TNAG-2472-FCO40-3599-Confidential-talks-between-the-UK-and-China-regarding-financ-1992 — Page 108

CONFIDENTIAL

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FROM: P F Ricketts, HKD

DATE:

30 March 1992

cc: Mr Burns

Mr Broadbent, Economic

Advisers

Mr Stone

FCO/HKG DIALOGUE ON ECONOMIC AND FINANCIAL MATTERS

1.

Thank you for sending me a copy of your draft terms of reference for this week's visit. These seem to me to give you a pretty full menu. One comment and one suggested addition:

- the comment is that I would not recommend spending too long on the hypotheticals in the first tiret of para 5. One can dream up endless catastrophe scenarios for Hong Kong. I think you will get more out of your talks if they are targetted on actual issues;

the addition is on the implications of the HSBC/Midland affair. I hope that in your talks with the FS and others you could touch on two aspects:

(a) the future of HSBC's "privileged position" if as

expected the Bank of England insist that the mind and management of HSBC Holdings should move to London. There are already calls in the pro-China press for this privileged position to be reconsidered. I see coincidentally that the Bank of England report comes down cautiously in favour of a Hong Kong monetary authority: not because the Exchange Fund Office and HSBC are managing things badly at the moment, but to equip the Hong Kong authorites to take on extra functions if needed, particularly settlement (a purely HSBC function now) and note issue (mainly HSBC). It would be interesting to know if this line of thought is likely to catch on in HKG or in the markets and also how people assess the likely Chinese attitude. The Chinese might not be averse to ending HSBC's (increasingly anachronistic) pro bono publico role. On the other hand, they would not want to see any weakening of Government control over financial and monetary matters. They may want to build up the Bank of China's role eventually to take over HSBC functions. But if the Bank of England are going to press the idea, we ought to have some assessment of the Chinese attitude.

SEBABO

CONFIDENTIAL

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