TNAG-0379-FCO40-425-Sterling-assets-and-balance-of-payments-of-Hong-Kong-1973 — Page 167

loans.

3.

ZANILAL

The money market in Hong Kong is restricted to inter-bank

There is no local paper in which the banks could hold part of

their liquidity and could re-discount in case of need. In consequence

the banks' external assets are greatly in excess of their requirements

for normal exchange transactions: in recent years the total of such

assets has ranged between 21% and 32% of the banks total liabilities.

A further consequence is that Hong Kong's sterling reserves are held

in approximately equal proportions by the Government and the banks

(e.g. end-February 1973 Government £357 mn : banks £353 mm.

.).

There is a 15% withholding tax on interest paid and

consideration is being given to its abolition in the case of banks

which set up special departments to undertake Asian dollar and

Hong Kong dollar certificate of deposit business.

However, there is

no exchange control in Hong Kong and most trading companies as well as

banks run their own foreign exchange books, and it is possible that the

Hong Kong Government may in the end decide not to abolish the tax

because of the possibility that its abolition would facilitate

switching between U.S.dollars and Hong Kong dollars by residents and

non-residents alike with consequential effects on the credit base.

There is a 15% profits tax in Hong Kong but this is not levied on

profits earned outside the Colony and nearly all Asian dollar business

is conducted offshore in order to avoid both the withholding tax and

the profits tax.

Recent Developments

The exaggerated stock exchange speculation over the turn of

the year clearly revealed the inadequacy of the institutional banking

framework.

The Hang Seng (Bank's equity) Index having been at 330 in

January 1972 rose to a peak of 1775 in March 1973, subsequently fell

to a low of 647 in May and currently is fluctuating somewhat above 700.