TNAG-0623-FCO40-771-Hong-Kong-Government-investments-in-South-African-stocks-1977 — Page 25

1.

2.

AS

Mr Smith

233

Mr Milton (HKD K247)

HONGKONG GOVERNMENT INVESTMENTS

2.

CONFIDENTIAL

RP RE.

2 2 Ark 17

Reference.

114)

H&K 102

102/1

19

K..

The points which you raise in your minute are dealt with below.

Value of Reserves held in Sterling: The key phrase in the record of your meet- ing with Haddon Cave appears to be 'diversification out of sterling'. One possible reconciliation of the accounts with your conversation is that Haddon Cave meant to say that 70% of Hong Kong's assets were to be taken out of sterling, leaving 30% in sterling. However he then complicated interpretation by using the figure of 89% which was the portion of the reserves held in sterling after the first diversifica-

Ipation. It would appear that the ought to have said that the diversification out of

sterling (at first 2%) became 11% and was to become 70%.

tualis Whath did sing 3.

When the diversification began: I do not have in my possession a full set of Hong Kong government accounts for the past and so have had to use just the published accounts. These show the diversification of the overseas assets held by the fiscal reserves fund began in the financial year 1972. The attached table details the figures. The figures relate only to the long term assets of the fiscal reserve fund, which are only part of the assets of Hong Kong government. My feeling is that the Hong Kong telegram (9 June) was drafted to create the impression to which you refer; a more accurate picture would have been given if the word 'further' had been inserted before degree in the penultimate line of the answer to Question 1. It would be accurate to say that my authority for stating that the policy of diver- sification began in financial year 1972 is the Report of Director of Accounting Services of the Hong Kong government. The figures in the attached table are in broad agreement with the figures quoted by Haddon Cave in your minute.

The

4. Current Policy of the Hong Kong Government: I attach a photocopy of page 12 of the Report of the Exchange Fund for the year ending December 1975. The underlined sec- tion gives details of the current exchange policy of the Hong Kong government. Treasury is aware of the amounts involved but not of the proportions.

5. Figures to be used: I will be unable to produce an analysis of the overseas assets of the Hong Kong Government at the end of 1976 until the 1976 report of the Exchange Fund is received. This should be available in Hong Kong by now. In addition the government accounts would be needed and would not be available until mid-April at the earliest. We do have some information on their sterling assets as we are used by the Bank of England as a post-box for transmission of figures to Hong Kong. However we have no knowledge of their foreign currency assets. are correct in noting the slight discrepancy between the figures contained in my minute and that in Barratt's letter; this was because a degree of approximation was needed in analysing the Hong Kong accounts. I agree that only the currency analysis should be provided as long as a rider is attached to the figures stating that the country of investment may differ from the country of the currency used for the investment.

6.

Lord Goronwy-Roberts should also be aware that the current government policy towards sterling balances is that they should be rundown in an orderly manner. To achieve that end, any reduction in official balances in the market will be met by activation of the so-called 'Safety Net Agreement' by which $1.5 bn is made available to the UK. In addition the UK government is offering holders of ofcial balances the opportunity to switch their holdings into a dollar denominated security. Initial approaches have been made to the Hongkong Government by HMT.

Finally, I confirm that the size of Hong Kong's fiscal reserves is not relevant to the current issue; the disposition of these reserves is relevant and has been

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/taken

CODE 18 - 77

CONFIDENTIAL