TNAG-0382-FCO40-428-Sterling-assets-and-balance-of-payments-of-Hong-Kong-1974 — Page 153

RE Barber Esq

Bank of England

Threadneedle Street

London EC2R 8AH

Dear Barber

226

(233)

STERLING GUARANTEE

-

HONG KONG

Treasury Chambers Parliament Street London SW1P 3AG

Telephone 01-930 1234 ext

27 November 1973

6227

HKK5/1

22 You will have seen a copy of Hong Kong telegram 1361.

2.

Perhaps it would be useful if I set out my present under- standing of the position. The Hong Kong sterling holding on 26 September on their existing conventional basis of valuation was £348 million. We have agreed that, still using the conventional basis of valuation, the withdrawal of the commercial banks from the guarantee arrangement means that Hong Kong's MSP should be 80%.

·

In effect,

3. The Declaration requires either a valuation based on Statute or a valuation based on market prices. Generally speaking. we prefer market valuation, but would be prepared to accept Hong Kong's conventional valuation as equivalent to statutory. without breaking the terms of the Declaration, we could accept either Hong Kong's conventional valuation or a market valuation.

4. Although it appeared at first that Hong Kong wanted to continue their conventional valuation, they now see that a market valuation would suit them better. This is probably because of the recent sharp fall in the price of gilt-edged securities. As part of the argument however they say that the revised MSP of 80% should be further revised to 78% to take account of the changed basis of valuation.

5.

However,

Given the peculiar circumstances of Hong Kong, I am inclined to recommend that we should accept the Hong Kong suggestion. if we do so, we should recognise that we are, for the first time, departing from the terms of the Declaration. The Declaration required the continuation of existing MSPs for sterling holders: it did not permit a revision of these MSPs to take account of the changed method of valuation between the Declaration and the previous agreements. (It might be claimed that by changing the method of valuation, we were in fact increasing MSPs above the level in the agreements. I do not wish to argue that point, but simply to say that we have not conceded to any other holder a recalculation of his MSP to take account of the changed basis of valuation.)

Other-

6.

If we are to concede the point, it will be important to keep secret the basis of the calculation of the new Hong Kong MSP.

1