TNAG-0735-FCO40-939-Policy-objective-for-the-developing-of-Hong-Kong-in-the-1980-1978 — Page 101

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With the wisdom of hindsight we may have been over tender and at any given moment the judgement was not an easy one. But we have now taken about HK$1.5 billion of Exchange Fund deposits out of the money supply by Swap arrangements, and no doubt this could be repeated if necessary (incidentally this is not public knowledge).

8.

We will now wait and see how the 84% increase in bank rates in the last six months, and our direct action on money supply, will work. We realise that more may be necessary. However this brings me to the part of the problem which will be of much the most interest to you. If in these or other ways the Government squeezes the private sector, it will come under increasing pressure to make its own contribution out of the public sector, not by cutting its targets, but by rephasing some projects and by containing growth in the public services. There are, as you know, good administrative reasons for consolidation at this time, but these economic arguments may now be added.

9.

While I certainly do not think that anything at all drastic is called for, we will certainly have to look very closely at the growth in demand on both the construction industry and manpower that the estimates for 1979/80 will make. As you know the forecast bulge in the period 1979/80 and 1981/82 has been worrying us for sometime, and now this conjuncture has come to aggravate a situation that we always realised would be difficult. The situation will of course be made easier by the likelihood of a whole series of pay claims and by what will result from the recently announced Salaries Commission.

10. Of course a revival of strong demand in export markets would provide exporters with sufficient margin to draw resources away from domestic consumption, and there seems to have been some sign of this during the revived demand of the last quarter in which the labour force of export industry increased, and that of the construction industry remained more or less constant. However analysts are gloomy about the possibilities for growth in the United States next year, and unless something wholly unexpected develops there or elsewhere I doubt if we can return to a healthy export-led economy purely through draw of export demand. Domestic demand will have to fall.

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