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34/€
VISIT TO HONG KONG - 26 MAY TO 6 JUNE 1974
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1. My main concern on this visit was to try to assess the impact of the present recession" and in particular the risks of social unrest and political reaction in an inflationary phase where real wages are falling. The peculiarities of Hong Kong call for considerable adjustment of approach from any outside observer seeking to make an objective assessment.
But I have come away with the impression that there is not a critical situation at the moment.
2.
The "recession" is in effect an estimated fall from around 8% to 4% in GDP growth in the current year. This has to be seen against the strong and steadily rising curve of Hong Kong's prosperity, reflected in a twenty-fold increase in the size of the Colony's budget over the last 20 years or so. Exports so far this year are in fact up on last year's figure, and the balance of trade is good. But Hong Kong exports nearly all it produces and imports nearly all it consumes. In recent years, export prices have risen faster than import prices, but this is now levelling off. The present situation is that, while economic activity is still rising, the reduced rate of growth has led to a reduced demand for labour: and, while wages are still being increased, they are being overtaken by an externally induced inflation.
3. This is a new situation for Hong Kong, and perhaps last autumn there was a degree of over-reaction. The Financial Secretary now thinks the situation may prove better than his budget predictions, but warned against over-reaction in the opposite direction. For the Government, the problem of "over-run" in development planning remains to be tackled: and, as the Governor has said in a recent despatch, both increased taxation and borrowing are contemplated to maintain the massive social programme on which Government has embarked. Borrowing is seen as essentially an offshore operation, since basically a balance of payments question is involved, and desirably confined to self-liquidating projects: and its extent for other purposes is restricted by the need to be sure of securing the bridging finance which will be required for the Mass Transit project.
4.
The representatives of industry and commerce whom I met all expressed a guarded optimism, which (as reflected in a recent survey conducted by the Hong Kong Chamber of Commerce) took the form of saying that, while there might be difficulty for others in the coming months, their own business was going to be all right. I had the feeling that perhaps they were being a bit too sanguine in view of the uncertainties ahead, arising from the world macro- economic situation, as regards both the capacity of particular
markets to buy Hong Kong exports and the possibility of increasing import costs. But one has to set against this the traditional resilience, flexibility and speed of adjustment to new circumstances which has kept Hong Kong business in the world on a steady up- curve despite all previous uncertainties.
5. On the wages and employment front, I found all in authority in Hong Kong alert to the possibility of social reaction, and conscious of the need to keep a close ear to the ground through
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