TNAG-0379-FCO40-425-Sterling-assets-and-balance-of-payments-of-Hong-Kong-1973 — Page 171

UNT IDENTIAL

7

and since the return of the funds of the former by the issuers was

usually greatly delayed the result was that normally all the banks,

apart from the Hongkong Bank, were extrenely short of liquid funds.

The Hongkong Bank was prepared to lend to the other banks but on very

punitive terms, usually for a minimum of 14 days at rates well above

the normal inter-bank rate. So far then it is clear that powers are

required, inter alia, to regulate the level of bank and finance house

credit, and that money market paper together with rational lender of

last resort facilities are also needed. During a recent visit ten

banks were asked informally whether they would favour in principle the

issue of local paper together with proper, re-discounting facilities: all except one (i.e. the Hongkong Bank) were wholeheartedly in favour.

The question of the desirability of the Hong Kong Government

issuing local paper in exchange for the banks' excess holdings of

foreign exchange was first raised with Hong Kong during the July 1972

talks in the context of the Sterling Agreement. The basis of the

proposal was essentially twofold. First, without adequate opportunity

to employ funds locally the banks were forced to hold a disproportionate amount of assets abroad and therefore had grounds for complaint.

Hence the moral obligation on the Hong Kong Government to provide a

guarantee to the banks in terms of Hong Kong dollars. Second, after

taking account of the banks' legitimate needs, the balance of such

large foreign exchange reserves at present held by the banks should be

in official hands as is normal in other sophisticated economies. At

the end of July 1972 the Governor of Hong Kong was officially

requested to consider the question.

This approach was followed up in

November 1972 when the Financial Secretary was in London and repeated

later in letters both to the Financial Secretary and the Governor.

The latter replied to Sir Denis Greenhill in December 1972 questioning