TNAG-1242-FCO40-1555-Future-of-Hong-Kong-1983 — Page 92

CONFIDENTIAL

I have anlated co

Mr Morris (HKD, K221)

ECONOMIC CONFIDENCE IN HONG KONG

566- 1.

Reference 040

RECEIVED IN REGISTRY

28 SEP 1983

DESK OF FICER

INDEX

REGISTRY

FA

Action. Taken

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You copied to us a paper on this subject by the Assessments Staff. I have a few comments.

2.

There are some rather odd, and potentially misleading, judgements in this piece. The following comments relate to the paragraph numbers of the original:

591

Para 1 The percentage figures refer to the appreciation of the US$ rather than the depreciation of the HK$. This latter figure is given by the percentage change between the inverses of the figures for HK$/US$ rates given in the annex. This gives the number of US cents obtainable for one HK$: in the period from 4/1/83 to 5/9/83, for example, this number fell by around 15%.

Para 2 The decline in the external value of the HK$ is not the principal reason for the recovery in export VolumeThere may have been some effect exports increased at a faster rate to the USA than to the UK, as the HK$ in fact appreciated slightly against the £, but the increase in the volume of sales is mainly the result of the recovery in the Territory's main export markets, of which the USA is the most important.

The argument about the current account is confused. In the first half of the year the value of visible exports increased faster than the value of visible imports, so the visible trade gap narrowed (from 14% to 12% of import value not covered by export value). The data for the USA is instructive. The value of exports (H1 1982 - H1 1983) rose by 25%, which is said to represent 16% in 'real' terms, implying a rise in the average HK$ unit value of about 8%. Given the change in the US$/HK$ rate, this suggests a fall in the US$ unit value of about 8%. The condition in this paragraph has thus already been met, but it is not necessary to go into this kind of elasticity analysis (which must also be undertaken for imports) given the improving visible trade balance.

Contrary to the claim made in this paragraph, corresponding capital account flows will thus be lower. In the absence of rationing in the foreign exchange markets there is nothing that suggests that import rationing or 'worsening balance of payments' follow from the described behaviour of the HK$.

Para 3 The first sentence seems inconsistent with the first sentence of paragraph 6.

The damage to government revenue from the property slump has already occurred and expectations have already been revised. Substantial contributions to revenue (greater than 10% of the total) only began in FY 1979/80, and the proportion fell again to about 6% in FY 1982/83; the estimate for FY 1983/84 is slightly lower (thus the 'is' at the top of the second page should be 'was').

CODE 18.77

CONFIDENTIAL

/Para 4