XN000022-1983-10-15 — Page 3

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SATURDAY, OCTOBER 15, 1983

+THE RATES OF EXCHANGE WHICH A BANK CUSTOMER WILL OBTAIN, WHETHER EXCHANGING BANK NOTES OR MAKING ANY OTHER FOREIGN CURRENCY TRANSACTIONS, WILL CONTINUE TO BE DETERMINED BY MARKET FORCES, BUT WILL IN PRACTICE BE CLOSE TO THE FIXED RATE OF HK$7.80 EQUALS US$1. THIS WILL BE THE CASE BECAUSE FROM NEXT MONDAY MARKET FORCES WILL OPERATE AGAINST THE BACKGROUND OF THE FIXED RATE FOR CERTIFICATES OF INDEBTEDNESS. I MUST EMPHASISE THAT THESE NEW ARRANGEMENTS WILL MEAN BUSINESS AS USUAL BETWEEN BANKS AND THEIR CUSTOMERS AT STABILISED RATES.

+YOU WILL ASK ABOUT THE IMPLICATIONS FOR THE ECONOMY OF STABILISING THE EXCHANGE RATE IN THIS WAY. IN THE SHORT TERM THERE MAY BE SOME UPWARD PRESSURES ON HONG KONG DOLLAR INTEREST RATES. ONCE THE STABILITY OF THE EXCHANGE RATE BECOMES EVIDENT AND ACCEPTED, INTEREST RATES SHOULD FALL BELOW PRESENT LEVELS. LOOKING FURTHER AHEAD, CHANGES IN THE EXCHANGE RATE WILL NO LONGER BE AN ELEMENT IN OUR ECONOMY'S ADJUSTMENT PROCESS. FACTORS SUCH AS INTEREST RATES AND MONEY SUPPLY WILL ADJUST TO BALANCE OF PAYMENTS PRESSURES AUTOMATICALLY WITHOUT GOVERNMENT INTERVENTION.

+THE GOVERNMENT BELIEVES THAT THIS NEW ARRANGEMENT MUST NOW

WE BE PREFERRED TO THE FREELY FLOATING EXCHANGE RATE SYSTEM. CANNOT RUN THE RISK OF FURTHER SPIRALLING DEPRECIATION, WITH THE RAMPANT INFLATION AND DISTRESS WHICH THAT WOULD BRING TO ALL OUR COMMUNITY. A RETURN OF CONFIDENCE IN OUR CURRENCY IS ESSENTIAL.

+1 SAID THAT I HAD TWO MEASURES TO ANNOUNCE. THE SECOND IS THIS. AS FROM MONDAY (OCTOBER 17) INTEREST ON HONG KONG DOLLAR DEPOSITS WITH FINANCIAL INSTITUTIONS WILL NO LONGER BE TAXED. THIS MEANS THAT THERE WILL NO LONGER BE A TAX ADVANTAGE IN HOLDING FOREIGN CURRENCY DEPOSITS OR IN HOLDING HONG KONG DOLLAR DEPOSITS OFFSHORE.

+AS I SAID LAST MONTH, THE GOVERNMENT MUST TAKE ACCOUNT OF THE POSSIBLE EROSION OF PROFITS TAX REVENUE ARISING FROM THE REMOVAL OF INTEREST TAX. WE ARE STILL STUDYING THIS COMPLEX ISSUE. IN REMOVING INTEREST TAX ON HONG KONG DOLLAR DEPOSITS WITH FINANCIAL INSTITUTIONS, WE ARE DOING THE MOST THAT IS POSSIBLE, PENDING THE OUTCOME OF OUR STUDY. I HOPE TO BE IN A POSITION TO PROPOSE MORE LASTING REFORMS IN THESE FIELDS OF TAXATION IN THE BUDGET NEXT FEBRUARY.

+THESE MEASURES ARE DESIGNED TO STABILISE THE EXCHANGE VALUE OF THE HONG KONG DOLLAR. AND THUS TO PROVIDE A CLIMATE FOR GROWING PROSPERITY WITH RESTRAINED INFLATION. THE GOVERNMENT HAS CONFIDENCE IN THE STABILISED EXCHANGE RATE. SO CAN THE PEOPLE OF HONG KONG. LET US NOW GET ON WITH OUR BUSINESS.+

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