CONFIDENTIAL
dollar deposit base. These more restrictive money market conditions adversely affected the rate of growth of Hong Kong's exports. Although 1973 was a record year for world trade (OECD exports rising by some 13%, in quantity terms) Hong Kong's domestic exports increased, in quantity terms, by some 7% only (though this was a marked improvement on its performance in 1972).
Internal and External Inflation
23. But this still slow rate of growth was not solely a consequence of the tightening of bank credit. During the second half of 1973, interest rates increased still further in Hong Kong in line with sharp movements abroad and this, on top of exchange rate uncertainties, had a further unsettling effect on producers. In addition, and associated with the stock market boom, there had been an acceleration of increases in property prices and rents (to such an extent that in the domestic sector the government introduced more comprehensive rent controls) and this also added to firms' trading difficulties. Furthermore, with the gathering momentum of inflation abroad as the world trading boom proceeded, Hong Kong's manufacturers were faced with rapidly rising import prices for raw materials and semi-manufactures, the supplies of which were becoming increasingly less reliable. Import prices increased overall by more than 20% in 1973, compared with less than 4% in 1972 and for the first time in many years the terms of trade deteriorated. Largely because of these uncertainties the demand for labour remained slack (reported vacancies showing a sharp decline), with increases in output coming mainly from higher productivity and extended working hours. As a result, manufacturing wage rates continued in 1973 to increase by about 10% only.
24. This relatively slow rate of growth of money wage rates came in the face of exceptionally rapid increases in consumer prices in the wake of very sharp increases in import prices for foodstuffs and household goods (reflecting not only mounting world inflation but also more aggressive pricing policies by China) and in the wake also of the heaviest rainfall in the region in more than a century (which seriously disrupted local food supplies). Consumer prices increased by nearly
13
CONFIDENTIAL
/20%
A