I
L.
absorption of labour and the maintenance of wages that would follow from the extra Government expenditure. (There is some recent evidence of this: the present low level of unemployment in Hong Kong, and the
素
G
suggest
size of recent wage increases in the construction industry, that public expenditure projects particularly MTR and the housing programme may have absorbed all of, or more than all of, the resources originally made idle by the slack in the private sector.) This is one respect in which classical theory may be a surer guide to the requirements of the Hong Kong economy than Keynesian theory. Nevertheless there is room for argument about how far budget deficit- ing can be carried, and my own view is that the Hong Kong authorities are likely to continue to err on the side of being too cautious, not least because the problem may continue to be compounded by the chronic tendency to under-estimate revenue and over-estimate expenditure. However, in spite of the frequent references to "fiscal reserves" and "fiscal guide-lines" (many of which seem to me completely meaningless) the Hong Kong authorities do not seem unaware of the real issues
involved.
Central Bank
6. The World Bank Report on Hong Kong recommended in effect that the Monetary Affairs Branch and the Exchange Fund should between them evolve into a Central Bank. No doubt this will eventually happen: for example, I understand it is intended to take the fiscal reserves into the Exchange Fund, thus facilitating Government intervention in the foreign exchange market (in the past the Government has had to borrow from the Hong Kong Bank in an attempt to prevent an excessive appreciation of the Hong Kong dollar, though I understand that an Ordinance does exist which permits the Government to issue Treasury Bills). But it must be recognised that the Government's ability to intervene in foreign exchange markets will continue to be limited not only by the factors outlined earlier, but also by doubts over how far China would wish to see such intervention, or indeed would wish to see the Colony's, foreign exchange holdings pooled and held by a
Central Bank.
4
CONFIDENTIAL
17