TNAG-0379-FCO40-425-Sterling-assets-and-balance-of-payments-of-Hong-Kong-1973 — Page 7

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rate, or $2.40 (as in the original 1968 Agreement) or $2.3506, the implied guarantee rate following the implementation last November.

Special position of Hong Kong

5. Hong Kong is one of the three largest sterling holders, along with Australia and Kuwait. The total official reserves (lay 1973) are £727 million, of which £354 million is held by the Hong Kong Government, and £304 million by the commercial banks. The map is high, at 89%,

6. One particular difficulty for Hong Kong is that there is no equivalent in the colony of a central bank, and no local paper to provide backing for the liabilities of the large and powerful commercial banks, which include the Hong Kong and Shanghai Banking Corporation. The banks have therefore been used to holding sterling securities as backing for their liabilities which are expressed in Hong Kong dollars. It was agreed in 1968 that it was appropriate to bring these sterling holdings of the commercial banks into the sterling agreements, along with the Government's own holdings, so the guarantee provided by HMG applies to all Hong Kong sterling.

Disterally

The Hong

Long Government in its turn assumed an obligation to the Hong Kong banks to guarantee their sterling holdings in terms of Hong Kong dollars. As a result of the exchange rate changes of recent years, during which the Hong Kong dollar appreciated against sterling and the US dollar, the Hong Kong Government has had to make larger payments to the Hong Kong banks than it receives from HMG. It claims to be under attack both for the cost of the guarantee to the banks and for the loss from holding the Colony's' reserves in depreciated sterling.

The immediate difficulty

7.

Although Hong Kong is a Colony, and the Governor's powers in theory almost absolute, he acts with the consent of the Legislative Council. Ile is concerned to be able to demonstrate that the public finances of the colony are managed for the benefit of the people of Hong Kong, and in particular that the external value of the colony's reserves

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