ARZACU (2)
CONFIDENTIAL
Background
THE HONG KONG/US DOLLAR LINK
1.
The link was introduced in 1983 following a period of severe exchange rate instability and has ever since played an important
part in maintaining stability and confidence. The Hong Kong Government believe the link will remain essential in the run-up to 1997 and that to break or alter the link just once would encourage speculation, with damaging effects on confidence. Some
economists have argued that overheating and inflationary
pressures in the economy necessitate adjustment and that this is
best achieved by revaluation. However evidence of overheating is not clear cut and the Hong Kong Government have indicated that they
will accept some inflationary adjustment.
2.
The Hong Kong Government has therefore resisted all
pressures, both international and speculative, for a revaluation.
Recent measures, including the threat to impose "negative interest
rates" on large Hong Kong dollar deposits, have been effective against speculators. There has also been some evidence suggesting that the growth of the US/Hong Kong trade deficit has been reversed.
Pressure for revaluation has therefore receded a little, at least
for the time being.
HONG KONG AS A NIE
3.
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The United States Government has attacked the Asian NIES,
including Hong Kong, for exchange rate policies which
in US eyes maintain the value of their currencies at artificially low levels.
In the case of Taiwan and possibly South Korea, there may be grounds for criticism. But we do not believe that there is any case against
Hong Kong, which is a free trader and has no overall surplus on visible trade. Hong Kong is understandably sensitive about the tendency to lump it together with the other Asian "dragons": in our contacts with the US we have argued strongly that it is quite different and should be treated in a distinct way. Recent US statements have recognised the value of Hong Kong's open trading
CONFIDENTIAL