TNAG-0379-FCO40-425-Sterling-assets-and-balance-of-payments-of-Hong-Kong-1973 — Page 16

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appears successful in bouncing the UK into offering a favourable guarantee, this will be a signal to the others that we are bluffing over the sterling agreements and are not really prepared to face an outflow from any of the major holders.

However, we have considered with the Bank of England what form a special offer to Hong Kong might take if Ministers decide that one should be made. The intention would be to tie the offer to a new guarantee to conditions that the Hong Kong Government would

We could offer start establishing a more sensible monetary regime.

(a) to guarantee the Hong Kong sterling at a current rate (nothing less would be attractive to them)

(b) we would make a charge for this guarantee which we would expect the Hong Kong Government to pass on to the banks

(c) the Hong Kong Government would undertake to begin issuing local paper or in the meantime to establish interest- bearing accounts for loans to the Government, and to become a londer of last resort.

We would argue that the reform of the monetary authority is necessary in any case (although the Hong Kong Government dispute this) and that it is in their own interests to centralise reserves since if there is a consolidation of balances under some reformed world monetary system, probably only official balances will be eligible.

There can be no certainty that such an offer would prove acceptable

It would or would persuade commercial banks to stay in sterling. probably be only a preliminary to a long drawn out negotiation. My own view is that to make a special offer now would depart from our general policy objectives and would weaken our negotiating position severely with the other holders particularly over the type of guarantee to be offered.

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