TNAG-1242-FCO40-1555-Future-of-Hong-Kong-1983 — Page 166

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C & Themen FED

Chi HallettELD

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Left

me

by the Governor

299

(565)

Enclosure (4)

Brief for the

Governor in London,

He bus com Planning Stiff September 1983

Possible manifestations of a

loss of confidence

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RECEIVED IN REGISTRY

SEP 1983

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Introduction

There has been a gradual erosion of

confidence since the talks began. This is

(1) (2)

reflected by sluggish growth in private consumption expenditure and a decline in private investment expenditure during a period of recovery in the export sector, and by a sharp depreciation in the

exchange value of the Hong Kong dollar(3). There

are other, less obvious but equally insidious

strains running through the economy.

This paper

#

provides a brief analysis of the first and second order effects on the economy of a situation in which the talks are perceived to be progressing towards an unacceptable or unattractive solution, or not progressing at all, in other words a situation giving rise to a loss of confidence in varying degrees.

Financial sector

2.

The effect of such a situation would be a

continuing and growing loss of confidence in the Hong Kong dollar. The foreign exchange market

would become very volatile, with transactions going inexorably one way towards a de facto de- monetization of the Hong Kong. dollar, as all sectors try to shift their savings and earnings into foreign currencies mainly the US dollar.

S

The Government could do little in such a situation to reverse the trend. If major banks were to try to REGISTRY halt the shift out of Hong Kong dollars, this might Action Taken lead to a sudden and substantial loss of confidence

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