TNAG-1270-FCO40-1620-Financial-policy-in-Hong-Kong-1983 — Page 9

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SECRET

CELLOR OF

CHANCEL

THE EXCHE

HIQUER

HUD

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FJ/n me FSINS

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RECORD OF A MEETING BETWEEN THE CHANCELLOR OF THE EXCHEQUER ↑ Danaki

AND THE GOVERNOR OF HONG KONG:

4.00 P.M., 7 OCTOBER, NO.11 DOWNING STREET

KLO

Jutt 0/10

Ꮕ

Sir E Youde said that he had been very grateful for the recent advisory visit by Mr Peretz and Mr Goodhart in connection with the proposed scheme to stabilize the Hong Kong exchange rate. They had done an excellent job. The Hong Kong Financial Secretary was preparing a paper on the scheme for EXCO: he would see it on his return to Hong Kong on 9 October; and EXCO would consider the paper on 12 October. If they approved the scheme, it would be introduced on the evening of 13 October. Predicting EXCO's reactions was difficult: their reactions might in part be affected by the health of the Hong Kong $ during

the course of next week.

2. The Chancellor said that Peretz and Goodhart had thought the scheme workable and appropriate. It was of course important not to expect too much of it. The awkward Hong Kong political situation was bound to have an adverse financial manifestation; and no financial scheme, however ingenious, could prevent that. The question was where to take the strain, on interest rates or on the exchange rate. If the Governor thought it best to shift it away from the exchange rate, we would certainly not wish to dissuade him. Moreover the scheme would remedy a long term weakness in the Hong Kong monetary system, to which the Bank of England had long drawn attention, and which had been highlighted by the political crisis.

3.

Sir E Youde thought that some in EXCO might feel, if the movement of the Hong Kong $ next week was similar to this weeks, that the crisis had passed, and did not call for a major change, such as the introduction of the scheme. He was however inclined to feel that considerable underlying instability would remain. But if the scheme were introduced, and the next round of talks with Peking went well and produced no adverse reactions, he might be criticised for an unnecessary "panic measure". The Chancellor thought that such criticism would be unreasonable. The insulation provided by the scheme was bound to be