TNAG-1270-FCO40-1620-Financial-policy-in-Hong-Kong-1983 — Page 199

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Alternatively, at that stage intervention might be in sterling, the more natural course if the HK rate were to be fixed in terms

of sterling with explicit UK backing. In that case those who bought sterling as the HK authorities intervened could be expected to seek quickly to turn much of it into dollars. We would then have to chose between permitting the sterling exchange rate against the US dollar to take the strain, pulled down by the HK dollar; or intervening with our own reserves as in paragraph 4 above. It is difficult to

judge how great the impact on sterling would be, but it could be quite substantial. Large holders of HK Øs, who hitherto have held back for fear of turning the rate too far against them, could be expected to take the opportunity of getting out while the going was good. sterling would be affected not just by the direct impact of these flows, but also by the knowledge in the markets generally that we would be taking the strain.

6.

And

However such intervention were carried out, in the end either the Hong Kong authorities or HMG or both would be acquiring a possibly very substantial volume of HK claims - in return for the current

&

Hong Kong reserves and some part of our current gold and dollar reserves, or financed by increased UK Government borrowing (either in sterling or dollars).

7. Perhaps, at first sight, the least unattractive form this option might take would be a statement that either we or the Hong Kong authorities would if necessary support the Hong Kong & against sterling at some rate well below the current market rate. But it seems very likely that in current conditions such a statement would in itself immediately drive the HK down to the chosen level of defence. Investors and speculators would assume the authorities knew something they did not. It is arguably possible that if the chosen rate were low enough defending it might not prove too difficult. There might be enough buyers at that level to raise the HK above the floor again, for a time at least. But the risks would be very great; at any moment some new political development could require massive intervention to support the rate we would then be committed to, as discussed above.