127
GRS 1150
CONFIDENTIAL
FM HONG KONG
TO DESKBY 06080JZ FCO
TELNO 3255
OF 0603032 OCTOBER 86 INFO PRIORITY PEKING
CONFIDENTIAL
TOP @ DIG.
MIPT: SECRETARY OF STATE'S VISIT THE MOOD OF HONG KONG
BEGINS
SUMMARY
1.
PUBLIC CONFIDENCE IS STILL DELICATE, ALTHOUGH IT APPEARS TO HAVE PICKED UP CONSIDERABLY FROM THE LOW POINT OF LATE 1985/EARLY 1986, THE RESOLUTION OF PRACTICAL PROBLEMS IN THE JLG AND LAND COMMISSION, HONG KONG'S STRONG RECENT ECONOMIC PERFORMANCE AND THE BULLISH STOCKMARKET OFFER ENCOURAGEMENT, BUT CONFIDENCE IN THE LONG TERM POLITICAL FUTURE IS STILL UNCERTAIN AND MANY PEOPLE ARE MAINTAINING A WAIT AND SEE'' ATTITUDE UNTIL THE 1987 REVIEW AND BASIC LAW DRAFTING ARE COMPLETED. THOSE WITH THE MEANS TO DO SO ARE STILL MAKING ARRANGEMENTS TO GET OVERSEAS STATUS.
ECONOMY
2.
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ECONOMIC PERFORMANCE IN 1986 HAS BEEN BETTER THAN IN 1985 AND BETTER THAN WAS EXPECTED AT THE TIME OF THE 1986 BUDGET. AS A RESULT, THE FORECAST FOR THE GDP GROWTH RATE HAS BEEN RAISED FROM THE BUDGET FORECAST OF 4.5 PERCENT TO 5.6 PERCENT. THIS IMPROVEMENT IS BASED MAINLY ON A STRONG GROWTH IN DOMESTIC EXPORTS. INFLATION AND UNEMPLOYMENT REMAIN LOW. THE PROPERTY MARKET, WHICH WAS STRONG LAST YEAR AND EARLY THIS YEAR, SEEMS TO HAVE STABILISED. THE STOCK MARKET IS BOOMING AND THE HANG SENG STOCKMARKET INDEX HAS BROKEN THE 2000 BARRIER FOR THE FIRST TIME. OVERALL CAPITAL INVESTMENT REMAINS WEAK - BOTH GROSS DOMESTIC FIXED CAPITAL FORMATION AND THAT PART OF IT REPRESENTED BY PRIVATE INVESTMENT
IN PLANT AND MACHINERY ARE EXPECT TO GROW BY ONLY 1 PERCENT IN REAL TERMS THIS YEAR. DATA IN IMPORTS SUGGEST, HOWEVER, THAT WITHIN THE ABOVE AGGREGATES, INVESTMENT IN INDUSTRIAL MACHINERY IS GROWING STRONGLY, PERHAPS BY AS MUCH AS 15 PERCENT IN REAL TERMS SO FAR THIS YEAR. THERE ARE SUGGESTIONS THAT OVERSEAS INVESTORS ARE MORE BULLISH THAN LOCAL ENTREPRENEURS.
BANKING
3. CONFIDENCE IN THE BANKING SECTOR HAS IMPROVED FROM THE LOW POINT IN 1985 AFTER THE TIME OF THE OVERSEAS TRUST BANK TAKEOVER BY THE HONG KONG GOVERNMENT, BUT IS STILL RATHER WEAK WITH THE SMALL LOCALLY INCORPORATED BANKS PARTICULARLY VULNERABLE TO RUMOURS. THE ENACTMENT OF THE NEW BANKING ORDINANCE EARLIER THIS YEAR, AND ITS COMING INTO OPERATION IN SEPTEMBER, HAS BEEN A HELPFUL FACTOR. REACTION TO THE RECENT USE OF THE EXCHANGE FUND TO RESCUE THE HONG NIN BANK WAS MORE MUTED THAN EXPECTED, SHOWING A CERTAIN PRAGMATIC ACCEPTANCE OF THE NEED FOR SUCH ACTION BY THE HONG KONG GOVERNMENT TO MAINTAIN STABILITY. COMPETITION IN THE BANKING BUSINESS IS KEEN WORLDWIDE, AND AS A RESULT SOME OF THE FOREIGN BANKS REPRESENTED IN HONG KONG HAVE BEEN RATIONALISING THEIR OPERATIONS. REDUNDANCIES HAVE BEEN REPORTED IN SOME MAJOR BRITISH AND AMERICAN BANKS. BUT THERE IS CONTINUED KEEN INTEREST, PARTIC- ULARLY FROM JAPANESE BANKS, TO ESTABLISH THEMSELVES IN HONG KONG.
POLITICAL
4. CONFIDENCE IN THE IMMEDIATE AND SHORT TERM PROSPECTS IN THE ECONOMIC FIELD IS NOT MATCHED IN THE POLITICAL. THERE IS INTENSE
INTEREST AMONG THE MEDIA AND POLITICAL GROUPS. ARISING FROM CONCERN OVER THE LONG TERM FUTURE OF HONG KONG, IN THE DRAFTING OF THE BASIC LAW AND THE PROSPECTS FOR THE 1987 REVIEW. DISCUSSIONS ON THE CONTENT OF THE BASIC LAW, AND PARTICULARLY ON THE POLITICAL STRUCTURE, INCLUDING THE METHOD OF SELECTING THE CHIEF EXECUTIVE AND THE RELATIONSHIP BETWEEN THE CPG AND THE SAR AFTER 1997, HAVE ATTRACTED A GOOD DEAL OF PUBLICITY, AS HAS THE SPLIT IN VIEWS BETWEEN THE HONG KONG MEMBERS ON MANY OF THE ISSUES. THE CPG APPEARS WILLING TO BE FLEXIBLE, BUT THERE ARE NEVERTHELESS SUSPICIONS THAT IT IS STEERING THE BLDC AND THE BLCC RATHER TOO MUCH ITS OWN WAY. THE PACE IS QUICKENING, INCREASING THE PRESSURE ON BOTH COMMITTEES.
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