TNAG-0379-FCO40-425-Sterling-assets-and-balance-of-payments-of-Hong-Kong-1973 — Page 245

presumably continue to be guided by Hong Kong's

interests in relation particularly to the balance

of import and export prices as well as by the

IMF rules.

3. On the Exchange Fund Guarantee Scheme, we

realise that the récent exchange rate variations

have increased the foreign exchange cost to you

of the guarantee. This is one of the results of

the decision to maintain the gold parity of the

Hong Kong dollar, which you will of course have

weighed in making your decision. This result

reinforces the arguments set out in the memo-

randum which accompanied Keeble's letter of

16 February on the desirability of issuing local

paper to the banks in exchange for their excess

foreign exchange holdings.

4. You also mention the possibility of

re-establishing the previous sterling link when

a new fixed parity for sterling is introduced.

Again you will want to examine this in the light

of your interests and of all that has happened

since sterling floated.

5. We accept that it might be easier for you

to take these decisions if the nature of the

arrangements to follow the expiry of the sterling

agreement were already known. But the position

is still as described in the third paragraph of

Keeble's letter to you of 16 February. We have

not forgotten your interests, We will let you

know as soon as there is any change.

032717 E.W.& S., Ltd. 164m 3/67.

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