TNAG-0382-FCO40-428-Sterling-assets-and-balance-of-payments-of-Hong-Kong-1974 — Page 138

ANNEX

CONFIDENTIAL

STERLING

1. Many people in Hong Kong believe that the UK seeks to control Hong Kong's reserves in order to bolster sterling. This is of course untrue. Hong Kong has been treated on a par with other sterling holders such as Australia. The floating of sterling resulted in loss to the Hong Kong Government but this was largely because they chose to guarantee their banks' holdings of sterling in terms of Hong Kong dollars, while our guarantee to Hong Kong was expressed in US dollars. Taking into account interest and guarantee payments, Hong Kong has done better to be in sterling than if they had switched to dollars ↔ 1968. The Hong Kong Government and banks together had some £800 million covered by our sterling agreement which expired in September 1973. The banks however diversified by forward sales before the expiry of the Agreement and are not eligible for the current guarantee. The Hong Kong Government have about £350 million of sterling left of their own, and are likely to accept the unilateral guarantee offered by HMG for the period up to March 1974.

Negotiations

for this have been required, because an adjustment of the Minimum Sterling Proportion was needed to reflect the non-inclusion of the banks' sterling.

2. The Hong Kong Government would like to be able to stress the modifications made to suit Hong Kong's needs. But the Treasury have to bear in mind the reactions of other sterling holders. The line to

take which we believe will be agreed with the Hong Kong Government is to stress that the new arrangement satisfies both sides within the

context of our unilateral offer. For the longer term future, we can say that we are consulting Hong Kong and the other sterling holders on the possible types of arrangement that might suit them for the post-March period if any new arrangement is established.

/HONG KONG.....