TNAG-0379-FCO40-425-Sterling-assets-and-balance-of-payments-of-Hong-Kong-1973 — Page 59

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arrangement would be temporary and would have to be

subsumed in whatever institutional solution, if any,

might emerge from the expert examination. However,

in putting over the case in principle for local

paper to the Hong Kong Government it would be well

to emphasise that it is only to the extent that

reserves are centralised that they are likely to be

in a position to benefit from any funding arrangement

which might be agreed in the context of international

monetary reform.

It follows from the above that a relatively modest start

should probably be made with the issue of local paper whilst at the

same time making it a condition of any special guarantee offer.

However, it would be essential for the Hong Kong Government to offer

an attractive rate of interest (as mentioned at (ii)(a) above] on this

risk free asset which in that event should be attractive to the banks

and others in Hong Kong and ensure the creation of a secondary market.

One approach might be to offer a guarantee on 100% of the Government's

sterling but to restrict it to, say, 75% of the banks' holdings the

balance of which should be used to purchase local paper. In practice,

since the take-up of local paper should be on a voluntary basis it is

difficult, without local knowledge, to pre-determine an exact

percentage such as 75% but the success of the scheme would depend

the yield offered and it is necessary to re-emphasise the cardinal

importance of this aspect of the whole operation. The guarantee

should be strictly limited in time, say, for six months, when there

would be a review with the objects of assessing how the local paper

had been assimilated (secondary market, lender of last resort

operations, etc.) and of renewing the guarantee which, if appropriate,

on

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