rrent situation
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3.
Events up to Monday 26 September are summarised in the Governor's telegram No 11 of that date (copy attached at Annex 1). In brief, between the close of business on 21 September and the close at noon on Saturday 24 September the Hong Kong $ lost 16% of its value against the US$ (to 9.575 at lowest), and 12% on the trade weighted measure, which has a loading of about 25% for the US $. The Hang Seng index of the stock market also declined by 63 points on 23 September, completing a fall of some 200 points (20%) in the course of this month. The Governor and Acting Financial Secretary therefore issued reassuring statements on 25 September, indicating that the
Government would use the Exchange Fund to intervene as necessary in the foreign exchange market, and that further measures were under consideration (including a possible revision to the arrangements linking the note issue and the Exchange Fund); and local prime rates were increased by 3% by the Hong Kong Association of Banks.
The immediate response to these announcements has been reasonably favourable. ing a temporary recovery to 7.90 on 26 September the Hong Kong $ has now moved (close on 28 September) to 8.15. The Hang Seng index also rallied somewhat on 26 September, despite the interest rate increase, although it has lost ground again in further trading and dropped to its lowest level since late last year by close of trading on
28 September following the announcement of the Hang Lung Bank collapse.
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Follow-
4. It is worth noting that the dramatic developments of last week follow a sustained
period of pressure on the Hong Kong exchange rate and the stock market. Notable factors include the extremely strong US dollar (which reached a peak in effective
terms in early August 10.1% up on its end December 1982 level compared with a 15% gain against the Hong Kong dollar over the same period) and a property and banking
crisis in the closing months of last year which does not seem to have been primarily
related to concern about the political future of Hong Kong. These developments have
contributed to the general mood of uncertainty, but the recent crisis seems to have
been overwhelmingly the result of political uncertainty fuelled by intensified Chinese
propaganda and the nervousness surrounding the outcome of the recent talks with the
Chinese over the future of Hong Kong. The very sharp falls in the exchange rate
last weekend followed immediately the fourth round of talks in Peking on 22 and 23
September and particular alarm seems to have been caused by the absence of any
official communique on the talks even describing them as "constructive and useful" -
the term used after the two earlier rounds on 12-13 July and 25-26 July. There was
also a report in the market that the Bank of China had been selling the local dollar
heavily.
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