TNAG-0379-FCO40-425-Sterling-assets-and-balance-of-payments-of-Hong-Kong-1973 — Page 293

HONG KONG

The Governor's letter is concerned primarily with the problem

of Hong Kong's sterling balances, and tries to demonstrate that our

recommendations concerning the issue of government paper would not

solve the immediate problem. It is, perhaps, worth pointing out at

the start that although our recommendations were put forward in the

context of the sterling problem, they were primarily designed to

contribute to the solution of the underlying institutional difficultier

! in Hong Kong, which go beyond the immediate sterling problem.

So far as the sterling balances are concerned, the Governor has, of course, got a valid case in arguing (paragraphs 5(b) and 9) the it is unreasonable to expect the Hong Kong Government and/or the banks

to go on holding so much sterling without the prospect of a new

guarantee.

He concedes that the interim arrangements agreed with

1

Haddon-Cave last November will be helpful but Hong Kong will certainly

need more help before long.

:

Someone

In the longer term, Hong Kong's difficulties will concern

other currencies as well as sterling, particularly when the banks'

diversification programme gets under way. Hong Kong earns a

substantial foreign exchange surplus and in this respect is in

much the same position as other surplus-earning countries.

has to take the exchange risk. In most countries the banks are able cover, themselves through a central monetary institution, which in turn may operate for the government account, so that the ultimate risk is borne by the government. In Hong Kong, ad hoc arrangements had to be

made, in the form of the guarantee arrangements, which proved

unnecessarily expensive for the Hong Kong Government.

This was the background to our suggestion that the Hong Kong

Government should make available some alternative asset, denominated

in Hong Kong dollars, which the banks could hold. The Governor's

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