TNAG-1267-FCO40-1616-Economic-situation-in-Hong-Kong-1983 — Page 319

CONFIDENTIAL

II THE HONG KONG DOLLAR RECENT PERFORMANCE

1. The fall in the external value of the HK$ has recently accelerated: by 6 June the rate against the US$ had passed 7.45, the trade-weighed index falling to around 72. (In December 1982 these rates were 6.55 and 80.5 respectively.)

2. This note briefly examines whether any systematic influences on the performance of the HK$ over the last few years can be identified. Figure 1 shows the rate against the US$ and the trade-weighted index on the basis of monthly averages for January 1979 to March 1983. Figure 2 shows other economic variables which may be related to changes in the HK$'s value:

3.

the visible trade gap

an index of relative interest rates in HK and the USA

an

index of relative consumer price inflation in HK and the USA (the latter being a reasonable proxy for OECD inflation).

The prior expectation might be that the rate of change of the HK$'s value would be related to the levels of these variables,

with a decline in value being associated with:

-

a widening trade gap

4.

- more rapid inflation in Hong Kong

-

relatively higher returns to bank deposits abroad.

Statistical analysis is made more difficult by the paucity

of data particularly on the side of capital transactions, but there is a more general problem of assigning causal significance to observed regularities in relationships within the data. Inflation in Hong Kong depends strongly on the value of the currency as it affects import prices, changes in interest rates in the Territory frequently follow changes in the exchange rate, and changes in the exchange rate will themselves eventually

influence the trade balance.

/5.

CONFIDENTIAL