TNAG-1266-FCO40-1615-Economic-policy-in-Hong-Kong-1983 — Page 8

BEST ESTIMATE ON THE BASIS OF THE INFORMATION NOW AVAILABLE.

BUT GIVEN THE VULNERABILITY OF THE HONG KONG ECONOMY TO UNFAVOURABLE EXTERNAL FACTORS, THE EVENTUAL GROWTH RATE CAN

STILL BE ADVERSELY AFFECTED BY UNPREDICTABLE ECONOMIC AND

POLITICAL EVENTS.

2. THE DEPRECIATION OF THE HONG KONG DOLLAR OVER THE PAST

YEAR APPEARS EXCESSIVE IN TERMS OF THE UNDERLYING ECONOMIC

FUNDAMENTALS, WHICH INDICATED AN EXPORT-LED RECOVERY.

SUCH WEAKNESS TO A LARGE EXTENT REFLECTS GROWING ANXIETY

ABOUT THE POLITICAL FUTURE OF HONG KONG.

3. THERE HAVE BEEN SUGGESTIONS THAT THE 10 PERCENT INTEREST

WITHHOLDING TAX ON HONG KONG DOLLAR DEPOSITS SHOULD BE ABOLISHED

IN ORDER TO LEND FURTHER SUPPORT TO THE EXCHANGE RATE. IN THIS

CONNECTION, IT SHOULD BE NOTED THAT THE ESTIMATED REVENUE FROM

INTEREST TAX IN 1983-84 IS DOLLARS 620 MILLION. ALTHOUGH

INDICATIONS ARE THAT THE ACTUAL YIELD WILL BE LESS, IT WILL STILL

REPRESENT A VERY LARGE SUM, PARTICULARLY IN VIEW OF THE CURRENT

BUDGETARY POSITION. ALSO OF CONCERN IS THE POSSIBLE EFFECT THE

ABOLITION OF THE TAX MIGHT HAVE ON PROFITS TAX REVENUE.

FURTHERMORE, THE EFFECTS OF THE ABOLITION OF THE TAX SHOULD.

NOT BE VERY DIFFERENT FROM THOSE OF INCREASING INTEREST RATES

BY ONE PERCENTAGE POINT. THE PSYCHOLOGICAL EFFECT MAY, HOWEVER,

BE SUBSTANTIAL.

4. THROUGH ITS EFFECT ON HMPORT PRICES, A DEPRECIATION OF THE

HONG KONG DOLLAR PUSHES UP THE RATE OF INFLATION. IF THE HONG KONG

DOLLAR HAD NOT DEPRECATED IN THE PAST TWELVE MONTHS - PARTLY DUE

TO CONFIDENCE FACTORS THE RATE OF INFLATION WOULD HAVE

BEEN MUCH LOWER.

5. PRICES AND RENTALS FOR COMMERCIAL AND, PARTICULARLY,

INDUSTRIAL PROPERTY HAVE NOW FALLEN TO A LEVEL WHICH PLACES

HONG KONG IN A HIGHLY COMPETITIVE POSITION IN COMPARISON WITH

OTHER BIG CITIES - PARTICULARLY IN TERMS OF FOREIGN CURRENCY, WHICH SHOULD BE ATTRACTIVE TO FOREIGN AND DOMESTIC INVESTORS.

YOUDE

MINIMAL

HKD

3

COPIES TO:

HONG KONG GOVT. OFFICE,

LONDON

HKK.

RECEIVE

090/1

REGM 269831

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Phon Geomax Phen the pl

Торыа

SEP1986 EXDIS (0,0. HK GOV'T OFFICES IN BRUSSELS, CENEVA, WASHINGTON, NEW YORK) FOLLOWING ARE STAFFETS ISSUED ON SUNDAY, SEPT 25 AT 1845 HOURS

AND 1900 HOURS,

DEEN SEEKER 21

INDEX

JAction Take ATTENTION NEWS EDITORS,

THE GOVERNOR, SIR EDWARD YOUDE, THIS EVENING EXPRESSED GREAT CONCERN ABOUT THE EXCHANGE VALUE OF THE HONG KONG DOLLAR IN RECENT DAYS.

