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C & Themen FED
Chi HallettELD
My Momis
Left
me
by the Governor
299
(565)
Enclosure (4)
Brief for the
Governor in London,
He bus com Planning Stiff September 1983
Possible manifestations of a
loss of confidence
(drafted by FS)
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Introduction
There has been a gradual erosion of
confidence since the talks began. This is
(1) (2)
reflected by sluggish growth in private consumption expenditure and a decline in private investment expenditure during a period of recovery in the export sector, and by a sharp depreciation in the
exchange value of the Hong Kong dollar(3). There
are other, less obvious but equally insidious
strains running through the economy.
This paper
#
provides a brief analysis of the first and second order effects on the economy of a situation in which the talks are perceived to be progressing towards an unacceptable or unattractive solution, or not progressing at all, in other words a situation giving rise to a loss of confidence in varying degrees.
Financial sector
2.
The effect of such a situation would be a
continuing and growing loss of confidence in the Hong Kong dollar. The foreign exchange market
would become very volatile, with transactions going inexorably one way towards a de facto de- monetization of the Hong Kong. dollar, as all sectors try to shift their savings and earnings into foreign currencies mainly the US dollar.
S
The Government could do little in such a situation to reverse the trend. If major banks were to try to REGISTRY halt the shift out of Hong Kong dollars, this might Action Taken lead to a sudden and substantial loss of confidence
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