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measures taken recently, in the property and labour markets, were therefore
particularly important.
14.
I noted what some Directors had said about fiscal policy not being
sufficiently tight, and said that the authorities were considering a number of
options which would broaden the tax base. However, I also noted a number of
speakers rightly pointing to the risks of raising taxes in Hong Kong too much.
I assured Spencer that there was absolutely no incentive for the authorities
to run down fiscal reserves to minimum levels in the run up to 1997. Indeed,
ensuring Hong Kong's continued stability and prosperity after 1997 was a - -
probably the--major preoccupation of Hong Kong policy makers.
15.
I had two further points on the exchange rate link. First I thought
that those Directors who advocated a change in the exchange rate
underestimated the crucial role of the link as an anchor for expectations
during a period of great underlying political uncertainty, in a country which
is particularly prone to financial speculation and rumour. A realignment,
however firmly described as a one off adjustment, would undoubtedly give rise
to speculation that there could be a reversal in the future. Second, if
Directors believed, as I did, that monetary policy needed an anchor, then it was not at all clear what other anchor there could be in a small open economy like Hong Kong, with sophisticated financial markets. Measures of the money
supply were unlikely to be a good guide to monetary policy decisions.
16.
Finally I said that the Hong Kong authorities accepted the temporary
arrangement to move to bicyclic procedure for Article IV consultations. This would mean no discussion in the Board next year. However, they looked forward
to the interim discussions they would be having with the staff. I thanked
Directors for their comments, and undertook to transmit them to my Hong Kong
authorities.
17.
A copy of the Deputy Managing Director's summing up will follow by
bag.
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