TNAG-0382-FCO40-428-Sterling-assets-and-balance-of-payments-of-Hong-Kong-1974 — Page 4

and Britain - part two

The Financial Link

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AST month we considered the value of the UK as both a trading partner and as an investor in HK industry and commerce The present article will consider in more detail the financial tie-up between Hong Kong and Britain. Since this is a subject more or less complete in itself, we shall leave for a third and this time final! article the role of Britain as HK's negotiator at the international conference table.

The Bulletin summarised last August the history of the financial link between 'Hong Kong and Britain. The Senior British Trade Commis- sioner, Mr. Tom Aston, during a recent address to a Lions Club meet- ing, likened this earlier article to an equation, but an equation in which the symbols on one side only had been written out in detail.

detail. The analogy was perfectly fair, and what now follows is our attempt to write out the symbols on the other side of the equation. Some degree of re- petition is unavoidable.

The problem of HK's reserves is of course a vexed one. Not the least of the difficulties would appear to be a widespread lack of under- standing of the

the role played by reserves not only in the case of Hong Kong, but in the case of any nation. A further complicating factor is the popularly held belief here that Hong Kong could, if allowed to do so by the British Government, handle its reserves far more successfully than at present is believed to be the case. Unfortunately, as any foreign ex- change dealer will confirm, the issue is not quite as simple as this.

The crucial point was summed up in our August article on the value of HK to UK when we pointed out that following the devaluation of sterling in 1967, UK offered all members of

the Sterling Area including Hong Kong, a free guarantee in terms of the US dollar value of all officially held Sterling, in excess of 10 per cent. of each country's total official ex- ternal reserves. In return, they were obliged to maintain a minimum pro- portion of their reserves in sterling (for Hong Kong, this was 99 per cent, later reduced to 89 per cent). Under this so-called Basle Agreement, Hong Kong reserves were thus guaranteed to September 1973 against any devaluation of the pound in terms of the US dollar from the then par value of US$2.40= £1.

For Hong Kong, 'official reserves' include a

a substantial part of the sterling reserves held by Hong Kong banks. Hong Kong's sterling reserve holding was and still remains the largest single holding forming con- sistently well over one quarter of the total sterling liabilities of the UK. (Government do not publish official figures for the value of our reserves with any regularity. However, the Financial Editor of the China Mail recently put forward a figure of $9,225 M overall, of which $8,120 M were official reserves held in sterling.)

At present, the only feasible alternative to sterling as રી reserve currency is the US dollar, which for the immediate future at least is likely to be prone to some pressure in

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