FINANCIAL AND MONETARY AFFAIRS
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rate index fell to 102.9 on December 15. On December 16, the Renminbi was devalued by 21.21 per cent against the Hong Kong dollar (as well as other major currencies). Consequently, the effective exchange rate index closed the year at 109.3, 8.6 per cent higher than 1988.
Deposit rates administered by the Hong Kong Association of Banks were changed six times during the year, comprising three upward adjustments in the first quarter and three downward adjustments thereafter. At the end of 1989, the savings deposits rate was 5.25 per cent and the three-month and 12-month deposit rates were 6.5 per cent and 7.5 per cent respectively, while the best lending rate stood at 10 per cent. The respective rates at the end of 1988 were also 5.25 per cent, 6.5 per cent, 7.5 per cent and 10 per cent.
Total deposits with authorised institutions in Hong Kong grew by 19 per cent during 1989, compared with 20 per cent in 1988. Analysed by currencies, Hong Kong dollar deposits rose by 12 per cent while foreign currency deposits increased by 24 per cent. Of the latter, the respective growth rates for US$ and non-US$ foreign currency deposits were 22 per cent and 27 per cent. The broadest definition of the money supply, HK$M3, grew by 15 per cent in 1989, compared with a growth rate of 19 per cent in 1988. This was broadly in line with the increase in nominal gross domestic product, estimated at 14 per cent.
Loans for use in Hong Kong (including those to finance trade) grew by 25 per cent in 1989, following an increase of 30 per cent in 1988. However, reflecting the deceleration in economic growth, these loans increased less rapidly in the second half than in the first half of the year. At the end of 1989, domestic loans accounted for 52 per cent of the total amount of loans and advances outstanding.
In the capital market, the most notable development was the six-year Hong Kong dollar-denominated bond launched by the World Bank in May. This was the first Hong Kong dollar paper issued by a supra-national borrower in Hong Kong since the public announcement by the government of its more relaxed attitude towards Hong Kong dollar borrowings by non-residents. The bonds carry a nominal value of HK$500 million and will mature in May 1995. The six-year maturity is in line with recent World Bank bond issues, the bulk of which have a maturity of five to seven years. The bonds were well received by both domestic and international investors. Since mid-June, they have been listed on the Hong Kong Stock Exchange. At the end of December 1989, the six-year bond was bid at 103.8, implying a yield to maturity of 9.2 per cent.
The market for fixed-rate negotiable certificates of deposit remained relatively quiet, notwithstanding the easing in local interest rates since April. For 1989 as a whole, there were altogether 52 issues of negotiable certificates of deposit reported to the Securities and Futures Commission. Of the 45 issues which were denominated in Hong Kong dollars, 35 were on fixed-rate terms. At the end of 1989, the total value of negotiable certificates of deposit outstanding amounted to $34 billion, roughly the same as at end-1988.
As with major overseas stock markets, stock prices on the Hong Kong stock exchange were generally on an uptrend in the first five months of 1989. From a figure of 2 687 at the end of December 1988, the Hang Seng Index rose almost continuously to 3 310 on May 15, its highest level since October 1987. Political events in China then sent the index down to 2 094 early in June. As the political situation in China became clearer, the index gradually climbed to 2 844 on October 10. The resilience of the local economy after the events in June, the declines in local interest rates and the good performance of major bourses overseas supported this recovery. However, following a substantial fall in the US stock market on October 13, the Hang Seng Index dropped by 181 points (or 6.5 per cent) on October 16, to 2 602. But, along with the quick recovery in overseas markets, the Hang