6650X
HONG KONG
CONFIDENTIAL
1
Although real growth in the Hong Kong economy slowed from 13.5% in 1987 to 7.4% in 1988, with a further slowdown officially forecast for this year, overheating persists. Unemployment stands at only 1.3% and a severe shortage of labour is putting pressure on wage levels and encouraging investment in lower cost manufacturing
facilities across the border with China. Although re-exports, partly the product of this investment, have been increasing very strongly, the trade position is deteriorating. Rents and property prices are rising sharply and, while the official index shows
inflation just below 10%, the Hong Kong bank and others believe
that a double digit figure would better reflect reality.
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2 To cool demand, the authorities have been nudging interest rates up since last summer, by restricting the balance which HSBC
is required to maintain with the Exchange Fund under the new
accounting arrangements and thus keeping monetary conditions tight. The level of the balance has been reduced by stages the last occasion in January and Joseph Yam (Nendick's Deputy) sees the possibility of tightening the screw by reducing the balance a little further in the period ahead. The authorities regard the experience with the new accounting arrangements as satisfactory so far. From HSBC's point of view, John Gray commented that the government had not been using the system very actively but that they were probably keeping something in hand
until things came to a crunch.
3
Short-term interest rates, unusually, offer a premium over US
rates but this has not, so far, had an impact on the exchange rate which has remained relatively stable. The last time the Hong Kong
dollar came under heavy pressure, at the end of 1987, the situation eased following the introduction of arrangements to make possible the imposition of negative interest rates on deposits. Although
this instrument was not, in fact, used, Nendick believes that its
availability had a strong psychological effect on speculators, in
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