TNAG-1270-FCO40-1620-Financial-policy-in-Hong-Kong-1983 — Page 110

GR 1500

SECRET

DESKBY 0708OOZ

SECRET

FM HONG KONG 07034OZ OCT 83

TO IMMEDIATE FCO

TELEGRAM NUMBER 1490 OF 7 OCTOBER

нск HKCK 10017

20.

TOP COPY

INDEX

Mar A

FOR CLIFT (HONG KONG DEPARTMENT) FROM BREMRIDGE.

MIPT.

IMPORTANT EXTRACTS FROM GOODHART'S REPORT ARE AS FOLLOWS:

See (51

SECTION 2: THE WORSENING POLITICAL UNCERTAINTIES INEVITABLY LOWERED HONG KONG CAPITAL VALUES AND ALSO, EQUALLY INEVITABLY, LED TO A CAPITAL OUTFLOW, A PORTFOLIO SHIFT. THE QUESTION IS WHETHER THE DECLINE MAN THE EXCHANGE RATE THAT NATURALLY RESULTED HAS NOW TAKEN ON A MOMENTUM OF ITS OWN. ARE BUSINESSMEN, FOR EXAMPLE, NOT REPATRIATING FOREIGN CURRENCY - NOT BECAUSE THEY INTEND TO KEEP THOSE ASSETS PERMANENTLY ABROAD - BUT BECAUSE THEY

EXPECT TO GET A BETTER RATE FROM A FURTHER DEPRECINATING HONG KONG

DOLLAR BY WAHHTING LONGER? WORSE STILL, IS A CYCLE OF EXCHANGE RATE DEPRECIATION, INFLATION, POLITICAL INSTABILITY, EXCHANGE

RATE DEPRECHATHON,

BECOMING VISIBLE? IS FEAR FEEDING

ON FEAR? MOREOVER, CERTAIN EXPECTATIONS ABOUT A SCHEME FOR

STABILIZING THE EXCHANGE RATE HAVE BECOME WIDESPREAD: WHAT

HAPPENS TO THE MARKETS IF THOSE EXPECTATIONS ARE DASHED, AND NOTHING

PUT IN ITS PLACE?

AGAINST THAT, THE (MANAGED) FLOATING EXCHANGE RATE CAN PROVIDE (AND HAS PROVIDED «UN RECENT YEARS) A USEFUL DEGREE OF FLEX:BHUITY

TO THE ECONOMY. THE CHOICE OF AN EXCHANGE RATE AT WHICH TO Flix

AS BOUND TO BE LARGELY AN ARBITRARY GUESS (MORE OR LESS) AND

MAY CAUSE FUTURE DIFFICULTIES. MF THE EXCHANGE RATES FIXED,

NIT FORCES THE PRESSURES OF ADJUSTMENT ELSEWHERE ON THE ECONOMY,

WHICH MAY BE EVEN MORE VULNERABLE.

THIS LATTER POINT AS THE CRUX. IN THE LAST FEW MONTHS THE PRESSURES

HAVE PREDOMINANTLY FALLEN ON THE EXCHANGE RATE. IF THAT IS FIXED, AND CONFIDENCE (INITIALLY AND PRIMARILY IN THE MAINTENANCE OF

THAT FIXED EXCHANGE RATE, BUT ULTIMATELY AND FUNDAMENTALLY IN THE FUTURE OF HONG KONG) DOES NOT RECOVER, OR WORSENS, THEN THE PRESSURES MUST FALL ON DOMESTIC INTEREST RATES AND LOCAL AVAHL- ABILITY OF CREDIT. EVEN THEN, HIGH HONG KONG DOLLAR INTEREST RATES AND RESTRICTED HONG KONG DOLLAR CREDIT WILL NOT NECESSARILY SEVERELY AFFECT THOSE LOCAL BORROWERS WHO ARE ABLE AND WILLING TO BORROW IN U.S. DOLLARS - WHERE THE HINTEREST RATES SHOULD NOT RISE, OR AT LEAST NOT NEARLY SO MUCH, - AND TAKE THE EXCHANGE RISK THEMSELVES. THIS, HOWEVER, REQUIRES THAT THE BUSINESSMAN HAS TO BE MORE WILLING TO ABSORB THE EXCHANGE RASK THAN THE BANKER. HN CRUDE TERMS IS MT BETTER TO HAVE THE (POLITICAL) PRESSURES AFFECT THE PRICE OF RICE OR THE PRICE OF PROPERTY (AND THE HANG SENG INDEX), OR CONSUMERS OR MORTGAGEES AND CONSTRUCTION

WORKERS?

SECRET

ITHE CHOKE

So