TNAG-1271-FCO40-1621-Financial-policy-in-Hong-Kong-1983 — Page 4

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Switchboard 01-233 3000

4225 Direct Dialling 01-233

22 December, 1983

It me kong the cold shoulder.

Second Permanent Secretary

- ANTONY ACLAND

Sir Antony Acland, KCVO, CMG, Foreign and Commonwealth Office, Whitehall, SW.

3/12

HONG KONG

Recent discussions between Douglas Blye, the Hong Kong Secretary for Monetary Affairs, and a very few people in the Treasury and Bank of England brought into focus a possible contingency that has been troubling us for a little while: that is the possibility that were financial conditions in Hong Kong to deteriorate seriously, for example as a result of a turn for the worse in the talks with the Chinese, the Hong Kong authorities could find themselves drawn into contemplating more extensive support operations for Hong Kong banks. The extent of contingent financial liability that might come into question is of course a matter of concern to both our departments, particularly since it would be a liability that, as we understand it, could fall to be met by HMG should it exceed the resources of the Hong Kong Government.

2. We are not comforted by the doubts we know the Bank of England have about the quality of banking supervision in the Colony;

or

by Blye's references to what is being uncovered at the Hang Lung Bank as the new management looks through its books. Blye also suggested that, in the worst case, if a substantial portion of the property sector in Hong Kong were to collapse, some form of support might have to be considered for the Hong Kong and Shanghai Bank.

3. The right course of action on any particular case may well depend a good deal on circumstances. But I do not think we can afford simply to await events. There are certain things which we should establish, and agree between us and with the Governor of Hong Kong as soon as possible.

4.

First, Blye said that he hoped to put in hand a factual analysis of the degree of exposure of different Hong Kong banks. We applauded this. I hope you would agree that we should encourage the Governor to

get the work completed as soon as possible, and reported to us.

5.

Secondly, I think we need a clear understanding about procedures for consultation and agreement before any commitments (including commitments in the form of public statements and assurances) are entered into by the Hong Kong authorities. This might seem to be an unwelcome constraint on the Governor, but we cannot afford to overlook the risk that his actions and statements could be committing UK Government resources.

16.