TNAG-0380-FCO40-426-Sterling-assets-and-balance-of-payments-of-Hong-Kong-1973 — Page 207

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£298 million, £142 million belonged to the Hong Kong and Shanghai Bank and £50 million to their subsidiary, the Hang Seng Bank, £66 million to the Chartered Bank, £8 million to the Bank of East Asia, £7 million to the Dao Heng Bank and £25 million to other Commercial Banks. Last October the Banks had held £472 million but had sold £148 million for Hong Kong dollars to supply sterling to the Bank of China. A further £8 million had been sold against the Haddon-Cave/Bell diversification facility.

Hong Kong Government

The Hong Kong Government held £448 million in foreign assets, of which £363 million were in sterling and £85 million in other foreign currencies.

The total holdings therefore of the Hong Kong Government and the Hong Kong Commercial Banks totalled £746 million of which £661 million were in sterling, making an MSP of 88.7%.

Post 24 September diversification

The Hong Kong Government think (and hope that this is a shrewd guess) that the Hong Kong Banks would not wish to reduce their sterling holdings below a total in the region of £190 million on following lines - the Hong Kong and Shanghai Bank £100 million, the Hang Seng Bank £25 million, Chartered Bank £40 million, Bank of East Asia £5 million, Dao Heng Bank £5 million and the others, say, £15 million. This would mean a drop in their sterling reserves of £100 million plus the £45 million which was owing to the Banks under the Hong Kong Government's guarantee connected with the Sterling Agreements. Mr Haddon-Cave said the Government would prefer to pay this compensation in Hong Kong dollars, but might be forced to pay it in sterling.

The Hong Kong Government as a medium term objective would aim to have about 50:50 in sterling as opposed to other currencies. They would therefore need to increase their present holdings of £85 million in foreign currencies to a total of £224 million, namely an increase £139 million. The total therefore of the likely diversification of the Banks and the Hong Kong Government would be in the nature of £240 million. He said this must move out of sterling. This he said led to the following questions: i. How would this affect the market? If the answer is "adversely" then ii. Would phasing help? and if it would iii. What inducements would HMG give Hong Kong to phase. And how would this be done?

Mr Haddon-Cave suggested that HMG should offer to maintain the value of the Hong Kong Government sterling in terms of Hong Kong dollars for the amount they wish to diversify. They would be content to leave uncovered the sterling they wish to retain in London. He argued that by phasing to help HMG over a difficult situation HMG should be prepared to guarantee their currency. To questioning, Mr Haddon-Cave conceded that market conditions might in fact mean that they kept more money in sterling than they at present intended to phase but this could of course not be assumed.

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/Mr