TNAG-1242-FCO40-1555-Future-of-Hong-Kong-1983 — Page 162

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MR WALLIS

1.

Exter

MKK040/1 &

RECEIVED In Regist

2 SEP 1983

DE IN JAPOIA

INDEX

CONFIDENTAL

84120/9

REGISTRY

PA

| Action Taken

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HKD FCO

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(566)

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M. Lysion,

ECONOMIC CONFIDENCE IN HUNG KONG

J+12414

The Hong Kong dollar continues its undramatic but consistent decline

against other currencies. Against the United States dollar in particular

its decline has been marked, as shown at Annex, falling by 17 per cent

during 1983 and by 24 per cent during the last 12 months. Despite

temporary upswings the trend remains definitely downwards and may even have accelerated recently. The raising by the Hong Kong banks of their

prime rate by 1 points to 13 per cent on 9 September is unlikely to

reverse the trend.

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2. The fall in the Hong Kong dollar has boosted exports, particularly those to the United States; as a result of increased demand, Hong Kong exports to the United States increased by 25 per cent in the first 6 months

of the year; total exports rose by 9 per cent in real terms. Income from

tourism has also expanded. Nevertheless Hong Kong imports more goods than

it exports and runs a consistent and substantial deficit on current account.

This deficit has been met in the past by overseas capital investment.

Unless world demand strengthens to the extent that exports increase in

volume sufficiently to offset the fall in unit prices, or alternatively

that inflows of overseas capital increase to counteract the deficit on

visible trade, then Hong Kong will either have to cutback on domestic imports (largely essential food and raw materials) or suffer a worsening

balance of payments situation.

3. Both domestic and overseas long term investment in the territory remains

low, as do imports of capital equipment such as machinery. Investment in

the property market is particularly sluggish and this is reflected in the

Hang Seng index, which is based largely on property companies together with utilities and the banking sector. The progress of the Hang Seng is shown at

Annex. The unwillingness of local investors, notably wealthy Chinese

entrepreneurs, to buy shares continues to prevent a sustained rally. The

decision of potential domestic investors to remain on the sidelines appears

largely to reflect the political situation. The property slump has reduced

1

CONFIDENTIAL