XN000022-1987-03-10 — Page 2

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TUESDAY, MARCH 10, 1987

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LACK OF CONFIDENCE CLAIM NOT PROVED

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A CLAIM THAT HONG KONG HAS A PERSISTENT PATTERN OF DISQUIET REFLECTED IN THE HESITANT PACE OF INVESTMENT AND IN SUSTAINED CAPITAL OUTFLOWS IS NOT PROVED BY FACTS, THE DIRECTOR OF INDUSTRY, MR K.Y. YEUNG, SAID TODAY (TUESDAY).

SPEAKING AT A LUNCHEON MEETING OF THE ROTARY CLUB OF HONG KONG NORTHWEST, MR YEUNG SAID THERE WERE TWO AREAS THAT HAD RECENTLY BEEN IDENTIFIED BY SOME OBSERVERS AS INDICATING A LACK OF CONFIDENCE IN THE FUTURE OF HONG KONG'S ECONOMY.

THESE WERE CAPITAL OUTFLOWS FROM HONG KONG AND INVESTMENT IN HONG KONG, HE POINTED OUT.

+ON THE FIRST POINT IT SEEMS TO ME THAT WHAT IS MORE IMPORTANT THAN THE EXISTENCE OF A NET OUTFLOW OF FUNDS ON THE CAPITAL ACCOUNT IS THE UNDERLYING MOTIVATION.

+WHILST THERE MUST HAVE BEEN SOME ADJUSTMENT IN INVESTMENT PORTFOLIOS OF HONG KONG RESIDENTS INTO OVERSEAS ASSETS AS A FORM OF INSURANCE AGAINST UNCERTAINTY ABOUT THE FUTURE, THERE IS EVIDENCE THAT MUCH OF THE OUTFLOW HAS BEEN MOTIVATED BY PURELY COMMERCIAL OR FINANCIAL CONSIDERATIONS.

+IN THE MONEY MARKET, FOR EXAMPLE, DESPITE THE ABSENCE OF EXCHANGE RISKS PROVIDED BY THE LINK BETWEEN THE HONG KONG DOLLAR AND THE U.S. DOLLAR, FOR ABOUT TWO YEARS THE INTEREST RETURN AVAILABLE ON HONG KONG DOLLARS HAS BEEN CONSISTENTLY BELOW THAT FOR U.S. DOLLARS, PROVIDING INVESTORS WITH AN INCENTIVE TO SHIFT INTO U.S. DOLLARS THAT HAS NOTHING TO DO WITH LACK OF CONFIDENCE.

+ INDEED, OVER THE PAST FEW YEARS NET LENDING TO BANKS OVERSEAS BY BANKS IN HONG KONG HAS BEEN CONSISTENTLY ON THE INCREASE.+

MR YEUNG SAID THERE WERE OTHER INDICATIONS THAT HONG KONG'S CAPITAL OUTFLOWS WERE NOT PRIMARILY MOTIVATED BY LACK OF CONFIDENCE.

+FOR EXAMPLE IT HAS BEEN REPORTED SEVERAL TIMES IN THE PRESS THAT HONG KONG ACCOUNTS FOR THE LARGEST SHARE OF FOREIGN INVESTMENT IN THE PEOPLE'S REPUBLIC OF CHINA OVER THE PAST SEVEN YEARS.

+FOR THE COUNTRY AS A WHOLE, HONG KONG IS SAID TO HAVE ACCOUNTED FOR OVER 60 PER CENT OF THE TOTAL VALUE OF FOREIGN INVESTMENT. FOR SOUTH CHINA INCLUDING THE SPECIAL ECONOMIC ZONES, HONG KONG'S SHARE IS SAID TO HAVE BEEN IN EXCESS OF 80 PER CENT.

+T HE QUESTION THAT ARISES IS WHETHER THIS CAPITAL OUTFLOW CAN BE INDUCED BY LACK OF CONFIDENCE.

/+CLEARLY,