6 D073528 200M 2/74 Cr.P.C. $39/3
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broken and a link was established instead with the United States
dollar. Later, in February 1973, the United States dollar was
devalued, by 10%, but with the Hong Kong dollar maintaining its value in terms of gold/SDR's. These changes in parities had a profound effect on the country pattern of Hong Kong's trade. Most noticeably, the quantities imported from Japan declined in 1972 and 1973, by about 10% in all, whilst the quantities impor- ted from the United States increased, by more than 30%. On the other hand, exports to the United States, which had already been facing increasingly severe competition from Taiwan and South Korea (both of which had devalued their currencies) declined, in quantity terms (by % in 1973). It should be emphasised here that the government broadly aimed to maintain the external value of the Hong Kong dollar (that is, its value in relation to tea weighted average of other currencies), this being partly in order to stabilise the import bill for foodstuffs from China. The government held to the view that its external competitive position would be restored through the ability of the internal cost/price structure to adjust to the new exchange rate pattern, largely through the wage mechanism. And that, in any event, of far greater concern was discrimination against Hong Kong from abroad in favour of Taiwan and South Korea, rather than increa- sed competition from low-cost countries as such.
(a) Erosion and Depletion of the Reserves
bring
19. These exchange rate movements, and in particular the depre- ciation of sterling following its flotation, resulted in heavy exchange losses for the government both on its fiscal¡(held largely in London) reserves and on the (largely sterling) assets of the Exchange Fund which, for the first time since its inception in 1935, moved into deficit. This deficit was also partly the result of compensation payments to the banks for exchange losses under the Exchange Fund Guarantee Scheme which were greater than the compensation payments received by the government from the United Kingdom under the Sterling Guarantee Agreement. At the end of 1974, the deficit stood at approximately 650 million, and represented a substantial prior charge on the fiscal reserves which themselves stood at only HK 2500 million (repre- senting just 3 months' government spending ay 1975/76 expendi- ture rates).
20. The low reserves level by the end of 1974 was not, however, solely a consequence of exchange losses. The increased rate of
/Government
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