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THE ECONOMY
The plummeting of the stock market in October precipitated a grave problem in the Hang Seng futures market, which suspended trading at the same time as the stock market. There was a large number of defaults on outstanding contracts, resulting in a substantial demand on the Guarantee Corporation which guarantees payment on all contracts executed on the Futures Exchange. To enable the Guarantee Corporation to meet its obligations and the futures market to continue operation, the government put together a rescue package to provide credit facilities of up to $4 billion to the corporation. Apart from the Exchange Fund, others parties also contributed significantly to the facilities, including a few banks, some members of the Futures Exchange and shareholders of the Guarantee Corporation. In the event, the rescue package succeeded in achieving the objective of ensuring continued operation of the futures market, and only $1.8 billion of the $4 billion facilities was actually utilised.
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Before the crash, trading in Hang Seng Index futures was at a high level: turnover amounted to about 3.55 million lots for the first 10 months of 1987. Trading dropped significantly after October, however. For the year as a whole, about 3.61 million lots were traded.-
As a result of the problems in the stock and futures markets, the government set up a Securities Review Committee in mid-November to review the management and operation of the Stock and Futures Exchanges and of the various regulatory bodies. The aim is to consider what changes are desirable to ensure the integrity of these markets, to protect investors, and to maintain Hong Kong as a major international financial centre. The review committee is expected to report in about six months.
Turnover in commodities futures during the year remained modest. For sugar, there were 282 237 lots of 50 long tons each; for soyabeans, 635 975 lots of 30 000 kg each; and for gold, 5 698 lots of 100 troy ounces each.
Unit trust funds continued to develop rapidly. The total number of unit trusts and mutual funds authorised in Hong Kong was 265 on December 31, 1987, compared with 211 at the end of 1986. This figure does not include the numerous sub-funds of authorised umbrella funds. There were 125 applications for authorisation outstanding at the end of 1987, compared with 68 a year earlier.
The price of loco-London gold moved between US$400 and US$498 a troy ounce during 1987, with active trading particularly in the latter part of the year. Movements in the price of gold in the bullion market operated by the Chinese Gold and Silver Exchange Society were similar to those of loco-London'gold. The tael price of gold fluctuated between $4,606 and $3,644 during 1987, ending the year at $4,502.
Inflation
The rate of consumer price inflation, as measured by the Consumer Price Index (A), was 5.5 per cent in 1987. The corresponding rate in 1986 was 2.8 per cent. The pressure of demand on resources and the lagged effect of the increase in import prices brought about by the depreciation of the Hong Kong dollar were the main factors contributing to the more rapid increase in consumer prices. On the other hand, relatively stable import prices of goods from China provided some cushioning effect.
Among the various components of goods and services in the CPI(A), foodstuffs, transport and vehicles, and miscellaneous goods recorded the most rapid increases in prices in 1987, at average rates of increase of 9.6 per cent, 9.2 per cent and eight per cent respectively. These three components together accounted for 71 per cent of the overall increase in the Index.