CONFIDENTIAL
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Trading, The Monopolies and Merger's Commission, or from the DTI; he had heard that Brussels had cleared the bid at 1100 that morning. He remained concerned that, against the odds, the MMC might wave through Lloyds bid. If Lloyds were to increase the bid beyond what HSBC could match Midland Institutional Investors would be likely to go for the short term cash benefits rather than consider the superior long term benefits that HSBC could bring to Midland. There was still some way to go in persuading Midland shareholders. The offer closed on 7 July if by then they had 50% then on 1 January 1993 HSBC Holdings would become resident in the UK.
China understood and probably supported the move. They had been anxious that it might destablise Hong Kong, but they had got to know Mr Purves, had confidence in him and wanted him to stay in charge in Hong Kong. K S Li (HSBC Director who left the Board recently) believed that China had taken the matter in its stride. By and large relations with the PRC were good. And Mr Purves believed HSBC would get their share of new branches in China as the economy continued to improve. HSBC expected to remain a note-issuing bank in Hong Kong and welcomed the prospect of the Bank of China becoming a note issuer.
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6. Mr Patten asked if inflation was insoluble because of the exchange rate link. Mr Purves thought the link was 20% of the inflation problem. The major difficulty was labour shortage and Hong Kong's effective "over employment" rate. The annual review of civil service salaries was likely to produce a row. The settlement would probably be too high in the eyes of the private sector. In the last two years civil servants had felt short-changed. The problem was that about four years ago the salary commission had got it wrong the adjustment factor for to reduce public sector pay awards from direct comparability with their private sector analogues (to take account of the fact that eg public servants enjoyed greater security etc) was about 1.3%. This was too small. The private sector thought it should be about 3.3%. If civil servants got what they wanted in the current pay round the private sector would probably no longer cooperate with the exercise in future; they would refuse to give the analogue figures.
7. The dollar link did provide some political stability. This was not strictly necessary now, but if Deng were to be the first of the old guard to die Hong Kong would need it. The link probably undervalued the Hong Kong dollar now, but if you revalued it once you would not be able to hold the line in the future and the Hong Kong dollar would become vulnerable to international money market predators. The exchange rate had been Hong Kong's Achilles heel in 1983 and it would be again unless the link were maintained.
Than
John Morris
CONFIDENTIAL