AFTER DAY-LONG DISCUSSIONS WITH THE CHIEF SECRETARY AND THE FINANCIAL SECRETARY, HE SAID HE SYMPATHISED WITH PEOPLE'S ANXIETIES BUT URGED THEM NOT TO BE CARRIED AWAY BY THE PRESENT MOOD OF PESSIMISM.

THE GOVERNOR SAID A STRONG EXPORT-LED RECOVERY WAS NOW UNDERWAY AND SO THE RATES QUOTED FOR THE HONG KONG DOLLAR WERE NOW QUITE UNREASONABLE. THEY CERTAINLY DID NOT PROPERLY REFLECT UNDERLYING ECONOMIC OR POLITICAL REALITIES. THE GOVERNOR STRESSED THAT HE WAS FULLY AWARE OF PEOPLE'S CONCERNS. HE BELIEVED THAT EVERYONE'S INTERESTS WOULD BE BEST SERVED BY CALMLY GETTING ON WITH THEIR JOBS. THEY SHOULD REFUSE TO BE DISTRACTED BY ALARMIST CHATTER AND MISLEADING COMMENTS WHICH HAVE THE EFFECT, INTENDED OR OTHERWISE, OF DAMAGING CONFIDENCE. THE TALKS ABOUT KONG KONG'S FUTURE ARE STILL IN PROGRESS AND IT WAS NOT TO BE EXPECTED, HE ADDED, THAT THEY WOULD REACH RAPID RESULTS BECAUSE THE ISSUES INVOLVED ARE COMPLEX.

IT HAS JUST BEEN LEARNED THAT A FURTHER ANNOUNCEMENT ABOUT THE OUTCOME OF CERTAIN CONSULTATIONS THAT THE ACTING FINANCIAL SECRETARY, MR DOUGLAS ELYE, HAS BEEN HAVING TODAY WITH REPRESENTATIVES OF THE NOTE-ISSUING BANKS COULD BE EXPECTED LATER THIS EVENING.

ADD GIS 21

ATTENTION NEWS EDITORS:

AS A RESULT OF THE RECENT UNWARRANTED DEPRECIATION OF THE LOCAL CURRENCY THE ACTING FINANCIAL SECRETARY, MR DOUGLAS BLYE HAS BEEN IN CONSULTATION THROUGHOUT THE WEEKEND WITH THE NOTE- ISSUING BANKS AND OTHER ADVISERS. VARIOUS PROPOSALS HAVE BEEN CONSIDERED. A DASIC PREREQUISITE OF ALL OF THESE PROPOSALS WAS FULL CONVERTIBILITY OF THE CURRENCY.

·

ONE PROPOSAL WHICH IS BEING ACTIVELY DEVELOPED INVOLVES A SUBSTANTIAL REVISION OF THE MECHANICS FOR ISSUING AND REDEEMING CERTIFICATES OF INDEDTEDNESS TO THE NOTE-ISSUING BANKS IN SUCH A WAY AS TO PRODUCE AN EXCHANGE RATE WHICH WOULD MORE ACCURATELY REFLECT THE FUNDAMENTAL STRENGTH OF THE ECONOMY, THE PROPOSAL WILL MEAN THE ASSUMPTION BY THE EXCHANGE FUND OF A MORE SIGNIFICANT ROLE IN THE EXCHANGE RATE DETERMINATION MECHANISM.

IN THE MEANTIME, THE GOVERNMENT SPOKESMAN SAID THAT THE EXCHANGE FUND RETAINS ITS EXISTING CAPABILITY TO INTERVENE IN THE FOREIGN EXCHANGE AND MONEY MARKETS.

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