FO371-46257 — Page 94

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NOTE A

Economic and Financial Situation. Of all developments of the Administration it seemed to me that the Treasury Department is suffering most from shortage of staff. Mr.Butters, who was in charge after his release from internment, had undoubtedly made a good start. As you know, the Administration early decided to declare the Hong Kong dollar as legal tender, to fix an exchange rate against sterling and to suppress the use of Japanese currencies. These moves combined with the fixation of a low price for sales of rice and the institution of free food distribution to indigents, had had an excellent effect in starting the movement of currency and in re-establishing confidence. By the time I reached Hong Kong many shops were open and hoarded stocks of luxury goods were on sale. Prices were admittedly five to ten times pre-war prices, but my own feeling is that as soon as imports start, these prices will fall to more reasonable levels. The Administration has also taken certain steps to promote the

circulation of currency, such as the employment of labour in big numbers for street cleaning, and the subvention of the fishing fleet; and these steps having promoted circulation of money on the lower levels and already checked the flow of people coming for free issues of rice. There is still of course a serious note shortage and banks, hampered by lack of staff, are not yet able to accept even current account business. I discussed this matter with Mr.Fenwick of the Hongkong Bank and I gather that as soon as staff expected from Shanghai in the near future are at work, he will be ready to accept new current account deposits and negotiate cheques in the normal way. It does not appear that other banking business can be started for some time.

Discussing this situation with Brigadier MacDougall, the Brigadier begged for immediate assistance on the financial side. He said that he had asked Mr. Anderson of the Channel to stay on

and help him, but this Mr.Anderson had not been able to do. Would it be possible for Lionel Davis to go down and give him assistance? Even for a short visit. I said that I would discuss this with you, but my own feeling was that, owing to the somewhat special functions of Mr.Davis' organisation, I thought it might not be advisable for him or his men to be linked too closely with the financial administration of the Colony. It may, however, be that Mr. Davis' special knowledge of financial conditions in South China would make a visit from him

to the Brigadier a valuable contribution.

On my first day in Hong Kong, Fapi were selling in the street at about C.N.850 to H.K.1, which gives a cross rate of C.N.8800 to £1. Only Customs gold unit notes were accepted by the street brokers, and there is no market at all yet for the more modern type of Chinese notes. On October 1st, business was being done on the street at about C.N.890 = H.K.81, and the trend seems to be steadily against Fapi. The Administration are worried that considerable quantities of Hong Kong dollars may be going out of the Colony at these low rates; and they have had under consideration the imposition of an export ban: but this at once raises the problem that one of their main tasks must be to encourage the in-flow of essential things such as food from China, for which at present currency must be exported. My own impression is that the credit of the Colony is now being established and that this may result in many Chinese from the mainland being content to keep their money for the time being in Hong Kong for the purpose of buying goods for export to China if and when shipments start reaching the Colony. In this connection the opening of the Banks for currency account business should also prove useful.

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