CONFIDENTIAL
5. Simple econometric analysis of monthly average data from 1/79 to 3/83 does not allow any robust relationships to be identified. Inspection of figures one and two suggests the
following however:
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6.
the regular and strong seasonal pattern of the visible
trade balance seems to be linked to the recovery of the
effective rate in the latter stages of 1979, 1980 and
1981, but the decline in 1982 is continuous and not attenuated by the usual seasonal narrowing of the trade
balance
periods of relatively high interest rates in the Territory (mid-1979 and end-1981) coincide with increases in value
of the HK$, both the effective rate, and the rate against
the dollar
the trend decline is probably related to the relatively
faster inflation in the Territory over this period,
though the trend is more pronounced (annual decrease in value against the US$ of around 8%) than the average
difference between HK and US consumer price inflation.
Political uncertainty has no doubt influenced the current
decline in the exchange rates, but the removal of withholding
tax on foreign currency (but not HK$) deposits in the HK
monetary sector may have contributed to the relative unattractiveness of holding HK$. HK$ deposits have remained fairly static since the end of 1981, and the increase in foreign currency deposits has resulted in a fall in the HK$
share of deposits with the financial system. Table A shows
these developments.
CONFIDENTIAL
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