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traders and investors in China. If past experience is anything to go by, the Chinese government is likely to over-react to developments in the economy which are considered undesirable or deviating from the correct path. Fortunately, there are yet few signs of China tightening its controls on the economy, particularly with respect to importation of goods and services and inflow
of foreign investments.
40.
In view of China's fiscal deficit and the need
to finance its modernisation programmes, China will probably have to borrow more money from abroad. China's fund raising activities in Hong Kong may well increase considering that the Hong Kong dollar, due to its link with the US dollar, is very stable against the US dollar and the current Hong Kong dollar interest rates are at
low levels (paragraph 33).
41.
The very rapid growth of Hong Kong's domestic exports and re-exports to China in the first quarter of 1987 further strengthened China's position as the second largest market for Hong Kong's domestic exports and the largest market for Hong Kong's re-exports (paragraphs 21 to 23). Hong Kong is now deeply entrenched in its role as an important entrepôt for China. On the assumption that a substantial part of this trade with China is related to outward processing activities, the productive capacity of the manufacturing sector in Hong Kong has effectively been enlarged significantly. This in a way
has enhanced the flexibility possessed by the Hong Kong economy in satisfying the substantial increase in the volume of overseas demand for its products.
G.F. 326
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