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CONFIDENTIAL
(Confidential)
Sir,
Hong Kong,
4 January, 1974.
On re-reading my first annual report, that for 1972, I recall the calm confidence with which I then wrote. I now realise it had been a very easy year. In contrast 1973 was peppered with alarums and distractions; nothing seemed to go entirely right and much went wrong. But though it has been a difficult year, and, from point of view of the administration industry and commerce alike, a very demanding one, it has turned out not so badly in the end. Some solid economic administrative and social progress has been made.
Economic
2. In the economic field the year has been dominated by rises in the prices. of imported raw materials and foodstuffs, producing inflation on a scale un- precedented in Hong Kong, shortage of raw materials for some key industries, and adjustment to drastic changes in the relative exchange rates of Hong Kong's major trading partners.
3. After an uncertain start to the year, the economy succeeded in adjusting correctly to imported inflation (by increased productivity), and to the new exchange rates (by modifying both traditional sources of supply and directions of export), and exports and growth picked up. The final results look like showing an increase in the volume of domestic exports of 6 per cent (24·8 per cent in value) over 1972, and about 7 per cent in the Gross Domestic Product in real terms. These are respectable enough.
4. The prospects for 1974 were for a continuation of this process of adjust- ment and recovery with a similar or greater rate of growth. But the oil crisis may have changed this outlook, not because Hong Kong is likely to be directly hurt (apart from inconvenience) but because of the possible effect on the level of demand in Hong Kong's markets abroad, on the supply and prices of raw materials, and on availability of shipping and aircraft. We are giving a great deal of thought to what the Government could do if 1974 sees these unpleasant possi- bilities materialise. Since we are committed to major programmes of social improvement which assume revenue based on continued growth, there could be some hard decisions to take.
5. Two other problems have been the subject of difficulty and some acrimony during the year: discrimination against Hong Kong's products, particularly in some UNCTAD preferences, and the sterling guarantee agreement covering the Colony's sterling reserves.
Trade negotiations
6. With considerable help from Her Majesty's Government and the Embassy, real progress has been made over discrimination in Japan. With regard to discrimination against Hong Kong in the EEC, the possibility of progress in 1975, and the firm statements made by Her Majesty's Ministers, have blunted resent- ment at the prospect of the UK in 1974 discriminating against her own Colony, but trouble may be expected if nothing can be achieved in 1975.
7. The Colony was also encouraged by the outcome of the negotiations of the Textile Group of GATT. The principles governing control of the textile trade are vital for Hong Kong, and the Colony could live with those agreed in Geneva. It of course remains to be seen how they will be applied.
CONFIDENTIAL