CUINT 1DENTIAL
Reference
But it seems
to work in MK's cium states.
vi
somewhat greater if HKG had not invested so much time in show commitment to the link.
6.
After the most recent speculative bout one would hope that the
However, markets now believe this committment to be credible. renwed American pressure might cast doubt on this.
The adjustment process
1
7.
The Economist article reports that to cool down the overheating Hong Kong economy, inflation is being left to do the trick'. This is not critical, and the accompanying facts, notably rising export prices and slower growth, suggest that such a mechanism is working. This seems to vindicate what we and HKG have been arguing for time: that Hong Kong is sufficiently flexible not to have to rely on
This sort of the exchange rate to achieve rapid cost adjustment.
observation, however, still tends to send shivers through many ecnomists for whom inflation is intrinsically a dirty word.
A basket
some
8. In making its case for a basket, the article makes one claim, one criticism of the link, and a conclusion. Of these, I am interested in the first, generally agree with the second and would dispute the third.
9.
The claim is that many Hong Kong business folk are pressing for a change'. Have we any evidence of this?
10.
The criticism of the link is that it is too much at the mercy of the 'vagaries of the American dollar'. This seems to me to be a fair point. The US$ has a capacity to behave like a roller coaster; and, however flexible the Hong Kong economy, it cannot be denied that the recent periods of low and high growth coincided with an ascendant and declining dollar. If the link were being redesigned from scratch the case for some basket linkage would be fairly strong. However, such an option is not on offer: the link has a history and thus cannot simply be redesigned. As noted, much has already been invested in the credibility of the committment not to change. That the cost in terms of lost credibility should enter any cost benefit calculation is often forgotten by those who criticise the link.
11.
The HK Any
The conclusion is that a basket similar to those operated by other Asian economies is what is required. This seems to be very dubious. Such baskets, often related to trade patterns, aim at setting an economically appropriate exchage rate. The virtue of the link is that the rate is given whatever economic conditions. economy is expected to adjust to that given, not vice versa. move to a 'relevant' exchange rate would inevitably increase the belief that the HK authorities would try to fine tune the rate to prevailing conditions, again undermining confidence in the exchange rate as a fixed reference point. Any basket that was considered should remain far removed from the specific circumstances in Hong Kong. The SDR might be one possibility.
MA 3AAA/2
CONFIDENTIAL
CODE 18-77