CONFIDENTIAL
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5. We asked about the property market which the Financial Secretary wisely signalled as a key area in his maiden speech. We were told to expect a consolidation in prices rather than a massive down-turn. The HKSB wants to avoid over-heating: they were watching the situation closely and limiting mortgages to 70%.
The budgetary outlook
6. The picture presented in the Budget was stronger than previously forecast, in part because of greater confidence about growth prospects. Moreover, it would improve further, if all went well, but the more that this is admitted publicly, the greater will be the pressure to make additional commitments, and this would be hard to resist. We noted that it would be tricky to budget for surpluses (which might be needed on macroeconomic grounds) when this meant further increases in taxes.
HKSB
7. The HKSB were waiting impatiently for Bank of England approval of their proposed merger with Midland. Negotiations have now resumed and are covered in separate telegrams. The prospects for agreement do not currently look good, although a rebuff to Hong Kong would be very damaging to confidence in Hong Kong. Meanwhile the HKG are looking at some of the consequences if the merger does go ahead. John Gray (Chief Executive) was at pains to deny that HKSB's position was to any significant degree "privileged" - a message which evidently has not got through to Lu Ping.
Hong Kong Monetary Authority
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8. Mr Nendick (Secretary for Monetary Affairs) said that the possibility of creating such a body was arousing press interest. The Governor had yet to decide (and we would be consulted shortly), but the thinking at official level was that a Monetary Authority could be created in name, but not as a new legal body, as an extension of the Exchange Fund. This would still be a Government Department but with an expanded remit to ensure the stability of Hong Kong's financial system. It could then employ its own staff and bring in international bankers (including the Bank of China when the time was right) on to the Exchange Fund Advisory Committee. In this way we could tell the Chinese that this was not privatisation nor contravene to the Basic Law. The local community preferred not to have major changes. What was proposed would require only a very small legislative change and should not arouse LegCo controversy as the creation of a new body would. Mr Nendick was keen to get ExCo approval quickly and talk to the Chinese in May in the Confidential Financial Dialogue (which was proceeding
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CONFIDENTIAL