TNAG-0448-FCO40-513-Sterling-assets-and-balance-of-payments-of-Hong-Kong-1974 — Page 29

CONFIDENTIAL

According to the second letter, switches out of US dollars should "combined with net sterling receipts in February, based on 31 1 74 market values, take the sterling proportion of total official external reserves above the agreed minimum

the telegram which

remains central

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*3. Hong Kong telegram No 375 of 27 March prompted our explicit mention of interest accruals (para 3 of my minute of 5 July). The adjustment to take account of sterling interest accruals during March (which the answering FCO telegram No 314 of 27 March applies to the original formulation of the modified settlement basis) is to be read as being intended to ensure that interest accruals are not excluded on the grounds that they are not purchases, not as adding them to topping-up

There is also the purchases calculated without regard to, them. evidence relating to Hong Kong's practice in February described in my manuscript note of 8 July.

4.

The view presented here of topping-up is entirely consistent

This was the first full with the Hong Kong telex of 19 March. statement of Hong Kong's understanding of the accidental breach provision.

5.

The reporting letters referred to above suggest to me that the Bank had evidence in mid-February that all was not well as regards the Hong Kong understanding conditions which had to be fulfilled. This is primarily because the figure in the letter of 11 February relating to MSH fulfilment at end-January is stated

The letter of to include 'gilts at 31 12 73 market valuation'.

4 March is less precise, referring simply to projected figures being based on 31 1 74 market values, but taken in conjunction with the earlier letter it suggests that the end-February fulfilment of MSH being aimed at was not the one we had intended.

11.

2

CONFIDENTIAL

• Please see additional paragraph at end.