TNAG-0379-FCO40-425-Sterling-assets-and-balance-of-payments-of-Hong-Kong-1973 — Page 278

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would be inappropriate to link them with the financing of the Kass Transit scheme. They would not be inflationary and lead to an un- stable currency as has been argued in the past, although this has not been recently pursued. Issues would be f:lly backed by foreign exchange reserves. Nor should this be seen as a major intrusion on the private sector, likely to lead to trouble with the Chinese:

it is simply the provision of Hong Kong Jovernment paper as an alternative to British Government paner in the banks' portfolios. The Jovernment's worry about not having the staff to run an issue of Government paper, and its disinclination to be involved with interest rate policy would also have to be put to rest. But the Government should welcome being in a better position vis a vie the private sector.

7. The generous terms of the existing Sterling Agreements were seen to be the major impediment to getting the Hong Kong Government to comply. The possibility that the sterling guarantee would not be renewed in particular in sterling held by the banks was therefore seen as an important lever in persuading the Hong Kong Government to take this step. 80 long as the Hong Kong Government was able to draw on a generous United Kingdom guarantee, and pass this on to the banks, it might still be reluctant to change the situation, even if this uarantee were in US rather than Hong Kong dollars. While it was recognised that the banks could not be expected to switch all their foreign assets into Hong Kong Government paper overnight, it was important to establish a basis from which to start and to provide Bome incentive for the banks to do so in stages.

8. The question was raised whether the switch into Hong Kong Govern- ment paper" might be inaugurated after April.as an alternative to the banks being permitted to switch a further £100 million, spread over 5 months, out of sterling into whatever they choose. This was not seen to be feasible, but it was agreed that it would be desirable to arrange for the iscue of Government paper as soon as practicable, and not later than September 1973. It was mentioned that something along these lines had earlier been proposed for the present diversification out of sterling, but that the Hong Kong Covernment had on that occasion turned it down.

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