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became less buoyant and this was soon to be reflected in Hong Kong's economic fortunes. In 1971 Hong Kong's domestic exports increased by only 4%, in quantity terms, compared with as much as 10% in 1970 and 16% in 1969. In consequence, the demand for labour slackened and by 1972 wage rates in the manufacturing sector were increasing at an annual rate of around 10% only, compared with nearer 20% in 1970. The gross domestic product in 1971 increased, in real terms, by only 3% and, per head of population, by as little as 1% (the lowest in more than a decade).
Exchange Rate Instabilities
18. Although, by 1972, world demand was again in an expansionary phase, Hong Kong's domestic exports remained sluggish (increasing by about 41% in quantity terms) with the result that the demand for labour continued to be relatively slack. But this slackness was now partly
on account of a desire further to contain labour costs in the wake of
new uncertainties for Hong Kong's exporters arising from turbulence on world foreign exchange markets. With the 'Smithsonian' currency realignments at the end of 1971, the Hong Kong dollar had been effectively revalued, by about 81% in terms of the United States dollar (making Hong Kong's exports more expensive in the United States, its largest market), and effectively devalued in terms of the Japanese yen (making Hong Kong's imports more expensive from Japan, its second largest overseas supplier). Then, in mid-1972, the United Kingdom announced that sterling would henceforth be allowed to float and that the Sterling Area (of which Hong Kong formed part) would be confined to the British Isles. Following this, the Hong Kong dollar's traditional link with sterling was broken and a link was established instead with the United States dollar. Later, in February 1973, the United States dollar was devalued by 10%, but with the Hong Kong dollar maintaining its value in terms of gold/SDR's.
These changes
in parities had a profound effect on the country pattern of Hong Kong's trade. Most noticeably the quantities imported from Japan declined in 1972 and 1973 by about 10% in all, whilst the quantities imported from the United States increased, by more than 30%. On the other hand. exports to the United States, which had already been facing
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