XN000022-1984-01-12 — Page 17

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The fall from the peak started in early 1981 and its main cause was oversupply and highly inflated prices. The boom was bound to bust, as it had done in so many other places in the world when property prices had outrun the market. I will hazard a guess that in 1982 the international banking community had become generally more

cautious as a result of concem about the degree of exposure to overseas

risks. Then came the new element the realisation in Hong Kong that

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1997 was only just 15 years away; and that an ever increasing number of decisions, both business and personal, would need to take that fact

into account,

1983 began, oddly enough in a calmer atmosphere but the second half of the year brought new problems. In the adjustment process some well known companies had got into difficulties. There were rumours of trouble among some of the financial institutions. Above all the

exchange value of the Hong Kong dollar declined substantially not only against the U.S. dollar but against the basket of ourrencies used for

our trade weighted index. Some of that decline was attributable to

the strength of the U.S. dollar itself and some no doubt to the decline in the rate of growth of our trade. But a great deal was attributable to political nervousness about the state of the talks in Peking. I do not have to tell this audience that foreign exchange markets are

Bensitive creatures. In Hong Kong the omission of two words from a communique on the September round of the talks led to a substantial

fall in the rate. If the fall had been due to economic factors alone

we should have left the economy to make its own adjustment. But the

causes were not economic and it had become apparent that the adverse effects on the Hong Kong economy, and on our trade and financial reputation, when added to the likely consequential increase in the domestic rate of inflation, out-weighed by a substantial margin the risks of changing the system which had served Hong Kong so well in the

previous decade. We therefore linked the rate of the currency to the U.S. dollar via the note issuing mechanism and left it to interest

rates and arbitrage to keep the open market rate close to it.

Nevertheless the depreciation of the Hong Kong dollar had been substantial. It is now being reflected in price levels and will continue to show for a while. In consequence the rate of inflation in 1983 is likely to be about 10 per cent, roughly the same as 1982.

/So much,