5.
1973, when the banks considerably increased their lending against
shares, there has been very little internally generated inflation.
in Hong Kong and the explanation for this lies partly in the high
degree of responsiveness of the wage rate adjustment process to
changes in the intensity of overseas demand.
(f) Money Supply
11.
The end of the property boom in the mid-1960's led to a run
on the banks, largely on account of their having become over-
committed in their lending to the building and construction indus-
try. But this and the net outflow of funds through the foreign exchange market during the 1967 disturbances apart, the money supply was able (even in the absence of a central bank) to increase
during the decade at a sufficiently rapid rate to finance the sub-
stantial expansion of Hong Kong's trade. By 1971, total deposits
with the commercial banks amounted to HK18,800 million, equiva- lent to aboutHK$4,500 (US$900) per head of the population. Of
this, about a third was in the form of savings deposits. The
degree of confidence in the banking system at this time can be illustrated by the fact that by 1971 some 12% only of the total
money supply was in the form of cash with the non-bank public (the ratio is now even lower, at %).
12.
The need for the money supply to increase at least as fast
as the growth of overseas demand, has, in the absence of a central
bank and even allowing for the possibility of changes in the banks' lending policies, emphasised the importance of having a
more or less continual net inward movement of funds througho
the foreign exchange market. Hong Kong has always had a deficit
in its visible trade but this has generally more than been off-
set by a surplus on invisibles and by net inward movements of
capital. These capital inflows have to an extent been associated
with Hong Kong's political stability, but they have also been
influenced by the stability and strength of the Hong Kong dollar
and by the absence of exchange controls. Even now, the government is not propared to manipulate the exchange rate for the purposes
of demand management, and it is still the case that the banks
do not have to differentlato botwoon rosident and non-resident
accounts. During the 1960's (and, indeed, before) government
revenue almost always exceeded public expenditure by a wide mar-
gin and this exerted a downward influence on the level of imports. The overall flow of funds through the foreign exchange market was, for the most part, unaffected, however, since the bulk of the
CONFIDENTIAL
/government's