TNAG-0542-FCO40-637-Strength-of-garrison-in-Hong-Kong-1975 — Page 76

3.

Kore has no control, but also draw attention to the need, in notiating with the Hong Kong government at the present time, to put aside the image of the Hong Kong economy which the Luilk-up experience of the 1960's and early 1970's/so readily/provides. (b) The 1971 Recession

}

to mind.

17. The government has tended to argue that the essential ingredients ofits past-economic achievements have included: its free-trade policy; its rapidly expanding supply of labour; a the free movement of capital into and out of Hong Kong; its low tax structure; and the narrowness of its taxbase; and the stabil- ity of its currency. But it is also undoubtedly the case that under-pinning its rapid expansion was the high growth of demand in its overseas markets. In 1970/71, world demand became less buoyant and this was soon to be reflected in Hong Kong's econo- nic fortunes. In 1971, Hong Kong's domestic exports increased by only , in quantity terms, compared with as much as 10% in 1970 and 16% in 1969. In consequence, the demand for labour slackened and by 1972 wage rates in the manufacturing sector were increasing at an annual rate of around 10% only, compared with nearer 20% in 1970. The gross domestic product in 1971 increased, in real terms, by only 3% and, per head of population, by as little as 1% (the lowest in more than a decade). (c) Exchange Rate Instabilities

18.

Although, by 1972, world demand was again in an expansion- ary phase, Hong Kong's domestic exports remained sluggish

(increasing by about 4, in quantity terms) with the result

that the demand for labour continued to be relatively slack.

纳雷

But this slackness was partly on account of a desire further to contain labour costs in the wake of new uncertainties for Hong Kong's exporters arising from turbulence on world foreign exchange markets. With the 'Smithsonian' currency realignments at the end of 1971, the Hong Kong dollar had been effectively revalued, by about 81% in terms of the United States dollar (making Hong Kong's exports more expensive in the United States, its largest market), and effectively devalued in terms of the Japanese yen (making Hong Kong's imports more expensive from Japan, ita docond largest overseas supplior). Then, in mid-41972, the United Kingdom announced that sterling would henceforth be allowed to float and that the Sterling Area (of which Hong Kong formed part) would be confined to the British Isles. Following this, the Hong Kong dollar's traditional link with sterling was

/broken

CONFIDENTIAL

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