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I strongly contested), there was an incentive to reduce assets to the minimum
allowed under the UK/China agreement, and new taxes would be difficult to
impose on the Hong Kong people. The choice was therefore to let inflation
rise, or adjust the exchange rate upwards. He would prefer to see an upward
adjustment in the exchange rate.
5.
Bonzom (France) welcomed the positive recent developments in the
economy, and was complimentary about the very impressive performance in the
past. He agreed with the staff about the importance of renewing the attack on
inflation, which he saw as resulting from the structural change in the economy
towards greater service sector activity. He agreed that the exchange rate link to the dollar had served Hong Kong well. However, the real appreciation
of the exchange rate should not be viewed as a worrying development, because
the balance of trade remained healthy. Unfortunately, control over inflation
had been lost, as displayed by the recent, unsuccessful attempt to raise
interest rates. If a real appreciation over time was inevitable, he would
prefer to see a one shot revaluation of the nominal exchange rate, rather than
a steady rise in inflation. Fiscal policy was very important. The surplus
had declined recently and fiscal policy was now exerting an expansionary force
on the economy. He welcomed the steps taken so far to dampen inflation. But
he also encouraged a broadening of the tax base, including property taxes.
Finally he encouraged a significant improvement in the standard of balance of
payments statistics that were currently available.
6.
Abbott (US) illustrated, with figures, how large the rise in Hong
Kong's export and re-export growth had been since 1983. Productivity in
manufacturing was growing fast, while productivity in services was growing
less quickly. Higher domestic wage growth in manufacturing was leading to
higher wage growth in services. This meant that unit labour costs were rising
more quickly in the service sector compared with manufacturing. This was the
source of the inflationary pressure. The fixed exchange rate was not the
immediate source of the inflation. Export unit values had been growing in
line with US dollar inflation, while the CPI had been growing much faster.
therefore disagreed with any suggestions that Hong Kong was importing US inflation. The peg was controlling prices in the traded goods sector. He
He
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