TNAG-0379-FCO40-425-Sterling-assets-and-balance-of-payments-of-Hong-Kong-1973 — Page 177

↑

}

SECRET

POSSIBLE HONG KONG GOVERNMENT REACTION TO THE ENDING OF THE

STERLING AGREEMENTS

1.

In particular this means that

This paper presupposes that if the Sterling Agreements are

not renewed Hong Kong will be treated no less favourably than

other holders of sterling.

Hong Kong must not be discriminated against over the

diversification of her sterling balances. In signing a

Sterling Agreement with Hong Kong, HMG have put her on

the same level as the independent holders and it would be

politically very damaging were restrictions to be placed on

Hong Kong movements out of sterling when the Agreement ends

(unless some quid pro quo were negotiated). Were this to

happen, we could expect an extremely bitter reaction from

Hong Kong and our position would be very difficult to justify.

2. It seems much more likely, however, that the Treasury,

whilst not welcoming full diversification, would not prevent

it. Before the Sterling Agreements were signed,

Hong Kong, as one of the Scheduled Territories, was prevented

from removing her reserves except with UK Exchange Control

permission. The descheduling of the Overseas Sterling Area

(except the Republic of Ireland and, later, Gibraltar) in June

1972 has removed this control. In any case, a rapid run-down

of her sterling holdings would be against Hong Kong's own best

interests as the releasing of large quantities of sterling

would reduce their value. Furthermore, there is in practice

nowhere apart from the US dollar market where her large assets

Interest rates in London are appreciably higher than

can go.

SECRET

/in