TNAG-1483-FCO40-2037-Economic-situation-in-Hong-Kong-1986 — Page 289

CONFIDENTIAL

1

MONDAY 27 JANUARY

HONG KONG

Deputy Secretary Alan McLean

HONG KONG ECONOMY

1. Recent export performance had been affected by:

2.

5%.

as:

problems in electronics worldwide which had affected component suppliers and factories involved in assembly work (the government was relieved not to have succumbed to pressure to subsidise R&D in electronics);

downturn in major markets, particularly the US (the

improvement in competitiveness due to the linked HK$ following the US$ down in value, which had occurred since early 1985, had only had a final effect rather later - with only December's export figures showing any increase over the 1984 level).

GDP for 1985 had grown at 0.8%; the forecast for 1986 was about Growth rates were likely to be slower over the next few years

the Territory continues to mature and wage levels continued to rise;

competition from other S E Asian countries increased.

The

The economy was likely to continue moving from manufacturing towards service industry. The hope would be that the Chinese Open Door policy would continue and that Hong Kong would increasingly provide various financial, transport and marketing services. Territory's port would continue to be important as a container centre no other port in South China could take the larger carriers. Private investment had been sluggish during 1985, but one bright spot was the planned 25% increase in area given over to container handling.

4. There has been some increased involvement in the Shenzhen zone with simple processing (dyeing and fabric treatment for example) and some land-intensive activity being established there. Figures were rather difficult to find, particularly on whether such investment represented a net increase or a shift from Hong Kong. It was likely that manufacturing would in any case move out from the city both to the New Territories, and with a continuation of current Chinese policy, into the SEZS.

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5. The exchange rate link system has worked well, though there have been some oddities in financial markets in particular an interest. differential in favour of US$ deposits over HK$ deposits of 1-2%, possibly reflecting an expectation that the link would be moved to

CONFIDENTIAL