CONFIDENTIAL
3
Sterling balances
8. The year saw a substantial relaxation of the proportion of the Colony's total external assets held in sterling. In July, as the end of the guarantee period on 30 September began to approach, it became apparent that if the Hong Kong banks were not informed well in advance of what successor arrangements would be offered, they might decide to cover their open post-30 September positions by selling forward, as they were legally entitled to do. In a difficult situation the Treasury were unable to provide this information, and, though the Hong Kong Government's own holdings were not touched, the banks sold forward a proportion of theirs. The Hong Kong Government eventually decided to participate in the arrangements offered under the Unilateral Guarantee, but the banks have shown no interest in doing so.
9. By March we will have to agree on some continuing arrangement after the interim Unilateral Guarantee runs out, and it looks as if this will have to be negotiated in circumstances of exceptional difficulty. The assets of banks are now excluded, so all that will be involved is the Government's own sterling holdings.
The stock exchanges
10. The most newsworthy event of the year was the extraordinary rise and fall of the stock market. As an indication of the frenzy generated, at its highest the value of the daily turn-over was equal to the sum of that on all European exchanges. Some large Hong Kong and UK houses made a killing at the expense of comparatively inexperienced local punters. The latter I hope have learned their lesson. The outflow of remittances to UK and other investors overseas of profits taken at the top of the market probably exceeded £200 million.
11. The phenomenon was damaging in many ways. But it was an extra- ordinary tribute to the solidity of the financial structure of the Colony and the resilience of its inhabitants that a blow of this sort could be sustained without either civil disturbance or a major financial failure. The shock has made possible the acceptance, after an interminable struggle, of legislation providing extensive disciplines for the market.
Relations with China
12. Next of importance after the economy in Hong Kong come relations with China. Local relations with Chinese officials have been friendly and pragmatic, and, in spite of the refusal of Her Majesty's Government to receive an official Chinese representative in Hong Kong, the unofficial representative and his staff have shown themselves increasingly willing to transact business in a matter-of-fact way with Hong Kong officials. I have myself been able to move towards a direct relationship of a sort with the unofficial representative. He and his staff have been notably helpful over additional supplies of water, immigration from China (which was badly out of hand) and, at the time of writing, oil products.
13. While I would expect the Chinese Government to continue to press for official representation, I would not expect them to carry this to a point at which it would affect relations with Her Majesty's Government or the friendly and pragmatic image they are clearly anxious to build up in Hong Kong. While no doubt reserving their position and keeping plenty of shot in their locker for this issue, they do seem ready to act on-and get what they can out of the easier official and social relationship we have tacitly offered.
146501-48
CONFIDENTIAL
A 2
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