TNAG-1267-FCO40-1616-Economic-situation-in-Hong-Kong-1983 — Page 311

CONFIDENTIAL

5.. The balance of payments can be seen as a part of a wider financial accounting, the flow of funds. This provides greater detail of the domestic economy, distinguishing various types of

Table II shows a sketch of such a framework for Hong

Kong (this is simplified by the absence of government debt).

transactor.

-

6. The columns relate to four sectors between which financial

transactions may take place the government, the rest of the world, private individuals and businesses, and the banks and DTCs. The top row shows the net financial surplus or deficit of each sector (and could be derived from aggregate national accounts showing

gross national product and its composition). Rows A to J show the various types of financial transaction that may take place.

7. Given that all transactions and transactors have been included,

and that each transaction is both a credit and a debit, in theory

and ex post each row and each column should sum to zero. Column 2

is the balance of payments with the current account in the top row,

and the items of the capital account in the remaining rows.

8.

Table II includes typical transactions, with direction

specified for Hong Kong. The

Territory is shown as running a

current account deficit (ie a surplus for the rest of the world) and with domestic saving not covering the whole of domestic investment. The direction of financial transactions is shown by a positive or negative sign, with a question mark where the direction is not certain.

3

9. The increase in the money supply (on the wide M2 definition used by the HK authorities and including some certificates of deposits in total deposits) for a given period would be shown by the last element in column one, the increase in notes and coins, plus the increase in all deposits of banks and DTCs (the last element of row F, with

sign removed).

10. Within this framework 'capital flight' may be defined in various

ways.

It could be:

-

an increased rate of investment abroad (2C)

an increase in deposits held abroad by residents (2E)

– a fall in non-residents deposits with the HK monetary system (2F)

an increase in 'bank' lending abroad (2G).

- Also, surely, transfer of assets into forerun

arrencies, msite row

F. See

20.

para CONFIDENTIAL

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/11.