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8.
Against these possible outcomes has to be weighed the risk of inaction: the effect of a continuing, possibly accelerating, fall
in the exchange rate, and the impact that would have on prices. Rising prices have caused riots before in Hong Kong, and could do so again. There are strong memories there of Shanghai in 1948. Such unrest could increase the political uncertainties, bringing further pressure on the exchange rate: a vicious circle.
Assessment
9.
Nearly all those we met, including the commercial bankers, thought that in the circumstances it was right to go ahead with the scheme. One consideration is the need for some action now that
expectations have been raised. Some thought that in principle better ideas might have been devised. But there is nothing else at anything like such an advanced state of readiness; or that could
be introduced with so few institutional changes.
The
10. The balance of risks described in paragraphs 7 and 8 above
is easier for those in Hong Kong to judge than for outsiders.
decision is one for the Hong Kong Government to take, and during our visit we made it clear that we could only advise on technical merits and practicalities. But there does seem a strong case for going ahead with the scheme, particularly if proper contingency arrangements can be devised in advance for handling forseeable risks and potential teething problems, and if a variety of other detailed improvements we were able to suggest can be incorporated.
The choice of currency link
11. Those who have been involved with working up the scheme have assumed that the link would be with the US . There is also fairly general agreement that the right rate to go for is HK $8 to the US $. Anything higher would look over-ambitious, particularly with further political uncertainties ahead. Anything much lower would risk locking in an unnecessary degree of inflation.
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