TNAG-0379-FCO40-425-Sterling-assets-and-balance-of-payments-of-Hong-Kong-1973 — Page 88

CONFIDENTIAL

4. OF THE POUNDS 82 MILLION REMAINING (IN THE HADDON-CAVE

/BELL FACILTY) WE PROPOSE TO LET THE CHARTERED BANK HAVE POUNDS 10

MILLION AND THE HONG KONG BANK GROUP POUNDS 72 MLLION, SPREAD EVENLY ON A DAILY BASIS OVER THE PERIOD FROM THE BEGINNING OF THIS

WEEK UNTIL THE EXPIRY OF THE AGREEMENT PERIOD. AT ROUGHLY POUNDS 2 MILLION A DAY THIS IS IN EXCESS OF THE POUNDS 20 MILLION

PER MONTH FIGURE REFERRED TO IN PARAGRAPH 5.OF BELL'S LETTER TO

HADDON-CAVE OF 1ST DECEMBER 1972 BUT WE PRESUME THAT, AT THIS LATE HOUR, YOU WOULD NOT OBJECT TO THIS, PARTICULARLY AS THE REVIEW ENVIS-

AGED IN PARAGRAPH 5 OF THE ORIGNAL DESPATCH OF 20TH

SEPTEMBER 1968 (AND REFERRED TO AGAIN IN RECENTLY AS BELL'S LETTER JUST REFERRED TO : PARAGRAPH 6) HAS NOT TAKEN PLACE.

5. YOUR PARAGRAPH 5: FROM A PURELY DOMESTIC POINT OF VIEW,

THE OWNERSHIP OF OUR STERLING ASSETS IS OF MUCH LESS IMPORTANCE

THAN THE EXCHANGE RISK THE COLONY AS A WHOLE BEARS IN RESPECT OF ITS

LARGE STERLING POSITION. THIS RISK REMAINS THE SAME WHETHER THE

EXCHANGE FUND GUARANTEES THE HONG KONG DOLLAR VALUE OF BANK OWNED

STERLING OR BUYS THE STERLING AGAINST THE ISSUE OF HONG KONG DOLLAR

PAPER. IN ANY CASE, ON THE ASSUMPTION THAT H.M.G. DOES NOT INTEND TO OFFER TO RENEW THE STERLING GUARANTEE AGREEMENT AFTER 24TH

SEPTEMBER AND THIS IS THE ONLY REASONABLE ASSUMPTION THAT CAN BE

MADE AT THIS TIME IT WOULD BE POLITICALLY IMPOSSIBLE FOR THE

EXCHANGE FUND TO ASSUME THE EXCHANGE RISK IN RESPECT OF THE BANKS'

STERLING ASSETS AS WELL AS ITS OWN. IF FOLLOWS THAT THE BEST COURSE

IS FOR US TO ADVISE THE BANKS THAT THEY MUST PREPARE TO COVER THEIR OWN POSITIONS BY DIVERSIYING INTO OTHER ASSETS AND THEY WOULD

BE CONTENT TO DO THIS.

OF THE HADDON-CAVE/BELL FACILITY DURING THE NEXT FEW WEEKS WILL

ENABLE THE TWO LARGEST PARTICIPATING BANKS TO MAKE A SUEFUL START.

TO THIS END, THE UTILISATION OF THE BALANCE

6. WE FOR OUR PART MUST EVENTUALLY DIVERSIFTY AT LEAST 50 PER CENT OF OUR EXTERNAL RESERVES (GENERAL ACCOUNT AS WELL AS EXCHANGE FUND ACCOUNT) INTO CURRENCES OTHER THAN STERLING AND PUBLIC OPINION

WOULD NOT PERMIT US TO DO LESS THAN THIS. BECAUSE WE SHALL HAVE TO FIND, AT TODAY'S RATE OF EXCHANGE, OF THE ORDER OF POUNDS 45 MILLION TO COMPENSATE THE BANKS (IN ADDITIONAL TO THE PAYMENTS A ALREADY MADE AS STERLING HAS BEEN WITHDRAWN FROM THE SCHEME) THE GOVERNMENT'S ABILITY TO DIVERSIFY WILL BE AUTOMATICALLY RESTRICTED BY OUR ABILITY TO SELL GILT EDGED SECURITIES. BUT THE BANKS WILL WISH TO DIVERSIFY PART OR ALL OF THE POUNDS 45 MILLION AS WELL AS PART OF THE STERLING WHICH THEY WILL STILL TOLD WHEN THE SCHEME EXPIRES.

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