Kong's productive pattern in the future. A more liberal plicy might undermine asset values, and hence pose a threat
the banking system. But this is scarcely a plausible argument if it happens when property values are escalating. There certainly seems to be some room for creative use of land policy, notwithstanding the JLG difficulties this might cause.
13. Turning to fiscal policy, HKG, and all its critics, are all emphasising the importance of restraining public expenditure during the next five years, and the need to reorder some priorities to accommodate PADS. But I think the recent IMF Mission were pretty realistic in recognising that the pressures are going to be very great, and that some upward creep in expenditure as a percentage of GNP was virtually inevitable. Against this background, I have a good deal of sympathy with their recommendation that HKG should be looking for rather bigger tax increases than they appear to be contemplating at present, and at restructuring to increase revenue sharply in a boom. Only if monetary policy can be tightened at will can HKG avoid this. We should also bear in mind the Government's direct influence on prices and wages, through fees, charges and government pay. I agree with the TMF that holding down fees below costs is not a sensible
course.
There
The.
14.
This leaves us with monetary policy and the link. are three possibilities: first, the present policy of sticking to the link with the US dollar; second, a step adjustment in the parity, which might be accompanied by a change to a link with a different currency or to a basket of currencies; and third, floating. The last can be rejected fairly quickly. Floating would allow a more flexible monetary policy. But it is attractive in economies in which wage and price adjustments are relatively sticky and in which the likelihood of speculative capital flows is relatively small. These are emphatically not the conditions of Hong Kong. greatest achievement of the link has, indeed, to eliminate these speculative capital flows. The benefit of greater flexibility to move interest rates up and down in a floating rate regime would be swamped by the sort of instability in capital flows which was banished when the link was introduced.
15. A step change in the parity for the link would have the attraction of both dealing an immediate blow to inflation and of speeding up the adjustment process.
This would not be an unmitigated blessing. Too rapid and painful an adjustment could do more medium term damage than the messier process that is prospect at present. Moreover, it would be tricky to pick the right amount of adjustment; it would be quite easy to overdo it, dealing a sharp blow to the traded goods sector, at a time when confidence will anyway be relatively fragile and
CONFIDENTIAL