TNAG-1270-FCO40-1620-Financial-policy-in-Hong-Kong-1983 — Page 193

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(a) further to depress confidence.

The slide in the exchange rate is

thus self-generating in such a volatile atmosphere;

(b) initially to help Hong Kong exports but increasingly to raise prices of imports and stimulate inflation (the trend level is now around 10%);

(c) to increase the potential for unrest in Hong Kong. This does not give rise to serious concern at present. Although there have been some protests about rising prices, it is the political future that preoccupies the people. But if unrest were to develop for political reasons it could be fuelled by

economic worries;

(a) to hit investors, particularly those in property. Mainland Chinese concerns are themselves being hit both in terms of capital investment and income designated in Hong Kong dollars.

The maintenance of confidence in Hong Kong's future on the part of the young profess-

ional class, who could find employment elsewhere, is especially crucial.

12. For completeness, I attach also at Annex 7 a short note summarising the extent

of current UK commercial and banking interests in Hong Kong. This shows that, although trade with Hong Kong represents only a small part of total UK trade (1.3% of UK exports) it is a significant market for UK capital goods and represents ECGD'8 largest single exposure. A banking collapse could also cause particular difficulties.

for the Standard Chartered Bank through its Hong Kong subsidiary.

Conclusions

13. The main conclusions I derive from this rapid analysis are:-

(i) the causes of the present financial crisis are overwhelmingly

political;

(ii) although the measures announced by the Hong Kong Government appear to have steadied the exchange rate (and the proposed denomination of Certificates of Indebtedness in US $s may help further) the prospect

remains highly uncertain and further periods of pressure can be expected

as the political talks continue;

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