TNAG-1270-FCO40-1620-Financial-policy-in-Hong-Kong-1983 — Page 248

GR 750

CONFIDENT | AL

DESK BY 23110OZ

CONFIDENTIAL

FM HONG KONG 23100OZ SEP 83

TO IMMEDIATE SINGAPORE (FOR PS/MR LUCE)

TELEGRAM NUMBER 35 OF 23 SEPTEMBER

HKK

10017

RECEIVED IN AGISTRY NO.

20 OCT 1983

HKK.

027/202

327/20

INFO IMMEDIATE FCO, PEKING

FOR PS TO MR LUCE.

THE FUTURE: HONG KONG DOLLAR AND STOCK MARKET. FCO TELNO 934.

PA

:GISTA

"tion Tak:

1. AT THE CLOSE ON 23 SEPTEMBER, THE HONG KONG DOLLAR/US DOLLAR EXCHANGE RATE WAS DOLLARS 8.73. ON THE SAME DAY IN 1982 THE RATE WAS DOLLARS 6.12. THIS REPRESENTS A DEPRECIATION OF OVER 42.5 PERCENT. THE TRADE WEIGHTED EXCHANGE RATE INDEX NOW STANDS AT 62.6 REPRESENTING A FALL OF NEARLY 28.3 PERCENT COMPARED WITH 87.3 ON THE CORRESPONDING DAY IN 1982. (THE EXTENT OF THE DEPRECIATION WAS PARTICULARLY SHARP IN OCTOBER LAST YEAR, IN JUNE THIS YEAR AND IN THE PAST WEEK. IN THE WEEK ENDING 23 SEPTEMBER, THE HONG KONG DOLLAR DEPRECIATED AGAINST THE US DOLLAR FROM AN EXCHANGE RATE OF 7.375 TO 8.73, A FALL OF 10.8 PERCENT. THE TRADE-WEIGHTED INDEX BEHAVED SIMILARLY).

2. THE HANG SENG INDEX HAS ALSO DECLINED SHARPLY. ON 1

JUNE 1992, IT STOOD AT 1404: BY THE CLOSE TODAY IT WAS DOWN TO 785 (A DECLINE OF NO LESS THAN 63 POINTS ON THE PREVIOUS DAY'S

TRADING).

3. THE HONG KONG DOLLAR'S WEAKNESS OVER THE PAST YEAR HAS PARTIALLY REFLECTED THE STRENGTH OF THE US DOLLAR WORLDWIDE, BUT REAL CONCERN ABOUT THE POLITICAL FUTURE, AND A RESULTING MOVE OUT OF THE HONG KONG DOLLAR, ARE CHIEFLY TO BLAME. THIS WEAKNESS IS TOTALLY OUT OF LME WITH THE UNDERLYING ECONOMIC FUNDAMENTALS WHICH INDICATE A FAIRLY STRONG EXPORT-LED RECOVERY. HOWEVER, THE CHINESE PROPAGANDA CAMPAIGN HAS SOUGHT TO ESTABLISH THAT THE WEAKNESS OF THE HONG KONG

DOLLAR IS AN ECONOMIC PHENOMENON AND NOT A POLITICAL ONE. FURTHERMORE, CHINESE OFFICIALS AND COMMUNIST NEWSPAPERS HAVE ACCUSED THE HONG KONG GOVERNMENT OF ENGINEERING THE WEAKNESS IN THE HONG KONG DOLLAR WITH THE AIM OF ENHANCING BRITAIN'S NECOTIATING POSITION. THEY HAVE IMPLIED THAT IT WOULD BE AN EASY TASK TO STABILISE THE EXCHANGE RATE IF THE GOVERNMENT WISHED TO

DO SO.

4. THE HONG KONG GOVERNMENT, THROUGH THE EXCHANGE FUND, IS DOING WHAT IT CAN WITHIN ITS POWERS TO SMOOTH OUT ERRATIC AND WAYWARD SPIFTS W THE EXCHANGE RATE. THERE HAS BEEN SUBSTANTIAL DIRECT INTERVENTION IN THE FOREIGN EXCHANGE MARKETS IN HONG KONG, AT TINES EXTENDED INTO LONDON AND NEW YORK. (THIS INFORMATION SHOULD

NOT BE REVEALED TO THE PRESS AS CUR POLICY IS NOT TO PROVIDE SUCH

INFORMATION). THE EXCHANGE FUND HAS ALSO BEEN ACTIVELY BORROWING

CONFIDENTIAL

/FROM