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Action Taker.
pa.
TO IMMEDIATE UKDEL IMF/IBRD WASHINGTON
TELNO 33
OF 18171OZ FEBRUARY 93
INFO IMMEDIATE HONG KONG, PEKING, UKREP JLG HONG KONG INFO IMMEDIATE BTC HONG KONG
(10)
175445
MDHOAN 9022
IMF/IBRD 1997 ANNUAL MEETINGS: HONG KONG'S TELNO 116
1.
WE AGREE WITH TUR. GRATEFUL IF YOU COULD RESPOND TO THE CHINESE DIRECTOR, DRAWING ON THE LINE TO TAKE IN PARA 2.
HURD
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SAVINGRAM
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FM UKDEL IMF/IBRD WASHINGTON
TO FCO SAVINGRAM NO. 34
[102300Z]
OF FEBRUARY 10, 1993
AND INFO.SAVING HONG KONG, MANILA (FOR DAVIS ASDB)
IMF: HONG KONG--1992 ARTICLE IV CONSULTATION
See UKDEL telno 42 of February 3
031/10.
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DETAIL
1. Before the meeting, I circulated BUFF/ED/93/13, and Che (China)
circulated BUFF/ED/93/15 (both faxed to London and Hong Kong). Che was
complimentary of economic performance, stressing that much of this success
reflected strong growth performance in China. He supported the exchange rate
link to the dollar, but was very concerned by the rising projected total
construction costs of the airport. He nonetheless reiterated Chinese continued
commitment to adhere to the Sino-British joint declaration, and to ensure a
smooth transition in 1997. Che made no additional comments during the meeting
itself.
2. Bonzom (France) said that the main problem facing HK was inflation. Core
inflation was still above 10 percent, and there was now a risk that inflationary expectations might start to become entrenched in the economy. This had to be avoided at all costs, especially as HK is a major financial
centre in the region, and because of the delicate transition process currently underway. He welcomed the measures taken on the supply side (labour importation and land sales), and encouraged that these policies be pursued.
He said that if inflation persisted, both Fiscal and Monetary policy should be tightened. In this context, he suggested a 'one shot' revaluation of the exchange rate against the dollar, which he claimed would allow real interest
rates to rise. If this was not done, then fiscal tightening was even more
important. He agreed with the staff's assessment that the current budget projections were likely to lead to strong aggregate demand and so stronger
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inflationary pressure in the medium term. He regretted that planned revenue
raising measures had been dropped in 1992, and urged caution on the level of
public expenditure. Finally, he welcomed the recent measures aimed at
strengthening monetary management and the collection of economic statistics.
3. Tabata (Japan) commented on the remarkable economic performance in
recent years. However, while inflation had slowed, it was still about 10
percent, reflecting demand pressures, supply constraints, and structural rigidities. He thought that the HK authorities should now search for ways of reducing current expenditures. He was also concerned that monetary policy was
too lax. HK needed positive real interest rates. Recent events in the ERM
showed that a fixed exchange rate system was fundamentally flawed and he
advised that the HK dollar should be allowed to float. He welcomed the recent
creation of the HK monetary authority, and agreed with Bonzom on the
importance of labour import measures which would ease conditions in the labour
market. In this context he warned of the dangers of allowing public sector
wages to rise too quickly. Wages had to grow below the growth rate of
productivity.
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4. Abbott (US) agreed that performance was remarkable. Nonetheless he, too,
was concerned that inflation was still 10 percent. This reflected the fixed
exchange rate combined with a build up in excess demand. It was important that
inflation expectations did not become entrenched in the system. If they did,
then the exchange rate link with the US dollar would become unsustainable -
thus demanding a policy response. In his view, therefore, the exchange rate
link, which he supported, effectively placed an upper bound on inflation. The
inability to use monetary policy placed greater pressure on fiscal policy. He
commented that the 5 year fiscal simulations in the staff paper seemed
plausible, and so agreed with the staff that the authorities should be ready
to take revenue and expenditure measures.
STAFF REPLIES
5.
Citrin (staff) emphasized the benefits of the exchange rate link, which
he concluded were greater than the associated costs. Minimising the costs
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