TNAG-0542-FCO40-637-Strength-of-garrison-in-Hong-Kong-1975 — Page 36

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that interest rates in Hong Kong, which had continued to rise in the first half of the year in line with movements abroad, were in the second half of the year a little slow to follow overseas rates downwards. But this can only be a partial explanation. No doubt, increased political instability in the surrounding region and the absence of internally generated inflation in Hong Kong added to the attractiveness of the Hong Kong dollar. Towards the end of 1974 the Hong Kong dollar appreciated against the United States dollar by rather more than was justified by the decline of the United States dollar elsewhere, and, in part, this was due to speculation against the United States dollar by Hong Kong's banks many of whom, with the substantial inflows of funds, found themselves with large uncovered United States dollar positions.

29. The resultant heavy and sustained pressure on the exchange rate in Hong Kong forced the government to allow the Hong Kong dollar to float in order to avoid the further exchange losses for the Exchange Fund (now in deficit) which support operations would have entailed. By January 1975, the trade-weighted currency index for the Hong Kong dollar (December 1971-100) had moved to 109, compared with 103 in the middle of 1974. This caused further considerable anxieties for exporters, but the government managed to nudge the index back to about 104 by June. However, substantial net flows of short-tern capital into Hong Kong are continuing (estimated at HK$4000 million for the first seven months of 1975) and these threaten to undermine the stability of the money market, largely by virtue of the fact that they could be withdrawn from Hong Kong at a moment's notice). Thus, for all practical purposes, the liquidity of the banking system remains relatively tight and such advances and loans as are now being extended are largely being facilitated by balances made available to Hong Kong by branch banks' overseas head offices.

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