TNAG-0448-FCO40-513-Sterling-assets-and-balance-of-payments-of-Hong-Kong-1974 — Page 90

For discussion

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on 23rd April 1974

SECRET

XCS(74)1 Copy No.

30.

MEMORANDUM FOR EXECUTIVE COUNCIL

MANAGEMENT AND SECURITY OF HONG KONG'S OFFICIAL

STERLING RESERVES

Previous Unilateral Guarantee

(a)

Introduction

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LAST

(બ)

51

In accordance with the advice of Honourable Members, Hong Kong participated in the unilateral offer to guarantee certain official holdings of sterling made by the British Government in a Declaration of 6th September 1973, The guarantee covered the period 25th September 1973 to 31st March 1974. During this period, the average exchange rate between sterling and the US dollar, at $2.3335, was below the guarantee rate of $2.4213, so the guarantee fell to be implemented. Hong Kong expects to receive compensation of the order of £10 million when the necessary formalities have been completed.

2

In order to maintain eligibility for compensation, it was necessary for Hong Kong to purchase £25.6 million sterling during the six-month period, These purchases together with £15. 1 million net sterling accruals offset the falling market value of gilt edged securities and the relative increase in the value of other currency holdings. However, taking the compensation payment into account, the effect of maintaining our eligibility for the guarantee has been that, since late September, the market value of our sterling reserves has increased from £313 million to £319 million and the market value of our total external reserves has increased from £397 million to £405 million. The "topping-up" purchases were mostly made at favourable rates of exchange, so the sterling acquired appreciated by the end of the period even before taking the compensation into account. Given that we were not able to diversify appreciably out of sterling at a time when the gilt edged market was weak, the market value of both our sterling holdings and total external reserves would have fallen if we had not adhered to the guarantee.

(b)

3

"Topping-up"

In the last month of the six-month period, a difference of opinion arose between Hong Kong and London as to the interpretation of a side-agreement dealing with accidental breaches by Hong Kong of its obligation to maintain specified minimum holdings of sterling. In November we had enquired about the arrangements for adjusting the level of our holdings of sterling in the event of falls in the prices of gilt edged securities in the following terms:

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