TNAG-0382-FCO40-428-Sterling-assets-and-balance-of-payments-of-Hong-Kong-1974 — Page 50

HONG KONG STANDARD

One of two English morning news papers. members of the community. Circulation:

HK sterling H.K. Standard 16/12/73 reserves

agreement

BY THE EDITOR, SUNDAY BUSINESS

HONGKONG yesterday announced it has reached a new "understanding with Britain in which its official sterling balances will come under London's guarantee until March 31, 1974.

The main feature of yesterday's agreement is that whereas in the past both official and bank sterling reserves were covered by the guarantee, in future only the Government's own sterling assets will be covered.

The Banks' holdings will be @excluded and the statement added that these were, in any case, "no longer judged to be sufficient to warrant inclusion.“

The new arrangement, said the Financial Secretary, Mr C. P. Haddon-Cave, "was satisfactory to both sides."

In September, the British Government announced to all holders that it would extend the guarantee to cover eligible sterling balances in London.

This assured them of a rate of U.S.S2.4213 for each pound they held, from September 25, 1973, to March 31, next year.

This agreement is particularly important in view of the current rate for sterling which is now U.S.$2.3050 to the tl and does not look like recovering unless and until the oil crisis and the current action by the British coal miners and railway workers is resolved.

Yesterday's official statement (published in full in Sunday Business) provides a temporary solution to the future of our sterling balances.

There is no indication yet of what the British Government proposes doing after March 31.

However it is evident from the Government statement that the banks have run down their own reserves of an estimated £350 million sterling significantly following the expiry of the original guarantee on September 25.

diversified.

It would now be difficult in the current international monetary climate for the Government to' move its funds out of sterling.

And with the sterling rate so low, Hongkong would stand to lose heavily if it did try to diversify further.

an

Hongkong is therefore committed to keeping absolute amount in sterling for another three and a half months but this does not affect its interest accruals which can be invested in non-sterling assets.

With the guarantee extended

until

the end of March, Hongkong, therefore, has an extended protection for those assets it has no choice but to keep in sterling.

Read by influential 25,000.

This was done by means of forward selling by the banks and they now appear to have Aheir funds diversified into assets of other currencies.

to

This took place without creating any dislocation sterling, the current weakness of the pound being due to a combination of more

recent

problems such as the latest British trade 'deficit. the oil crisis and domestic industrial unrest.

have Britain might well wished for the banks' funds to have remained in sterling or, failing this, for the Hongkong Government to have replaced them with official funds.

an

But when the Hongkong Government held off accepting extended the offer of guarantee after September 25, the banks appear to have taken the obvious and logical course of protecting their funds by selling forward.

And the Hongkong Government would have been in no position to make good what the banks took out.

Assuming therefore that the banks have taken out virtually all their former sterling holdings, it can be calculated from already published figures that this would leave Hongkong's official sterling holdings of about £350 million still in Britain.

For the time being the is Hongkong Government evidently satisfied to let things stand.

A large part of the colony's overall holdings have

been