TNAG-0379-FCO40-425-Sterling-assets-and-balance-of-payments-of-Hong-Kong-1973 — Page 264

Mr Holland

1.

11

Reference

PA & 2

file

21.11

HONG KONG: BANK OF ENGLAND DRAFT MEMORANDUM

You kindly sent me a copy of your minute of

30 January. I fully agree that the object of the exercise is to get the Hong Kong Government to appreciate that its own choice may be between local paper and guarantee arrangements. However, I wonder whether your suggested redraft of paragraph 2 will produce the right reaction. We have to convince the Hong Kong Government that it is in its own interest to introduce paper, not just the interest of the Banks. From the Government's point of view it is not the guarantee to the Banks that has caused the recent trouble but the gap between the guarantee and the sterling agreement. Your paragraph 2 might lead the Hong Kong Government to conclude that paper would solve the Banks' problems, but would do nothing to solve their own. The Banks matter to the Hong Kong Government. But their own reserves matter more.

2. I wonder, diffidently, whether we should not insert something to underline that in the absence of a sterling or other arrangement, a guarantee to the Banks would be likely to be more expensive for the Hong Kong Government than would an issue of paper. Presumably if they had a guarantee the Banks would have no incentive to minimise foreign exchange losses by intelligent deployment of their reserves. But if the Government took this money into its own reserves in exchange for paper it could so manage them as to minimise losses or maximise gains.

3. Would this point perhaps be met by ending the last sentence at the bottom of your first page at " could be complex" and then inserting:-

"The Banks would have no incentive to minimise exchange losses, and such guarantees might well therefore be more costly to the Hong Kong Government than if the reserves were under their direct control. Moreover, for non-sterling currencies

...

H

1 February 1973

Copy to:

Mr Keeble

Mr Lewty FRD

ACSL

A C Stuart

Hong Kong & Indian Ocean Department

DD 897152 154596 500M 1/72 GM 1541 2

CONFIDENTIAL