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SUMMARY OF WORLD BANK REPORT ON HONG KONG'S ECONOMIC POLICY
1.
The World Bank team has delivered the goods. In the complete absence of 'knobbling' by us they have suggested numerous, radical major and minor reforms very much along the lines we have proposed in the past. Here I summarise their conclusions (preceded by the letter C) and their recommendations (preceded by the letter R). There is very little indeed in the report which members of the Hong Kong Government (HKG) can use as ammunition against us or against many of our current proposals. I strongly endorse the report's recommendations, particularly the setting up of a central bank.
MACROECONOMIC MANAGEMENT
2. C. Recent changes are only the first step. More must be made and these will require some new institutions as well as changes in policy. By far the most important institution needed is a central bank; the new Monetary Affairs Branch should be an evolutionary step towards it.
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3. The Exchange Rate C. Because of the openness of the economy this is the most important macro-tool for controlling the economy both in structural and cyclical terms. But the present institution for controlling it - the Exchange Fund - is woefully inadequate for the task: the Fund's liquid foreign assets are HK$ 4 bn.*, while total foreign reserves are HK 15.5 bn. importantly the Fund has very small resources of HK's (0.7 bn') with which to buy more foreign currency and is completely 'out- gunned' by the private banking sector which has assets totalling HK 66 bn. (the Fund's total assets are HK$ 6 bn. while the Hong Kong and Shanghai Bank (HKB) alone has assets of HK 36 bn. and just one of its subsidiaries has another HK 7 bn**). (Further- more management of exchange ratios through manipulation of
/foreign
These figures are not published but come from the Exchange Fund's annual Report and relate to the assets as at 31/12/76. They are not known outside Government.
The Hang Seng Bank
CONFIDENTIAL
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