TNAG-0379-FCO40-425-Sterling-assets-and-balance-of-payments-of-Hong-Kong-1973 — Page 272

SECRET

1.

Hong Kongi

the Governor's letter of 18th December 1972 on the issue of Government paper to the banks

Suggestod lines of a memorandum to be enclosed with Sir Denis Groonhill's reply

The banks in Hong Kong are in a difficult position in that,

for historical reasons, whilst the bulk of their liabilities in

expressed in Hong Kong dollars a sizeablo part of their assets is held

in foreign exchange, predominantly in sterling, In normal

circumstances with such abnormally large holdings they would be

subject to an exchange risk in the event of a change of the

international value of sterling.

This exchange risk, however, 18

covered at present by the Hong Kong Government by the arrangements

entored into with the banks, The Hong Kong Government is able to

cover part of this exchange risk from external sources by reason of the

guarantee provided by the Sterling Agreement which covers the bulk of

officially held sterling.

2.

Г

At some stage the Hong Kong banks are likely to be faced with

the choice of having large uncovered foreign exchange positions, both

in sterling and in other currencies, or of reducing their foreign

exchange holdings to levels sufficient only for their normal

requirements and covering the exchange risk on such reduced holdingo

in the normal way, The only mothod of reducing their foreign

exchange holdings would be by selling the amounts in excess of their

amounts

day-to-day requirements for obligations expressed in local currency,

If this were to occur then the banks' Hong Kong dollar liabilitioa

would be matched by assets in the same currency and their foreign

exchange "books" would be similarly balanced. The banks would then

be in the same position as their counterparts in other sophisticated

economies and likewise the Government - as is the case in all advanced

countries would take into the Colony's official reserves the foreign