TNAG-0381-FCO40-427-Sterling-assets-and-balance-of-payments-of-Hong-Kong-1973 — Page 180

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XCS(73)9

to acquire sterling in these amounts against Hong Kong dollars would be quite impracticable and inconsistent with the need to reduce our sterling position. Nor could such action be defended politically. Furthermore, we would only be guaranteed on our opening position (i. e. Statement II: £407 mn; or Statement III: £347 mn) and, moreover, on 90% only. That is to say, in return for building up our position to £664 million to satisfy the M.S. P. condition only about two-thirds or one-half of our likely closing position would be covered, As regards (c); to run down the Government's non-sterling position could not be justified in terms of prudent management of the Government's reserves and could not be defended politically.

Conclusion

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It follows that the solution put forward by British officials to assure Hong Kong's participation in the post-24th September guarantee arrangement is neither feasible nor defensible for this Government.

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Nevertheless, we accept the British Government's objective of stabilising the situation pending the formulation of longer-term

It would not be in our own interests arrangements.

quite apart from wider considerations for the market for sterling to be adversely affected. This could happen were the Hong Kong Government to fail to play its part (e.g. by selling securities hastily) or by publicity attending non-participation in the unilateral offer, Needless to say, there has never been any question of the Hong Kong Government pursuing a policy of diversification regardless of the stability of the market.

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Accordingly, the best course would seem to be to inform the British Government, in accordance with the spirit of the first sentence of the formula mentioned in paragraph 16 above,

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(a)

(b)

that the Hong Kong Government's sterling position will not be reduced for the time being below our eligible balances at 24th September (presently valued at £347 million);

that the Hong Kong Government will use its best endeavours to persuade the banks to maintain an overbought sterling position at least equal to that held on 25th September.

As regards (a): in the present state of the gilt edged market there is little likelihood that the Government would be able to switch any funds into non-sterling assets for some months to come.

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