Mr Keeble
CONFIDENTIAL
MR. STUART
See minute
PIA
Das
Lifex,
HONG KONG: BANK OF ENGLAND DRAFT MEMORANDUM
I think that this draft memorandum provides a very useful basis for discussion. But I have a rather large number of possible changes to suggest. To the extent that they are acceptable, perhaps they could be incorporated, together with the changes which you and the other recipients of this minute wish to see made into a counter-draft which we could offer to the Treasury and the Bank. We shall also, at some stage, have to draft a coverer from the PUS.
1. My first suggestion is designed to overcome
what seems to me to be a jump in the argument at the beginning of paragraph 2 of the Bank's draft. For the banks will only face the choice postulated if the Hong Kong Government decline to give them foreign exchange guarantees related to the Hong Kong Dollar. The main object of this exercise is I think to get the Hong Kong Government to appreciate that its choice may be between issues of local paper and a continuation of guarantee arrangements. Hence I suggest:-
"12.
For so long as the Hong Kong banks have no option but to hold a sizable proportion of their assets in foreign exchange, the Hong Kong Government is likely to be under heavy pressure to offer foreign exchange guarantees to the banks. In large measure, this is legitimate pressure; for in the absence of guarantees linked to the Hong Kong Dollar the banks are forced to take risks which are not normally faced by commercial banks. The banks have made very clear the distaste with which they regard the possibility of large uncovered sterling positions after September 1973. But in the future, all exchange rates are quite likely to move more frequently than in the past, so that risks will attach to any foreign exchange holdings. A continuing guarantee (or maybe set of guarantees covering currencies other than sterling) by the Hong Kong Government to the banks could be complex, and
/perhaps
CONFIDENTIAL
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