TNAG-1173-FCO40-1465-Future-of-Hong-Kong-special-study-by-FCO-for-the-Prime-Minis-1982 — Page 299

SECRET

OFFICIAL FOREIGN CURRENCY RESERVES OF THE COLONY AND THE GOVERNMENT'S HK DOLLARS BALANCES. AS AT END-DECEMBER 1981, TOTAL ASSETS OF THE FUND AMOUNTED TO SOME HK DOLLARS 37.0 BN

(INCLUDING ASSETS HELD AS CURRENCY COVER): EXTERNAL ASSETS AMOUNTED TO HK DOLLARS 31.5 BN. BECAUSE OF THE ABSENCE OF CONVENTIONAL DOMESTIC RESERVE ASSETS IN THE FORM OF GOVERNMENT DEBT IN HONG

KONG, THE BANKING SYSTEM ALSO HOLDS SUBSTANTIAL NET FOREIGN EXCHANGE ASSETS (HK DOLLARS 11.9 MN AT END-1981), CONCENTRATED MAINLY IN THE NOTE-ISSUE BANKS, PARTICULARLY HSBC: FOREIGN ASSETS CONSTITUTE THE RESIDUAL LIQUIDITY OF THE BANKING SYSTEM AS A WHOLE. HONG KONG DOLLAR

5. THE HONG KONG DOLLAR WAS LINKED TO STERLING UNTIL JUNE 1972 AND TO THE US DOLLAR BETWEEN 1972 AND NOVEMBER 1974. SINCE THE LATTER DATE IT HAS FLOATED INDEPENDENTLY ACCORDING TO SUPPLY AND DEMAND IN THE MARKET, WITH THE EXCHANGE FUND INTERVENING ON OCCASION TO MODERATE DISORDERLY MOVEMENTS.

BALANCE OF PAYMENTS AND DEBT

6. HONG KONG HAS A VERY OPEN ECONOMY, WITH EXCEPTIONALLY HIGH DEPENDENCE ON EXTERNAL TRADE AND CAPITAL FLOWS, AND IMPOSES NO EXCHANGE CONTROLS. THE CURRENT ACCOUNT OF THE BALANCE OF PAYMENTS IS NORMALLY IN DEFICIT (HK DOLLARS 8.4 PN IN 1981), OFFSET IN WHOLE OR IN PART BY SIZEABLE NET INFLOWS OF PRIVATE CAPITAL BOTH DIRECT AND PORTFOLIO. THE GOVERNMENT ITSELF HAS ONLY VERY MINOR EXTERNAL DEBT ALL DUE TO THE ASIAN DEVELOPMENT BANK (ON WHICH SEE BELOW): THIS DEBT CARRIES HMG'S GUARANTEE. THERE IS NO INTERNAL DIRECT GOVERNMENT DEBT OUTSTANDING, BUT THE GOVERNMENT HAS A CONTINGENCY OBLIGATION IN RESPECT OF GUARANTEES ON DEBT OF GOVERNMENTAL AGENCIES

OF SOME HK DOLLARS 750 MN. THE EFFECTIVE (TRADE-WEIGHTED) INDEX FOR

THE HONG KONG DOLLAR STOOD AT 85.9 (DECEMBER 1972 = 100) AT END-1981, REPRESENTING A FALL OF 2.6 PERCENT OVER THE YEAR.

BANKING

7. THE MONETARY SECTOR IN HONG KONG COMPRISES SOME 123 LICENSED

BANKS AND 360 DEPOSIT-TAKING COMPANIES. AS AT END-1981 TOTAL

LIABILITIES OF THE SECTOR AMOUNTED TO HK DOLLARS 633 BN, OF WHICH HK DOLLARS 272 BN WAS HONG KONG DOLLAR-DENOMINATED, THE REMAINDER

REPRESENTING OFFSHORE BUSINESS. HONG KONG DOLLAR-DEPOSIT LIABILITIES

AMOUNTED TO HK DOLLARS 164 BN AND LOANS FOR USE IN HONG KONG TO

HK DOLLARS 143 BN. HONG KONG'S OFFSHORE BANKING BUSINESS HAS

DEVELOPED RAPIDLY IN RECENT YEARS, AIDED BY THE FREEDOM FROM

CONTROLS AND A GROWING CONCENTRATION OF FINANCIAL EXPERTISE WITHIN

THE COLONY. AT END-1981, 89 FOREIGN BANKS HAD BRANCHES IN HONG

KONG AND A FURTHER 121 REPRESENTATIVE OFFICES. HONG KONG IS NMW A

SIGNIFICANT INTERNATIONAL FINANCIAL CENTRE, WITH A LEADING

POSITION IN LOAN SYNDICATION FOR ASIAN BORROWERS: THE FINANCIAL

SECTOR IS A MAJOR EMPLOYER AND ITS OVERSEAS EARNINGS MAKE A

SIGNIFICANT CONTRIBUTION TO THE COLONY'S SURPLUS ON INVISIBLE TRADE.

8. THE HONG KONG AND SHANGHAI BANKING CORPORATION (HSBC) OPERATES

THE CLEARING FOR INTER-BANK SETTLEMENT AND THE OTHER BANKS MAINTAIN

CLEARING BALANCES WITH IT. THE HSBC AND CHARTERED HAVE ON OCCASION

EITHER ON THEIR OWN INITIATIVE OR AT THE HONG KONG GOVERNMENT'S

-2- SECRET

/REQUEST