SALAHL
RESTRICTED
G.
HONG KONG/US DOLLAR LINK
1. Contribution to stability
Since October 1983 the Hong Kong/US dollar link has brought about
stability and maintained confidence by creating a predictable financial framework. Any change in the link would be a matter for the Hong Kong Government. They are convinced tht such an action
would cause uncertainty and speculation in the years ahead, which
could seriously harm Hong Kong. We endorse this view.
2.
Criticism of the link: risk of protectionist measures against
Hong Kong
We seek to put Hong Kong's case as robustly as we can to our fli ends and partners and in international fora. The merits of the case are clear. Hong Kong's overall trade remains more or less in balance. Hong Kong operates an open trade regime fully in accordance with the General Agreement on Tariffs and Trade. The Hong Kong/US dollar
link was introduced in 1983 following a period of severe exchange
rate instability. It has been maintained ever since while the while
the US dollar has both risen and fallen, providing clear evidence
that the link is not intended as an instrument of trade policy. Any protectionist measures against Hong Kong in retaliation against maintenance of the present dollar link would be patently
unjustified. I believe that we are succeeding in getting this message across to the international community.
3.
Risk of inflation
There was a modest increase in the rate of inflation in 1987. The most representative consumer price index increased by 5.5% compared with 2.8% in 1986. The upward trend has continued into 1988. this acceleration is partly due to the rising costs of imports, but the main cause has been the strength of the economy, putting strong pressure on property prices, rentals, wages and salaries. The upward movement in inflation must of course be watched with care. But current levels remain low by historical standards.