TNAG-0382-FCO40-428-Sterling-assets-and-balance-of-payments-of-Hong-Kong-1974 — Page 73

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For discussion

on 11th December 1973

XCS(73)11 Copy No.

MEMORANDUM FOR EXECUTIVE COUNCIL

MANAGEMENT AND SECURITY OF HONG KONG'S STERLING RESERVES

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On 2nd October 1973, after considering memorandum XCS(73)9, a copy of which is annexed, Honourable Members advised and the Governor ordered;

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that the Hong Kong Government's response to the British Government's Declaration of 6th September should take the form of an offer to maintain the level of official sterling reserves (excluding the banks' sterling) at the position reached after 24th September 1973, subject to these reserves being guaranteed by Her Majesty's Government at the rate of US $2.4213 to £1.

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The Council noted that careful: consideration would have to be given to the public relations aspects in order to meet both local political considerations and yet not disturb the foreign exchange markets.

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The British Government was informed of Council's' advice immediately after that meeting and, during a subsequent exchange of telegrams, accepted that the banks' sterling should not form part of "official" external reserves. But it has taken time to resolve several other aspects, the main one relating to the British contention that Hong Kong's participation should be, and be seen. to be, in accordance with the conditions laid down in the unilateral offer; whilst Hong Kong has insisted that there could be no question of maintaining a minimum sterling proportion of an upward moving total of "official" external reserves.

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The British Government has now accepted that Hong Kong may participate in the guarantee on the following basis: the amount guaranteed would be £313 million, being the Government's sterling holdings at current market values at 24th September 1973 (£331 million) less the sterling element of compensation paid to the local banks on 26th September under the Exchange Fund Guarantee Scheme (£18 million). The proportion of "official" sterling reserves as now defined (£313 million) to total "official" external reserves as now defined (£397 million, of which £84 million is held in a variety of non-sterling foreign assets) at current market values at that date was 78.85%.

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Under the terms of the British Government's Declaration of 6th September, Hong Kong will be guaranteed at a rate of US $2.4213 = £1 on £313 million provided assets valued at this sum are held until 31st March 1974. There is no obligation to maintain a minimum sterling proportion of accruals above £397 million but, if total "official" external reserves should fall before the 31st March 1974 (which is highly unlikely), a minimum sterling proportion of 78% would have to be maintained.

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