TNAG-0379-FCO40-425-Sterling-assets-and-balance-of-payments-of-Hong-Kong-1973 — Page 268

CONFIDENTIAL

v. Third sentence to read: "It is recognised,

of course, that exchange risks are not eliminated by a transfer of foreign exchange holdings from the banks to the Government. But if the banks are unwilling to carry such risks, and have to be covered by some form of Hong Kong Government guarantee, then in effect it is the Hong Kong Government which assumes the exchange risk on foreign exchange holdings. It is, however, normal practice for Governments to hold directly the bulk of a country's reserves."

vi. Delete paragraph 4.

vii. In paragraph 7, delete the sentences between

"rediscounted with a Central Authority" and "The organisation of an aftermarket"

viii. Add new paragraph at end:

"8. It is recognised that there are technical problems yet to be examined. Moreover, it seems right that issues of local paper should be on a modest scale to begin with, so that the adjustment from long-established practices can be a gradual one. But it seems in the interests both of the banks and of the Hong Kong Government that steps should be taken

in Hong Kong to evolve the banking system away from dependence on guarantee arrangements; and the sooner this process is initiated, the smoother this transition can be."

30 January 1973

cc Mr Marshall (FRD)

Mr Stuart (HK&IOD) ✓

CONFIDENTIAL

-3.

DAHIL

DG Holland