THE ECONOMY
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In line with the general increase in property prices and rentals, land prices were also driven higher in 1988. Almost all lots put out at government auctions during the year were favourably received.
The Financial Scene
The major financial markets in Hong Kong generally exhibited less volatility in 1988 than in 1987. Monetary and credit expansion became more moderate, against the background of firmer interest rates and a more moderate growth rate of the economy.
Speculation on a revaluation of the Hong Kong dollar, which began in late 1987 and continued in January 1988, caused a temporary strengthening of the exchange rate to HK$7.76 against the US dollar. However, the speculative pressure subsided rapidly thereafter in the face of the government's determination to maintain the linked rate at HK$7.80 to US$1 and the threat of imposing charges on large Hong Kong dollar deposits under the Interest Rates Rules announced by the Hong Kong Association of Banks. For the rest of 1988, the exchange rate of the Hong Kong dollar moved within a narrow range of HK$7.7600 to HK$7.8220. During 1988, the Hong Kong dollar fluctuated, along with the US dollar against other major currencies. Thus the overall exchange value of the Hong Kong dollar, measured in terms of the effective exchange rate index, moved within a range of 99.5 to 103.7 and closed the year at 100.6. At the end of 1987, the index was 100.5.
Apart from a short period at the beginning of 1988 when local interest rates were depressed to very low levels in response to the inflow of speculative funds, interest rates in Hong Kong generally followed an upward trend over the course of the year, in line with increases in US dollar interest rates. At the end of 1988, the interest rates set by the Hong Kong Association of Banks on savings deposits and three-month deposits with banks stood at 5.25 per cent and 6.5 per cent respectively. The best lending rate was 10 per cent. These rates were significantly higher than those recorded at the end of 1987, at 1.5 per cent, 2 per cent and 5.5 per cent respectively.
Loans for use in Hong Kong including those to finance trade, grew by 30 per cent in 1988, the same as in 1987. At the end of 1988, local loans accounted for 55 per cent of the total amount of loans and advances outstanding. Total deposits (in all currencies) with authorised institutions, on the other hand, grew by 20 per cent during 1988, compared with 28 per cent in 1987. Analysed by major currencies, deposits denominated in Hong Kong dollars and in US dollars continued to grow less rapidly than those denominated in other currencies. The growth rates for these three categories of deposits during 1988 were 12 per cent, 20 per cent and 35 per cent respectively. As a result, the proportion of Hong Kong dollar deposits in the total fell from 44 per cent at end-1987 to 41 per cent at end-1988. To a large extent, the rapid increases in foreign currency deposits were the result of measures taken by a number of authorised institutions to compete for deposits, such as the acceptance of foreign currency deposits in lower minimum denominations, the offer of a greater variety of currencies, and the introduction of deposits with less exchange rate risks to depositors. The monetary aggregates, on all definitions, grew at slower rates in 1988 than in 1987. HK$M3, for example, grew by 13 per cent during the year, following an increase of 27 per cent in the preceding year.
The market for debt instruments experienced a modest recovery towards the end of 1987 and at the beginning of 1988, as local interest rates were depressed during the period. The rise in local interest rates since February, however, dampened investor interest in debt instruments, particularly those on fixed-rate terms. For 1988 as a whole, the Securities