CONFIDENTIAL
36
Mr
Sir D Watson
Wats
VISIT TO HONG KONG
1.
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My main impression from my recent visit, compared with the previous year, was of a malaise, particularly in the European middle-ranks of the Civil Service. The Governor also told me
that he was more worried about the finances of Hong Kong than he had allowed himself to appear during his recent visit to London.
2.
On the financial situation Mr Haddon-Cave explained to me at length that a slowing down of the pace of development might be necessary. The economy was only growing at 4% rather than the expected 7% per year. And even if full growth was regained, recurrent expenditure was already rising so fast that, even without additional capital commitments, it would be very difficult to balance the budget. The three ways of raising new money were by loans, by increased taxation, or by the use of Hong Kong's reserves. For loans, as the Governor had told us, Mr Haddon-Cave hoped to raise about HK150 million a year for three years from the Asian Development Bank and other sources. He also intended to propose some increases in taxation. But, although the members
of LegCo and ExCo had told the Governor they would support this, Mr Haddon-Cave was not hopeful that they would actually agree to substantially higher taxes when it came to the crunch. Lastly,
he himself did not consider that it would be prudent to run down Hong Kong's reserves any further. These were already at too low a level by comparison with the annual budget. Moreover a large proportion of the reserves had to be held against contingencies such as debt servicing, the Mass Transit railway and so on. A new development, which Mr Haddon-Cave described as the most closely kept secret in Hong Kong, was that the Exchange Fund was not sufficient to cover 100% of the Hong Kong note issue.
This meant that part of the Fiscal Reserve had to be tacitly earmarked against the shortfall in the Exchange Fund. (I have minuţed separately to Mr Holland on this question.)
3.
When I discussed all this with the Governor he agreed that Mr Haddon-Cave might well be taking too cautious a view.
In
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