TNAG-0379-FCO40-425-Sterling-assets-and-balance-of-payments-of-Hong-Kong-1973 — Page 32

CONFIDENTIAL

exception of the Hong Kong Bank, all the other banks recently approached welcomed the possibility of local asset issues and

might therefore accept this as a quid pro quo for their sterling

being removed from the guarantee. Given present circumstances

in the exchange markets, a current rate guarantee could be

expensive for the UK, as the risk of implementation would be

relatively high, but it could be considered a worthwhile price

to pay in the short term for achieving the desired reforms in

Hong Kong.

A slightly different situation would exist if it is

decided to offer for a limited period a "unilateral declaration"

to Sterling Agreement signatories. One could then perhaps offer Hong Kong an extension of the Haddon-Cave/Bell diversification

facility during this period (say until March 1974) while at the

same time making known our willingness to consider a special

bilateral arrangement when and if the unilateral declaration

lapses. In the meantime, with something like the Exchange Fund Guarantee Scheme remaining in existence, talks on establishing the reformed financial structure could proceed, during which we

could make clear that any sign of 'give' on their part would make

us more amenable to such a special arrangement. However,

However, during

any such talks, we must avoid appearing to be imposing

on Hong Kong for our own interests, a fear which underlies much of

Hong Kong's reaction to any proposals we make.

solutions

The political case for a special arrangement with Hong Kong

rests on the fact that she is a Crown Colony under the direct rule

Theoretically and constitutionally we should therefore

of HMG.

do (and be seen to be doing) everything in our power to safeguard

her interests. One could argue, however, that recent communications