TNAG-0379-FCO40-425-Sterling-assets-and-balance-of-payments-of-Hong-Kong-1973 — Page 275

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To summarise, the fact that the banks continue in Hong Kong

a practice long outmoded elsewhere is largely because there are no

suitable local currency assets for them to hold as cover for their

Hong Kong dollar deposits. For this purpose they require short-term

interest earning paper which is marketable in case of need and can

be rediscounted with a Central Authority. The guarantee agreement

between the Government and the banks is in effect a substitute for

proper local assets and a continuation of the arrangement - already

proved costly to Government - would be inconsistent with the changes

which are taking place in Hong Kong's money and banking system,

Neither can it be assumed that II.M.G.'s guarantee arrangements would

continuo indefinitely. We look foward to developments in the

International Monetary System which would subsume sterling's role as

a reserve currency. If, therefore, steps can be taken in Hong Kong

to avolve the banking system away from dependence on guarantee

arrangements, the sooner they begin the better. Pressure from the

banks for a renewal of their arrangement with Government after

September 1973 should be relieved if suitable local assets were made

available. The organisation of an aftermarket and rediscount.

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facilities are matters which can be worked out between the Government

and the banks, As regards the technical assistance referred to in Mr. Boll's letter to Mr. Haddon-Cave of 1st December 1972, arrangements have already been agroed with the Hong Kong Government for a member of the Bank of England's staff to be seconded to Hong Kong to assist in

the administration of monetary matters,

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