TNAG-0380-FCO40-426-Sterling-assets-and-balance-of-payments-of-Hong-Kong-1973 — Page 215

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The difficulty for the HongKong Government lay not so much in the immediate situation, where stone-walling answers could be given, but when the Chancellor's second message arrived. If that message was unsatisfactory from the HongKong point of view, the HongKong Government would be in a very difficult position.

5. Mr Haddon-Cave said that, if the Chancellor's letter contained an unsatisfactory offer, the HongKong authorities would either

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(a) wish to have complete freedom to diversify although they

could be relied upon not to "run amok";

(b) alternatively, to negotiate a new type of agreement with

HMG under which HongKong would undertake to exercise constraint in exchange for HMG paying a price for that constraint.

"a

The longer-term objective of HongKong policy was to move to." squarer position". By this, Mr Haddon-Cave meant a position which neutralised to the maximum extent the effects of movements in foreign

exchange rates both up and down.

Form of a Possible New Agreement

7. Mr Haddon-Cave said that the HongKong authorities have been giving thought to a possible new type of agreement. The essential features would be that the sterling which HongKong continued to hold would not be guaranteed; but the part which HongKong wanted to diversify would be guaranteed by HMG in exchange for an undertaking to phase the diversification. HongKong did not mind whether they had complete freedom or some constraint of phasing, but if there were to be a

constraint, the financial costs should be borne by HMG.

8.

The HongKong Government had made some guesses about the amount of sterling which the HongKong banks would wish to sell. They guessed that the Hong Kong banks would not wish to reduce their sterling below £190m. This would be a reduction of £100m. (This assumes that

compensation under the existing agreement would be paid in HongKong dollars. If it were paid in sterling, the amount of this compensation, about £45m, should be added to the £100m.) On Government account, the HongKong authorities wished to reduce their sterling holdings in the medium term by 50%. Their non-sterling assets would have to

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