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THE ECONOMY
maintaining stability in the exchange rate of the Hong Kong dollar. They also served to protect the interests of the banks' depositors. The actions taken were effective in over- coming these problems.
To promote further the stability and effective functioning of the banking system, a new Banking Ordinance was enacted on May 29, 1986 and came into operation on September 1. The new ordinance, which replaced the previous Banking and Deposit-taking Companies Ordinances, provides a single supervisory framework for both banks and deposit-taking companies, now collectively known as 'authorised institutions'. The ordinance contains new provisions designed to facilitate more effective supervision of banks and deposit-taking companies, in particular, by providing the Commissioner of Banking with sufficient dis- cretion and flexibility to enable him to identify problems at an early stage and take action as the situation demands.
A total of 10 new banking licences were granted to foreign banks in 1986, the highest figure since the moratorium was lifted in 1981. The increasing number of foreign banks conducting business in Hong Kong as well as using Hong Kong as a base for extending their operations elsewhere is a reflection of the growing importance of Hong Kong as an international financial centre. There was, however, a further decrease in the number of registered deposit-taking companies, reflecting a continuing process of adjustment to the three-tier banking system introduced in 1981, and the effect of imposing more rigorous entry requirements. The gradual 'pruning' of the sector, with the majority of the remaining deposit-taking companies now owned by banks, has removed many of the weaker in- stitutions with the result that the sector as a whole is now fundamentally sound.
In the stock market, the total turnover in 1986 (with turnover on the previous four exchanges and on the unified Stock Exchange combined) amounted to $123 billion, 62.4 per cent higher than in 1985. The Hang Seng Index ended the year at an unprecedented high of 2 568 (July 31, 1964=100), compared with 1 752 at the end of 1985.
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In 1986, there were nine instances of companies going public and 13 rights issues, raising a total capital of $8,685 million. There were nine reconstructions of companies or re-activations of shell companies.
The total number of authorised issues of commercial paper and certificates of deposit was 119 on December 31, 1986, compared with 90 at the end of 1985.
The turnover on the Futures Exchange in 1986 was: for sugar, 273 800 lots of 50 long tons each; for soyabeans, 330 524 lots of 30 000 kg each; for gold, 6 366 lots of 100 troy ounces each; and, for the Hang Seng Index Futures, 825 279 lots.
The price of loco-London gold moved between US$325 and US$445 a troy ounce during 1986, with active trading particularly in the latter part of the year. Movements in the price of gold on the Chinese Gold and Silver Exchange Society were similar to those in the loco-London gold market. The tael price of gold fluctuated between $3,030 and $4,100 during 1986, touching a high of $4,095 on October 7, 1986, before ending the year at $3,629.
Inflation
The rate of consumer price inflation, as measured by the increase in the Consumer Price Index (A), remained low at 2.8 per cent in 1986. Taken together, 1985 and 1986 represent the best two consecutive years since the mid-1970s in terms of this inflation rate. However, towards the end of 1986 the lagged effect of the pick-up in import prices since the second quarter of the year was beginning to affect retail prices. Further, with aggregate demand beginning to exert pressure on the aggregate supply of resources in the latter part of the