TNAG-0379-FCO40-425-Sterling-assets-and-balance-of-payments-of-Hong-Kong-1973 — Page 267

ping.

CONFIDENTIAL

to

would probably be more too

The banks would have no incentive to minim qe exchang bossas, and buch g

perhaps unduly costly to the Hong Kong Government. For non-sterling currencies, the Hong Kong Government cannot look for cover for any guarantees it may feel it necessary to give to the banks;

and without

in any way prejudging the terms of any successor well it;

que rewitões be more costly to the Vers la cit

Sterling Agreements after September 1973, it cannot be assumed that HMG's guarantee will continue indefinitely. Indeed we look forward to developments in the International Monetary System which would subsume sterling's role as a reserve currency.

Copement tha reserves

it the under thew direct contio 1

3. Any guarantee arrangements (present and future) between the Hong Kong Government and the banks are essentially devices to eliminate or reduce the risks attaching to bank holdings of foreign exchange assets against liabilities in Hong Kong Dollars. The only alternative method of eliminating such risks would be to provide banks with the opportunity to reduce their foreign exchange holdings to levels sufficient only for their normal requirements: the exchange risk on such reduced holdings could be covered in the normal way. And the only way in which banks could substantially reduce their foreign exchange holdings would be by selling the amounts...

(Line 5

of paragraph 2 of Bank draft.)

ii. Last sentence of existing paragraph 2 to read:

......fundamentally an institutional problem which would be bound to give rise to difficulties whenever a change.

11

UMLAR

iii. It would I think be wise to omit specific references

to the personal letter from the Governor. Paragraph 3 could then begin: "It follows from what is said above.

iv. Second sentence of paragraph 3 to read: "There need be no question of compulsion." Whether or not the question of compulsion will arise at some stage depends on what the Hong Kong Government intends to do about exchange control; but I agree that we need not go into exchange control issues in this note.

/v.

CONFIDENTIAL

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