THE ECONOMY
57
Under the linked exchange rate system, the Hong Kong dollar moved for most of the time within a narrow range of HK$7.77 to HK$7.81 per US dollar during 1987. Along with the US dollar, however, it depreciated by 23 per cent against the Japanese yen and by 18 per cent against the German Deutschemark during the year. The Hong Kong dollar's overall exchange value, measured in terms of a new effective exchange rate index, fell by nine per cent. The depreciation of the Hong Kong dollar, particularly against the Japanese and European currencies, helped Hong Kong's export performance in these markets, although it also added to the inflationary pressure in the economy through higher import prices.
Another consequence of the linked exchange rate system is that the movement of interest rates in Hong Kong should broadly follow that of the corresponding US dollar interest rates. Until the latter part of October, interest rates in the United States remained generally stable with a gradual upward trend. Consistent with this trend, local money market interest rates firmed up gradually, before easing sharply towards the end of the year. Deposit interest rates administered by the Hong Kong Association of Banks, following a downward adjustment early in the year, were adjusted upwards five times until the crash in the stock market in October, after which the rates were adjusted downward again. Averaged over the year, interest rates were still low compared with their levels in recent years.
Demand for loans was generally strong as a result of the buoyant economic activity. Outstanding loans and advances extended by deposit-taking institutions grew by 56 per cent during the year. Among these loans, 52 per cent were for use within Hong Kong. Deposits with deposit-taking institutions and the money supply also increased, both by 28 per cent. As in the previous years, their foreign currency components grew faster than the overall totals, reflecting in part the development of Hong Kong as an international financial centre. At the end of 1987, about 40 per cent of the total deposits were in Hong Kong dollars. Rising local interest rates during the first three quarters of the year, however, dampened activities in the market for fixed-rate debt securities, which comprised pre- dominantly certificates of deposit. Most of the new issues were on floating-rate terms. At the end of December 1987, the total value of certificates of deposit issued and outstanding was $34 billion. On the same date, there was a total of eight Hong Kong dollar money market or capital market funds holding assets of about $341 million. These funds provide a useful vehicle for small investors to participate indirectly in the wholesale financial markets. The Hong Kong stock market had been extremely active up to October 19, 1987. Turnover for the first 10 months of the year amounted to $333 billion, 273 per cent higher than the corresponding period in 1986. The Hang Seng Index at the beginning of October stood at 3 950, compared with 2 090 a year earlier.
On October 19, 1987, as part of a world-wide collapse of equity markets, the Hang Seng Index dropped by 421 points. The Stock Exchange of Hong Kong subsequently closed the market for four days, during which time volatility and downward pressures continued to dominate markets overseas. On the re-opening of the local market on October 26, 1987, the Index dropped by an historic 1 121 points, wiping off 33 per cent of the total market value of the local stocks. The market continued to be volatile for a short while, in line with the situation in the overseas markets, but gradually stabilised thereafter.
Over the year, the total volume of turnover in the stock market amounted to $371 billion, 202 per cent higher than in 1986. The Hang Seng Index (July 31, 1964 = 100) ended the year at 2 303, compared with 2 568 at the end of 1986. There were 19 instances of companies going public and 28 rights issues, as well as 40 reconstructions of companies or re-activations of shell companies. A total of $44.1 billion of capital was raised in the stock market in 1987.