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02653
MDLIA 8304
BY THE AIRPORT AND OTHER PUBLIC WORK PROJECTS, THE MISSION CONSIDERS THAT INFLATION IS NOT LIKELY TO DECLINE IN THE IMMEDIATE FUTURE.
5. THEY ARE CONCERNED THAT A CONTINUATION OF INFLATION RATES WELL IN EXCESS OF THOSE IN MOST TRADING PARTNERS, COMBINED WITH THE MAINTENANCE OF A FIXED EXCHANGE RATE, MAY WELL REDUCE THE LONGER- TERM COMPETITIVENESS OF HONG KONG'S ECONOMY. WHEN DOMESTIC DEMAND DISSIPATES, A WEAKENED EXTERNAL POSITION COULD LEAD TO A CYCLICAL ECONOMIC DOWNTURN, WHICH WOULD BE EXACERBATED IF, AT THE SAME TIME, THE US DOLLAR AND HENCE THE HONG KONG DOLLAR WERE TO APPRECIATE SIGNIFICANTLY. SUCH A SCENARIO UNDERSCORES THE IMPORTANCE OF AVOIDING AN ENTRENCHMENT OF INFLATIONARY EXPECTATIONS OR OTHER
ECONOMIC RIGIDITIES.
MONETARY POLICY.
6. THE MISSION WELCOMES THE ESTABLISHMENT OF THE HKMA WHICH
HAS RAISED FINANCIAL CONFIDENCE AND FACILITATED ENHANCEMENTS TO THE FINANCIAL SYSTEM, SUCH AS THE PROPOSED NEW CLEARING SYSTEM FOR DOMESTIC DEBT.
7.
THE MISSION CONSIDERS THAT THE EXCHANGE RATE LINK HAS PROVIDED A TRANSPARENT AND FIRM POLICY ANCHOR WHICH WILL REMAIN OF CENTRAL IMPORTANCE IN THE PERIOD LEADING UP TO 1997. THERE WAS A TECHNICAL SESSION TO EXPLAIN THE MECHANICS OF THE CASH ARBITRAGE PROCESS TO THE MISSION. THEY AGREE THAT THE LINKED RATE SYSTEM REMAINS THE BEST OPTION FOR HONG KONG'S MONETARY POLICY.
8.
THE MISSION CONSIDERS THAT THE LIQUIDITY ADJUSTMENT FACILITY HAS PLAYED A USEFUL ROLE IN SMOOTHING THE IMPACT ON FINANCIAL MARKETS OF TEMPORARY DISTURBANCES. THEY SUGGEST TO ESTABLISH A FORMAL CONSTRAINT THAT CREDIT EXTENDED THROUGH THE LAF SHOULD NOT EXCEED THE OUTSTANDING VALUE OF EXCHANGE FUND BILLS AND COLLATERALIZED FOREIGN EXCHANGE ASSETS SO THAT THE HKMA COULD NOT IN FUTURE BECOME A NET SUPPLIER OF DOMESTIC CREDIT TO THE BANKING
SYSTEM.
FISCAL POLICY.
9. WHILE NOTING THE LIKELY SURPLUS OUTTURN IN FY 1993/94, THE MISSION FEELS THAT THE CIRCUMSTANCES STRONG REVENUE FROM ASSET TRANSACTIONS AND DELAYS OF CAPITAL EXPENDITURES - RESULTING IN UNEXPECTED SURPLUS MAY NOT CONTINUE. IN ADDITION, INCREASING
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