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WDTH CUSTOMERS OR IN THE INTER-BANK MARKET WILL CONTINUE TO BE SET BY THE FORCES OF COMPETITION, AND THAT, ALTHOUGH THE RATE SHOULD SETTLE CLOSE TO THE ON RATE, THE PUBLIC MUST NOT EXPECT TO FIND
THE RATE FIXED AT PRECISELY THAT LEVEL.
27. THE INITIAL PUBLIC RECEPTION TO A MEASURE DESIGNED TO STABILISE THE EXCHANGE RATE IS EXPECTED TO BE FAVOURABLE. THE SUCCESS.
OF THE SCHEME DEPENDS, HOWEVER, UPON LATER FINANCIAL REACTIONS WHICH CANNOT BE PREDICTED. IF INTEREST PATES WERE TO RISE, EVEN IF ONLY TEMPORARILY, CERTAIN SECTORS - PARTICULARLY PROPERTY COMPANIES AND HOME BUYERS - WOULD BE HURT AND COULD BE EXPECTED TO REACT ACCORDINGLY.
CONCLUSHON
23. THE PROPOSED SCHEME APPEARS TO BE THE ONLY PRACTICAL METHOD OF STABLISHING THE EXCHANGE RATE AT THIS TIME. HTS INTRODUCTION
WOULD SHIFT THE BURDEN OF CONFIDENCE CRISES ONTO BANKS AND BORROWERS
AND THENCE ASSET PRICES. INFLATION WOULD BE CONTROLLED. THE INTEREST RATE ROUTE COULD IN THE WORST CIRCUMSTANCES BE PAINFUL, BUT WOULD NOT POSSESS THE SORT OF APPARENT SELF-FEEDING INSTABILITY THAT THE EXCHANGE RATE HAS EXHIBITED ON SOME RECENT OCCASIONS. IN TERMS OF LONGER-TERM ECONOMIC CONSIDERATION, THE SCHEME WOULD SPELL THE END OF THE EXCHANGE RATE AS A DIMENSION OF ADJUSTMENT, BUT WOULD INTRODUCE ANOTHER MIN-BUILT AUTOMATIC MECHANISM WHEREBY THE HONG KONG DOLLAR MONEY SUPPLY AND INTEREST RATES WOULD TEND TO ADJUST N A STABILESING MANNER TO BALANCE OF PAYMENTS PRESSURES, WHETHER RESULTING FROM DOMESTIC OR EXTERNAL DEVELOPMENTS. THE BENEFITS IN TERMS OF LOWER INFLATION RATES MIGHT HAVE TO BE PAID FOR BY LOWER GROWTH RATES. RISKS ARE INVOLVED, BUT THEY SEEM FAR LESS THAN THE RISKS OF MAINTAINING THE STATUS QUO. 14 ANY CASE THERE IS ARGUABLY A POLITICAL NEED FOR ACTION.
*INTEREST WITHHOLDANG TAX
29. THE ADMINISTRATION CONSIDERS THAT THE IMPACT OF THE SCHEME, AND THE DEGREE OF CONFIDENCE T ATTRACTS, WILL BE SUBSTANTIALLY ENHANCED IF THE INTEREST TAX ON HONG KONG DOLLAR DEPOSITS IS SIMULTANEOUSLY REMOVED.
30. EXAMINATION OF THE FURTHER IMPLICATIONS FOR REVENUE FROM PROFITS TAX AND POSSIBLE WAYS OF PREVENTING ANY EROSHON HAVE NOT YET BEEN COMPLETED. INDEED THEY HAVE JUST STARTED. #T IS THEREFORE PROPOSED THAT INTEREST TAX ON HONG KONG DOLLAR DEPOSITS WETH FINANCIAL INSTITUTIONS SHOULD SIMPLY BE EXEMPTED FROM TAX WITH EFFECT FROM MONDAY 17 OCTOBER, PRIOR TO ANY MORE FUNDAMENTAL LEGISLATIVE CHANGES WHICH MAY BE INTRODUCED IN THE BUDGET NEXT SPRING. THE FINANCIAL SECRETARY WILL SPEAK ON HOW HIMMEDIATE LEGISLATION CAN BE IMPLEMENTED. -7-
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