TNAG-1483-FCO40-2037-Economic-situation-in-Hong-Kong-1986 — Page 292

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potentially somewhat more stringent, but the main purpose is to extend those powers over DTCs where at present there are no intermediate strictures short of suspending registration. Lessons had been learned in 1981-82: the system was not self-equilibriating and government had an important role to play in the financial system. The new Bill introduces a capital adequacy ratio with a minimum of legal requirement of a 5% capital/risk ratio. A trigger level of 8% will be set for banks, and 10% for DTCs - the offence under the law will be not reporting if this level is reached. (Liquidity has not been a problem with the smaller banks in difficulties, and it is likely that "window dressing" will still be difficult to detect.) The system of annual examination of banks and DTCS will continue; the Bill should produce better indicators and early signs of problems.

7.

The

Current difficulties (over and above the continuing effects of the property collapse) were linked to lending to ASEAN countries now in difficulties through commodity and oil price falls (and also the property slump in Singapore). Past lending here had been to private enterprise, which had offered seemingly good prospects, but which had sufferend a conflation of problems with the world downturn. large banks had significant spread in lending to be able to weather such difficulties; there were over-concentrations of lending in smaller banks and DTCs (locally incorporated banks - excluding the Hong Kong and Hang Seng - were likely to show lower profits in 1985 even at considerable cost to inner reserves).

8. On the brighter side, international banks are still seeking licences in the Territory, with their main interests in the North Pacific China, Japan and South Korea, not ASEAN.

9.

Manufacturing investment in Hong Kong is still slack.

Lending

in total to industry had probably grown more slowly than the inflation rate. While the Stock Market has risen with increases in confidence, turnover is still relatively low.

CONFIDENTIAL