TNAG-0379-FCO40-425-Sterling-assets-and-balance-of-payments-of-Hong-Kong-1973 — Page 279

9. It was not thought that any change in banking legislation would be required. Nor would there be much difficulty in establishing a

market in Hong Kong Government paper. Issues over a range of maturities from Treasury bills to five-year securities were envisaged,

but initially Treasury bills would be the most suitable instrument.

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10. It was recognised that exclusion of banks holdings from any

renewed Sterling Agreement would need to be extended on a «fn basis

but this was not seen to raise any problems. In the absence of Sterling Agreement we might make some special arrangement with Hong

ong.

THEREPLY TO THE GOVERNOR'S LETTER

11. it was agreed that it would be desirable to shift communications

onto more normal channels, and therefore that a short covering letter from the PI'S to the Governor with an attached Treasury/Bank memorandum would be the most sitable form of reply. The covering letter would be written in the light of the memorandum, of which the Bank of Englan would provide a first draft.

12. The memorandum would set out the case for issuing Hong Kong Government paper, in the context of more frequent exchange rate change and of the impending reform, etc, and would deal the fear of inflation · ary consequences and of departing from financial solidity. It would make the point that there would be no advantage or need to link such issues with loans that might at some later stage be raised in connect- ion with the Kass Transit scheme.

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13. It would point out that the banks have a legitimate grip in being unable to cover their Hong Kong dollar liabilities with Hong Kong dollar assets while they are unsure of the continuance of the guarantee. The issue of Hong Kong Government paper would remove this ground for complaint.

14. It would make the point that the cost of servicing the interest on Government paper so issued would be met, and probably more than met, by the interest received by the Hong Kong Government on its holdings of sterling.

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