TNAG-0747-FCO40-951-Visits-of-Foreign-and-Commonwealth-officials-to-Hong-Kong-1978 — Page 68

Mr Stewart (HKGD)

HKK cool!

31

CONFIDENTIAL

?? JUN 1978

PA

HONG KONG STANDING COMMITTEE: CENTRAL MONETARY INSTITUTION (CMI)

1.

At yesterday's meeting of the Standing Committee, I was invited by Mr Cortazzi to record my view in relation to para 7 of Mr M Stewart's minute to the Secretary of State on his visit to Hong Kong.

2.

I see the role of a CMI in Hong Kong as:

(a)

an independent agency to manage the exchange rate and reserves;

(b) public lender of last resort.

The new Monetary Affairs branch of the Financial Secretary's office now performs (a) and the Hong Kong and Shanghai Bank (HKSB) covers (b). It is the latter that concerns me in that I foresee a potential conflict of interest between the HKSB normal (profit-oriented) commercial operations and that of its role as a Government Banker and lender of last resort, which can give it an advantage over other banks, especially when one allows for its technical monopoly position and the interest rate cartel.

3. Of course, I accept that Mr M Stewart heard no complaints locally on his recent visit, and it would be up to smaller banks to protest. However, I would wish to record that an unsatisfactory position does exist in my view because of a latent conflict of interest and a lack of competition due to an absence of a public lender of last resort. Both of these factors could be to the detriment of Hong Kong generally.

19 May 1978

Ainem

Adrian Smith

Smil

Senior Economic Adviser

сс

Mr M J Stewart (Special Adviser)

CONFIDENTIAL