G.F. 326
CONFIDENTIAL #2
4
7.
Changes in trade flows are, however, not the only
determinants of changes in the exchange value of the Hong
Changes in interest rate differentials
Kong dollar.
are
also important through
through their influence both on capital
flows and on the timing of the financial flows associated
with trade. In terms of market interest rates, throughout
the year to date there has tended to be an interest rate
differential in favour of the US
US dollar, which has been
quite wide in recent months.
The recent stability in the
effective exchange rate of the Hong Kong dollar at a time
when its nominal rate against the US dollar was weakening
can
be
of influences
overall
explained by the combined
trade flows and the interest rate differential in favour
of the US dollar. Given, in addition, recent domestic
scratchiness which has added to uncertainty, the overall
performance of our currency has been good. I would add
also that the slowdown in the growth rate of loans and
advances is marked.
8.
During the year
the year various further steps have been
taken to encourage the development of Hong Kong as the
world's third largest international financial centre. The
principal was the exemption from interest tax of foreign
deposits with financial institutions
in Hong
currency
Kong, thereby removing the tax incentive to place foreign
currency deposits offshore. At the same time the tax rate
2.
Hong Kong dollar deposits with
with the same
was reduced from 15% to 10%.
CONFIDENTIAL # 3
institutions