TNAG-0381-FCO40-427-Sterling-assets-and-balance-of-payments-of-Hong-Kong-1973 — Page 86

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when commercial bank sterling was also taken into account, the exclusion of the latter now leaves the official sterling proportion

some 9 percentage points below MSP. The Executive Council hen clearly indicated that it would not approve purchases of sterling above the 26 September level of £348 million (equivalent to the 24 September level minus the sterling compensation payments of £19 million to the commercial banks) and the Governor of Hong Kong has proposed that in the new circumstances Hong Kong should participate in the unilateral scheme on the basis of the MGP of 80 per cent which the holding of £348 million represents.

11.

At an earlier stage, it seemed possible that a new MSF for Hong Kong might be pitched at a level equivalent to the sterling proportion maintained by the Hong Kong government when the former MSP of 89 per cent was being observed in respect of the joint holdings of the Government and the commercial banka. This would have afforded an obvious basis in logic and equity. The formOT 89 per cent MSP was, however, last observed at end-June, when the Government sterling proportion wes 82.6 per cent, and sterling purchases of £60 million would now be required to bring Hong Kong up to an 82.6 per cent proportion. Although Hong Kong has expressed a strong desire to be able to participate in the orrenze- ment and concern to avoid rocking the boat, it seems clear that the Executive Council will not be moved in its determination to avoid further sterling purchases and the latest indications that we love are that Hong Kong would drop out of the guarantee arrangement f accommodation is not offered on an 80 per cent MSP basis.

12.

Inasmuch as the main object of the operation is to stahiling official holdings at about their 24 September level, and not to induce further sterling purchases, the Hong Kong proposal my be regarded as substantively acceptable. However, since secrecy

cannot be relied upon, it is necessary to consider how any accommodation with Hong Kong on the basis of an MSP of 80 per cent could be justified in such a way as to avoid consequential presanco

for MSP concessions elsewhere.

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