TNAG-0448-FCO40-513-Sterling-assets-and-balance-of-payments-of-Hong-Kong-1974 — Page 87

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even if a continuing decline in gilt prices suggested that another breach at the end of the next month would be probable if no preventive action were taken; in other words he thought he was entitled to maintain MSP one month in arrears.

4. We had no reason to deduce from exchanges after we gave the accidental breaches provision that Hong Kong were putting this rather strange interpretation on it. Although the immediate cause of the breaches was the fall in gilt prices, they need not have occurred if Hong Kong had either maintained a "safety margin" above MSP or changed the composition of their, sterling holdings; or if these were ruled out on "political" grounds, made anticipatory purchases before the end of the months in which gilts were falling. Hence we could not regard the breaches as "purely accidental".

5. This disagreement was settled with rather bad grace on Hong Kong's side. Given the tendentious account of it presented in Mr Haddon-Cave's memorandum to EXCO, it is not at all surprising that members of EXCO did not think very highly of the line we took.

6. Mr St Clair has told me that he was not disposed to recommend that we should accede to Hong Kong's request for a revised accidental breach provision, not least because in their present mood the Treasury don't mind whether Hong Kong stays in or not. I think he is right, though I suggested that we should ensure that the tone of our reply was not such as to cause a public disagree- ment to occur, eg by an unofficial member of EXCO grumbling to the Press. But I think Mr St Clair is right because the present accidental breaches provision is

It is adequate for the purpose for which we intended it. for Hong Kong to manage their affairs so that they do not

Maintenance fall below MSP except for accidental reasons. of a safety margin and the exercise of informed judgement are all that other holders seem to require. definition, let along the operation, of an arrangement of the kind Mr Haddon-Cave suggests would be extremely complicated, and is, I suggest, unnecessary).

(The

7. Mr St Clair said he would circulate his submission, possibly with a draft reply.

30 April 1974

cc:

Mr Goodfellow HKIOD

Diwenty

D I Lewty ·

Financial Relations Dept