation of its case betrays all the usual sloppiness. A breach of MSP is not unavoidable; it is politically convenient given the Hong Kong Government's relations with "banking circles" and EXCO. This is part of a bigger story on which I have minuted separately.) But, as I see it, there is one inevitable consequence of acceding to this request, which we shall have to make clear. It is that in the event of such a breach, the guarantee obligations of the Agreement will lapse. Subject to legal opinion, I don't think that there would under the terms of the Agreement be any basis for the payment of compensation if such became due. Possibly the Hong Kong Government have thought this one out for themselves and concluded (as they well might) that the chances of implementation under the terms of the existing Agreement over the next couple of months are slight. Regrettably, I think it more likely that this consequence will not have crossed their minds; and that we may therefore hear strident cries of "foul". But I fear that this would be just another illustration of how difficult it is to help Hong Kong.

6 July 1973

cc Mr Stuart (HK&IOD)

Miss Pestell, (FRD)

Mr Franklin (Economists)

CONFIDENTIAL

D G Holland