XN000022-1987-05-19 — Page 6

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TUESDAY, MAY 19, 1987

ASSESSING THE STRENGTHS AND WEAKNESSES OF HONG KONG'S LINKED EXCHANGE RATE SYSTÉM, MR YAM EXPLAINED THAT HONG KONG HAD A FORMAL LINK WITH THE US DOLLAR IN A MANNER WHICH WAS SOMEWHAT DIFFERENT FROM A PEGGED RELATIONS HII

+THE LINK IS ARGUABLY A STRONGER FORM OF RELATIONSHIP THAN Á PEG, AND IS SIMILAR TO THE 19TH CENTURY GOLD STANDARD AND THE 20TH CENTURY CURRENCY BOARD SYSTEM. AT THE CENTRE OF IT IS THE FIXED PRICE AGAINST THE US DOLLAR AT 7.80 FOR THE ISSUE OR REDEMPTION OF CURRENCY NOTES. THIS IS AN IMPORTANT ANCHOR WHICH IS NOT NORMALLY A FEATURE IN A PEGGED RELATIONSHIP,+ HE EXPLAINED.

+IT PROVIDES A CLEAR, ADDITIONAL OPPORTUNITY FOR ARBITRABE WHEN THE EXCHANGE RATE IN THE FOREIGN EXCHANGE MARKET MOVES SIGNIFICANTLY AWAY FROM THE LINKED RATE. THERE IS NO FORNAL INTERVENT LÖN RANGE SUT THE OPTION TO INTERVENE, IN A MUCH MORE FLEXTILE MANNER THAN THE CASE OF A PEGGED RELATIONSHIP, IS THERE,+ HE ADDED.

HOWEVER, HE ADMITTED THAT ONE UNDESIRABLE ASPECT IN PEGGING OR LINKING ONE'S CURRENCY TO ANOTHER CURRENCY WAS THAT THE BOMESTIC ECONOMIC AND MONETARY CONDITIONS THEN BECOME MUCH MORE DEPENDENT ON DEVELOPMENTS IN THE DOMINANT ECONOMY, IN PARTICULAR THE MOVEMENTS OF THE BOMINANT CURRENCY.

*WE HAVE SEEN HOW THE STRENGTHENING OF THE US DOLLAR IN 1984 AND THE FIRST QUARTER OF 1985. AND ITS SUBSEQUENT DEPRECIATION, AFFECTED OUR DOMESTIC EXPORTS AND OUR ECONOMIC GROWTH PERFORMANCE. OUR GBP GREW BY LESS THAN 1 PER CENT IN 1985 BUT BOUNCED BACK TO RECORD A GROWTH RATE OF ALMOST 9 PER CENT IN 1986.

+OUR DOMESTIC EXPORTS FELL BY 5 PER CENT IN 1985 BUT GREW BY 16 PER CENT IN 1986. THE RECENT WEAKNESS OF THE US DOLLAR HAS ALSO THREATENED TO BRING HIGHER INFLATION. THERE WERE ALSO SPECULATIVE INFLOWS INTO THE HONG KONG DOLLAR, NECESSITATING ADJUSTMENTS THROUGH LOWER INTEREST RATES AND HIGHER GROWTH RATES OF THE MONEY SUPPLY. HK$M3 GREW IN THE SECOND HALF OF 1986 BY 12 PER CENT COMPARED WITH 4 PER CENT IN THE FIRST HALF. IT GREW BY ANOTHER 6 PER CENT IN THE FIRST QUARTER OF THIS YEAR, HE SAID.

MR YAM NOTED THAT THESE RATHER UNUSUAL FLUCTUATIONS MUST BE PUT IN THEIR PROPER CONTEXT. +NO BOUBT THEY ARE A REFLECTION OF THE EXTENT OF ADJUSTMENTS NECESSARY UNDER THE LINKED EXCHANGE RATE SYSTEM, BUT WHAT WE HAVE SEEN RECENTLY WERE RATHER EXTREME MOVEMENTS IN THE US DOLLAR. AGAINST THE JAPANESE YEN AND THE DEUTSCHEMARK THERE WAS A SWING OF ALMOST 50 PER CENT.

+THE FACT THAT, EVEN AGAINST SUCH VOLATILE CONDITIONS, WE ACHIEVED, OVER A PERIOD OF FOUR YEARS, VERY RESPECTABLE ECONOMIC GROWTH WITH FULL EMPLOYMENT AND MODERATE INFLATION, ON TOP of EXCHANGE RATE STABILITY, IS VERY MUCH A VINDICATION OF THE EFFECTIVENESS OF THE LINKED EXCHANGE RATE SYSTEM AND THE EFFICIENCY OF THE ADJUSTMENT MECHANISM OF OUR ECONOMY,

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HE SAID.