TNAG-0379-FCO40-425-Sterling-assets-and-balance-of-payments-of-Hong-Kong-1973 — Page 251

TWAR

CONFIDENTIAL

Reference

Mr Stuart (Hong Kong & Indian Ocean Dept K 246)

US DOLLAR DEVALUATION AND HONG KONG

In reply to your minute of 16 February, I would like to tackle the problem in two sections.

STERLING AGREEMENT

1.

In return for countries agreeing to keep a certain proportion of their reserves in Sterling (their 'Minimum Sterling Proportion')

the Sterling Agreements give a guarantee in USA terms to countries' holdings of official Sterling. In these agreements, the UK accepted the obligation to pay compensation to these countries to offset a reduction in their value if the middle sterling/US dollar rate fell and remained throughout a period of 30 consecutive days below the trigger point of $2.3760 (ie 1% below $2.40 which was the parity at the time when the agreements were concluded.) In the case of Hong Kong, the British Government guarantees, without charge, the US dollar value of 90% of the eligible sterling held by the Hong Kong Government, including 90% of the eligible sterling owned by the banks and brought into official hands through the Exchange Fund Guarantee Scheme.

2. Sterling was floated on 23 June 1972 and the first implementa- tion payment at $2.3506 (the middle Sterling/US dollar rate in London at the close of business on the last day of the 30 day period) fell due on 23 November. Subsequent movements in the rate did not justify further implementation payments. Because Sterling has now risen above $240 as a result of the dollar devaluation, further payments by the UK are unlikely. However, this will not have an adverse effect on Hong Kong's official reserves:

on the contrary, each pound held in these reserves will have risen in US dollar terms to the extent of Sterling's rise from its previous level. The value of Sterling reserves in relation to the Hong Kong dollar isa separate point which I discuss below. As to your query regarding "the total of payments that would have been made by us to Hong Kong if the US dollar had not devalued", I cannot give you an answer. Such payments would have depended on how Sterling floated if the US dollar had not been devalued and this of course is impossible to determine. Nevertheless, it is reason- able to suppose that, if the US dollar had not been devalued, there would have been a general upward movement of exchange rates in Europe, which would have made unlikely any further implementation payments.

3. After the first implementation discussions were set in train to establish the procedure for settlement and implementation during a floating period and one of the basic principles we sought agree- ment on was reverse payments, if Sterling's rate should move up again. Some countries including Hong Kong agreed in principle to this but no formal exchange of letters was carried out. For this reason, no refund of payments above $2.3506 is likely to be sought, although so far only Australia has been informed of this. This whole subject is currently under discussion within and between the Treasury, Bank of England and FCO, and no final decision has yet been reached.

THE HONG KONG

CONFIDENTIAL

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