BANK CONFIDENTIAL
5
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16 The resulting debt ratios improve over the forecast period: debt/GDP falls from 18% in 1992 to 12% in 2001, debt/exports from 12.5% in 1991 to 9.5% in 2001, and debt service from 4.2% in 1992 to 1.7% in 2001. These forecast ratios result in a 10-year default probability of 8%. But this figure has to be treated with caution due to data problems (see para 2), and the unusual nature of risks to Hong Kong: the extreme and increasing dependence on the economic performance and political stability of China. Hence the main risks are closely linked to those outlined in the China forecast.
There are some
Risks to the Forecasts
17 Risks to the forecasts are considerable, and would appear to include (in no particular order)
(a) the succession to Deng: there are currently several possible candidates to succeed Deng, which could prompt a destructive power struggle, particularly if Zhu Rongji, the current favourite, undermines his position by mishandling his attempts to cool the economy;
Aren Arbulent (b) a turbulent retrocession for Hong Kong undermining confidence. Possible fall-out might
involve: the reimposition of capital controls; the severing of the HKS:US$ link; the collapse of intikiel to come
asset prices; collapse of financial institutions; etc.
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(c) the exacerbation of centrifugal forces within Chinese society, with tensions Guangdong asserting its economic independence, possibly prompting a forceful reaction from Beijing;
(d) the collapse of China's banking system prompted by past failure to control massive lending by NBFIS;
(e) loss of most favoured nation (MFN) status for China, as almost one third of China's exports go to the United States (10% directly and 20% via Hong Kong);
(f) breakdown of GATT negotiations, prompting a global trade war;
(g) disintermediation of Hong Kong as gateway to China, eg if China improves its own infrastructure to cope with increasing trade, and/or resolves its political problems with Taiwan allowing direct trade to begin.
The coincidence and timing of any combination of the above could have serious consequences for China's predicted performance. It was felt inappropriate at this stage to predict a hypothetical (and somewhat arbitrary) worst-case scenario; however, we would be happy to examine the consequences of any specific scenario which the Group may to decide upon at the meeting.
Bank of England
Developing World Division HO-3
Middle & Far East
24 September 1993
Jakob Lund (601 5625) / Andy Orchard (601 4483)
Jakob fund
A. Cochard.