TNAG-1267-FCO40-1616-Economic-situation-in-Hong-Kong-1983 — Page 393

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Mr Hoare

CONFIDENTIAL

MKK09014

RECEIVED IN REGSIFY NO. 51 - 8 JUN 1983

cc: Mr Broadbent, ESID

DESK OFFICE:

INDEX

PA

FALL IN HONG KONG DOLLAR

1.

! REGISTRY

Action Taken

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Reference

RA

BX-2716

Mar2

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THE 316

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I have minuted separately on the general question of confidence. It may be helpful to expand a little on views expressed during my visit last week about the recent fall in the Hong Kong dollar.

2. There is general agreement that while the causes are mixed, the immediate movement resulted primarily from the strength of the US dollar. There was a natural tendency for people to move their cash into that currency and there has undoubtedly been considerable speculation. I heard suggestions that British banks had been involved and the Chief Secretary, Sir Philip Haddon-Cave, said that the Hong Kong Electric Company had also taken part. There were а good many rumours that the Bank of China and Chinese banks had

This is entirely possible. The Chinese banks are primarily there to make money and will operate on a straight commercial basis. Nevertheless the Chinese as a whole will have suffered from the fall in the local currency because of reduction in foreign exchange earnings.

3.

A complicating factor has been the decline in the property market and the consquent reduction in investment opportunities in Hong Kong dollars. An increasing number of people who would otherwise have invested locally have therefore been keeping their cash safe in US dollars. To all this has been added the worry about the future and the progress of the negotiations. This has increased the lack of confidence in the Hong Kong dollar, however illogical that may be in terms of medium and short-range financial calculation. This sort of political consideration probably contributed to the fact that the raising of base rate by 2% on 21 May did not do more than temporarily arrest the slide. Consideration may now be given to removing tax on interest on Hong Kong dollar deposits. That would however be a relatively small move in terms of incentive to uphold the dollar.

4.

In

Hong Kong authorities are taking the situation calmly. the Governor's view there will be fluctuations over the next few months but it is quite possible that the currency will go down to around 8 to the US dollar. Provided that it can settle at a sensible market level that need not be too tragic. This does not mean that there is complacency but it is not calculated at this stage that a genuine panic run on the local currency has begun.

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R D Clift

CODE 18-77

2 June 1983

CONFIDENTIAL

Hong Kong Department