ENG-1969 — Page 75

FINANCIAL STRUCTURE

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living of the people (by reason of their almost total reliance on imported food and other goods) along with a costly and completely unnecessary deterioration of terms of trade; or of not devaluing the Hong Kong dollar and taking the loss for the most part, directly on the reserves of Government and the commercial banks. After an initial devaluation which maintained temporarily the previous relationship with sterling, the Hong Kong dollar was revalued four days later by 10 per cent against sterling to a new rate of 1s 44d, equivalent to a 5.7 per cent devaluation of the Hong Kong dollar from its previous international parity. This decision cost Hong Kong public funds $450 million or nearly $120 per head of population. This sum included nearly full compensation paid from the Exchange Fund to commercial banks against their consequential losses.

These events finally made it clear that the old relationship with the pound was no longer appropriate to Hong Kong's economic situation. On the other hand, it was not possible for Britain to allow any significant diversification of Hong Kong's sterling assets of £350 million into other currencies, in view of her own depleted reserves; while at this stage she was not prepared to offer guarantees of the international value of sterling reserves. Negotiations in London in April and May 1968 resulted in a novel arrangement whereby Hong Kong was given the right to use its sterling assets to purchase British Government bonds, of seven years maturity, denominated in Hong Kong dollars. The rate of interest was per cent below the current cost of United Kingdom Treasury borrowing for seven years. These bonds were purchasable to a value of £100 million or 50 per cent of official reserves, whichever was greater, up to an absolute maximum of £150 million. This arrangement went far to safeguarding the value of Hong Kong's reserves in terms of the Hong Kong dollar but safeguarded their international value only if it were possible to avoid for seven years a devaluation of the Hong Kong dollar.

In July 1968, with the backing of the so-called Basle arrangement whereby credits of US$2,000 million were made available to Britain by the Group of Ten, Britain offered all members of the sterling area, including Hong Kong, a free guarantee in terms of US dollar value of all officially held sterling in excess of 10 per cent of each

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