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CONFIDENTIAL
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PS/Lord Caithness
FROM: S H Broadbent
DATE : 10 December 1991
cc: Sir J Coles
Mr Burns
Mr Ricketts, HKD or
Very interesting. I have premed for relaxing the laban laws. They should do more a this
HONG KONG: INFLATION
requlaily
area and
reduce to
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of GOP
accounted for Govt. expenditure. PADS will
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no
but are
cerbate this and acher should be taken
cannot tell HILL whert to co 1. Hong Kong Department have asked me to respond to the cly at our queries on inflation recorded in Sir J Coles' minute of goue
December.
Is there an inflation problem?
time look
2. Inflation has been on a rising trend in Hong Kong since 1987. The consumers price index peaked at 13.9% in April 1991. The figure has since fallen, albeit largely because "special factors" have unwound. Businessmen are concerned that it is undermining Hong Kong's competitiveness. For this reason, and because of the effects on vulnerable social groups, it has been a major concern in Legco.
Causes
3. The main reason for the inflation has been burgeoning demand (from the boom in Southern China) running into capacity constraints (mainly slower growth in the labour force). To some extent inflation in Hong Kong is an inevitable part of the process of adjustment by which low value added production is shifted to China. It is not a threat if manufacturing productivity continues to grow, and means higher real incomes for everybody in Hong Kong. But higher wages also mean higher prices for services such as transport and haircuts In normal circumstances the process would be self-correcting, but demand in coming years may be stoked up further by government spending both PADS and meeting some of the aspirations of the newly democratised system.
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CONFIDENTIAL