7.
In terms of net financial transactions (Table
3), the financial sector of Hong Kong as a whole maintained a net creditor position vis-a-vis China prior to late 1981, confirming the role of Hong Kong as a source
of creait finance for China. However, after late 1981
a reversal in trend and Hong Kong became a net debtor until the second quarter of 1985. The lagged
effect of China's decision in late 1978 to devote three
years (1979-81) to economic adjustment with a view to
rationalising the pace of modernization, and the high
level of interest rates prevailing from 1980 onwards in international financial markets were probably among the
main reasons for the decline in net credits to China over
this period. At the same time, there were apparently
measures taken by China to internationalise its banking business, one of which was by the extension of short-term credit facilities on commercial terms. There were
frequent reports of China's participation as a lender in international syndicated loans to finance major
→
development projects, particularly in Hong Kong
(paragraphs 23 and 24). Another possible reason for Hong Kong's growing indebtedness to China was probably the practice of "liability management", a contemporary banking practice pioneered by US banks in the early sixties. example, a Bank of China branch in Hong Kong may fund its local lendings by borrowing from its head office in
China.
For
Such a transaction will appear in the statistical
returns as "liabilities to banks in China".
8.
Nevertheless, following the completion of the economic adjustment in China and the renewed acceleration of the modernizations programme, China re-entered the international financial markets as a net borrower.
Kong also resumed its net creditor position vis-a-vis
Hong
A
:
G F. 326
CONFIDENTIAL #B