CONFIDENTIAL
slow growth of incomes. The fact that there were substantial surpluses in both these fiscal years was to an extent on account of exceptionally large windfall increases in revenue from stamp duties and land sales following unparalleled activity on the stock market and an associated sharp rise in property prices.
The Stock Market Boom
21. In 1971 and 1972, there had been considerable overseas interest in the stock market and this could have been partly on account of China's rapprochement with the West. The net inflows of funds on capital account through the foreign exchange market were substantial at this time, amounting to an estimated HK$3000 million in 1971 and HK$2000 million in the first half of 1972 (compared with about HK$1000 million in a more 'normal' year). During this 18-month period, the Hong Seng Index of Share Prices increased from around 210 to 440. This sharp rise attracted widespread local interest in the stock market also, and by the end of 1972 the Index had risen to over 840. This further rapid increase was to a large extent fuelled by a considerable expansion of bank credit, advances and loans for the stock market increasing in 1972 by more than those for the ordinary purposes of industry and trade. Soon after, in March 1973, the Index reached a peak of 1,775. But in the second half of 1972 and in the early months of 1973, profit-taking on the stock market by overseas institutions resulted in a net outflow of funds on capital account of over HK$4000 million. This put the balance of payments into deficit and contributed to the index plummeting to 430 by the end of the year.
The Liquidity Squeeze
22. The outflow of funds (which brought the banks' foreign exchange reserves down to around HK$5000 million or a little below the 1971 level by the middle of 1973, and to only 20% of deposit liabilities) and the fact that a considerable proportion of banks' outstanding advances and loans was against shares acquired at grossly inflated prices, resulted in bank credit becoming tighter. And this was reinforced by the banks' decision to raise interest rates in the early months of 1973 in a move to prevent the further erosion of the Hong Kong
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