TNAG-0382-FCO40-428-Sterling-assets-and-balance-of-payments-of-Hong-Kong-1974 — Page 74

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In effect, Hong Kong has now been offered the opportunity to participate in the guarantee on terms similar to those Honourable Members advised should be sought, with one exception. It would be incumbent upon the Hong Kong, Government to top up the guaranteed sum to £313 million should gilt edged prices fall and the current market value of sterling holdings be reduced below £313 million. Already, because of depressed prices since 24th September, purchases of about £11 million would be necessary to make up the sum as at 30th November. The British authorities argue that the converse could well happen and prices rise to a level where sterling holdings at current market values could be in excess of £313 million; in which case this excess could be diversified into other currencies.

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At this time, with optimistic forecasts for the exchange value of the US dollar and pessimistic forecasts for the pound sterling, it would seem almost certain that some compensation would be due at the end of March 1974 should Hong Kong participate in the guarantee. For this reason, and because depressed gilt edged prices in London make it undesirable to sell our securities anyway, there would seem to be every advantage in participating in the guarantee. Although it may be necessary to make purchases of sterling from time to time. during the period to the end of March 1974; those securities or deposits would attract high rates of interest."

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6##The British Government is most anxious that the details of the arrangement for Hong Kong's participation in the guarantee should not reach other participants in a way that causes them to think that Hong Kong has been singled out for specially favourable treatment... However, once the current dialogue has reached a successful conclusion, some publicity will be essential and Honourable Members should note that, if it is decided that Hong Kong should participate, the line taken would be along the following lines:

WADA.

(a) discussions between the British and Hong Kong

Governments have produced a result that is satisfactory to both sides and Hong Kong is participating in the arrangement and enjoys the guarantee in respect of "official" sterling holdings;

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(b) the coverage of the previous Sterling Guarantee

Agreement was exceptional in that the guarantee blasi. covered the banks' sterling. The exclusion of the fouley banks from the new guarantee brings the position of

Hong Kong into line with that of other holders and reflects the fact that the banks' sterling is no longer judged to be sufficient to warrant its inclusion;

(c) Hong Kong's participation in the new guarantee is din.

* based on the external reserve position at the

expiry of the former agreement, but with adjust-de ments made to take account of the non-participation

of the banks;

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