02/04/93
17:51
202 623 4985
UKDEL IMF-IBRD →→→ ERD FCO
005/009
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the economic and financial stability in Hong Kong as well as the confidence of Hong Kong residents and investors. In this regard, we welcome the Hong Kong authorities' reiteration that they will continue to make efforts to sustain the linked exchange rate system. Also, we appreciate the authorities' adherence to the use of assets under the Exchange Fund mainly to stabilize the exchange rate.
Second, we note with grave concern that within a short period of time the total construction cost of the new airport has increased substantially. This will consequently pass a heavy and wasteful financial burden to the future H.K. Special Administrative Region and Hong Kong residents. Our view remains that there is plenty of room for containment of capital expenditures on the new airport. The Hong Kong authorities are urged to return to a more cost-effective package for constructing the new airport under the guidance of the 1991 Memorandum of Understanding.
Third, as the staff has rightly pointed out, given the constraint on monetary policy, fiscal policy should play a key role in containing domestic demand and repressing inflationary pressures. However, we are gravely concerned with the continued expansionary trend of fiscal policy in 1992 and beyond, resulting mainly from substantial investments in the new airport. The recent tendency to expedite spending is, in fact, eroding the soundness of fiscal policy. In this connection, we are in complete agreement with the staff that the importance of rationalizing budgetary expenditures should be stressed in order to avoid imparting additional stimulus to aggregate demand so long as the economy remains at full employment and inflationary pressures are strong.
Fourth, we have noted that in recent years the Hong Kong authorities have gradually strengthened both their influence in the money market and their supervisory mechanism over the banking sector, in light of changes in the economy and the financial sector. In this connection, we welcome the establishment of the Hong Kong Monetary Authority. We believe that maintaining a stable monetary management framework under the administrative structure is important for economic and financial stability.
Regarding prospects for Hong Kong's economy in 1993, we are confident that despite some uncertainties, the expectations for Hong Kong's economic growth will be optimistic. There are far more encouraging, as well as positive, factors which will continue to lend an even stronger back-up to Hong Kong's economy in 1993. What merits special mention here are the following points;
1.
China's rapid growth with social stability has become the most important source of Hong Kong's sustainable export-led growth. In particular, the recent miraculous economic development in southern China continues to provide enormous opportunities to Hong Kong to widen, as well as deepen, its industrial transformation. Ties between these regions will
become even closer.