TNAG-0380-FCO40-426-Sterling-assets-and-balance-of-payments-of-Hong-Kong-1973 — Page 206

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RECORD OF A MEETING HELD IN THE TREASURY

ON FRIDAY 10 AUGUST 1973

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Mrs M Hedley-Miller was in the Chair. Treasury and Bank officials, together with Miss Pestell, FRD, and myself, were present on the one side. The Financial Secretary (Mr C P Haddon- Cave), Accountant-General (Mr D A Blye) and the Exchange Controller (Mr J C Paterson) represented Hong Kong.

2.

Referring to the meeting held the previous afternoon between the Minister of State at the Treasury (Mr John Nott) and Mr Mitchell on the one side and the Governor and himself on the other, Mr Haddon-Cave said the Minister had made two requests: firstly that during the next four weeks there should be no forward selling of sterling by the Hong Kong Government or the Commercial Banks and secondly the Governor should regard it as likely that the Chancellor's second message would be beneficial to Hong Kong. In this connection, Mr Haddon-Cave said that the Exchange Fund Ordinance forbids the Hong Kong Government to sell sterling forward and that they would use their moral suasion on the Banks.

3. In regard to the Chancellor's forthcoming message, Mr Haddon-Cave made it clear that he did not expect it to be attractive to Hong Kong. He said the Colony may well not want to be locked in with sterling in future. He claimed that the present agreements had not worked satisfactorily and that henceforth Hong Kong would prefer to have their freedom. suggested that they should give us an idea of their thinking on this.

He

4. Mrs Hedley-Miller agreed, but said this would have to be without commitment. Mr Haddon-Cave said that on the assumption that the arrangements after September 24 would not be agreeable he saw two alternatives:

5.

i.

they could "run amuck";

ii. they could discuss with Treasury a degree of restraint. They favoured this course which would mean that they would phase their efforts to build up a "squarer position". He explained that this meant having a foreign exchange position where gains would offset losses as opposed to the present position where Hong Kong's reserves were held almost entirely in one currency, namely sterling.

Mr Haddon-Cave then explained Hong Kong's basic sterling position on 31 July as understood by the Hong Kong Government. This broke down into:

Commercial Banks

These held £298 million in sterling under the guaranteed scheme. Their other currency holdings were not known. Of this

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/£298 million