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become a net supplier of domestic credit to the banking system. Such a limitation would enhance
the transparency of the reserve-backed nature of the currency.
Initial public stock offerings, largely of shares in mainland Chinese firms, have resulted in
volatility in financial markets, and sharp deviations have been observed between their subscription
and secondary market prices. To improve the stability and transparency of market activity, it may
be desirable to review the methods used to issue these shares; in addition, we welcome your
intention to study ways of reducing frictions in the clearing system that have contributed to sharp
movements in short-term interest rates. Finally, the growing sophistication of Hong Kong's
financial markets suggests the need for an ongoing assessment of the pros and cons of current
rigidities in the system for setting some bank deposit rates.
On fiscal policy, in spite of projections of declines in the government balance in recent
budgets, the outturns have reflected a rather stable surplus in relation to GDP. A similar situation
appears to be likely in FY 1993/94. This prudent stance has been desirable in light of robust
growth in private demand and the high degree of utilization of domestic resources. Much of the
explanation for deviations between actual and projected budget balances involves unexpected
strength in revenues from asset transactions and the postponement of some capital expenditures.
We have concerns that these circumstances may not continue duties on asset transactions are
volatile relative to other sources of revenue, while capital spending will need to rise to provide the
infrastructure, such as the ACP, required to sustain high rates of growth over the medium term. In
addition, strains on the fiscal position may result from increasing political pressures for tax
reductions and higher social spending, as well as possible cost increases due to delays on the
ACP.
Against this background, there are a number of reasons for continuing the prudent fiscal
stance pursued in the past. From a short-term perspective, continuing high utilization of domestic
resources underscores the need to avoid adding to demand pressures. In this context, the impact
on prices is likely to involve, not only higher direct costs of public works projects themselves, but
also spillover effects on other sectors of the economy of the associated resource demands. From
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