TNAG-0381-FCO40-427-Sterling-assets-and-balance-of-payments-of-Hong-Kong-1973 — Page 90

DRAFT TELEGRAM TO HONG KONG

SECRET

(w/199

STERLING ARRANGEMENTS

We have been able to consult Ministers on the basis of the material

that you have kindly provided and can now respond substantively to

the propositions set out in your telegram 1117.

Given the run-down in the sterling holdings of the commercial banks,

it is now plainly appropriate that the guarantee should extend only

to the sterling holdings of the Hong Kong Government. We consider

it appropriate to adjust your MSP accordingly, to take account of

the non-inclusion of the commercial banks. We consider that the

adjusted MSP should be 80%, corresponding to the ratio of official

sterling holdings by total official external reserves on 26 September

(after payment of £19 million compensation to the commercial banks

under the Exchange Fund Guarantee Scheme.)

3. Paragraph 10 of telegram 1117 refers to the implications for

MSP of a fall in the price of gilts. The terms of the unilateral

offer are, however, no different in this respect from those of the

previous Agreements, and involve acceptance on our part of the results

of your statutory arrangements for valuation for calculation both of

MSP and of amounts payable if the guarantee is implemented.

It seems

to us reasonable that you should similarly accept the consequences of

these arrangements. While the terms of the unilateral Declaration,

taken in conjunction with your statutory basis of the valuation, may

require purchases if a new book valuation reflects a fall in the price

of securities, they may, symmetrically, permit sales if the price of

securities.rise. This applies in respect both of gilts and of other

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