TNAG-0542-FCO40-637-Strength-of-garrison-in-Hong-Kong-1975 — Page 73

5.

1973, when the banks considerably increased their lending against

shares, there has been very little internally generated inflation.

in Hong Kong and the explanation for this lies partly in the high

degree of responsiveness of the wage rate adjustment process to

changes in the intensity of overseas demand.

(f) Money Supply

11.

The end of the property boom in the mid-1960's led to a run

on the banks, largely on account of their having become over-

committed in their lending to the building and construction indus-

try. But this and the net outflow of funds through the foreign exchange market during the 1967 disturbances apart, the money supply was able (even in the absence of a central bank) to increase

during the decade at a sufficiently rapid rate to finance the sub-

stantial expansion of Hong Kong's trade. By 1971, total deposits

with the commercial banks amounted to HK18,800 million, equiva- lent to aboutHK$4,500 (US$900) per head of the population. Of

this, about a third was in the form of savings deposits. The

degree of confidence in the banking system at this time can be illustrated by the fact that by 1971 some 12% only of the total

money supply was in the form of cash with the non-bank public (the ratio is now even lower, at %).

12.

The need for the money supply to increase at least as fast

as the growth of overseas demand, has, in the absence of a central

bank and even allowing for the possibility of changes in the banks' lending policies, emphasised the importance of having a

more or less continual net inward movement of funds througho

the foreign exchange market. Hong Kong has always had a deficit

in its visible trade but this has generally more than been off-

set by a surplus on invisibles and by net inward movements of

capital. These capital inflows have to an extent been associated

with Hong Kong's political stability, but they have also been

influenced by the stability and strength of the Hong Kong dollar

and by the absence of exchange controls. Even now, the government is not propared to manipulate the exchange rate for the purposes

of demand management, and it is still the case that the banks

do not have to differentlato botwoon rosident and non-resident

accounts. During the 1960's (and, indeed, before) government

revenue almost always exceeded public expenditure by a wide mar-

gin and this exerted a downward influence on the level of imports. The overall flow of funds through the foreign exchange market was, for the most part, unaffected, however, since the bulk of the

CONFIDENTIAL

/government's