SMUENTIAL
9
fund adequately productive investments, this could be of benefit to the economy. A less satisfactory allocation of resources has, however, often been the result elsewhere.
27.
If the funds were recirculated within Hong Kong, they would represent a potential addition to the pool of funds available for private domestic investment, though not on a one-for-one basis because some savings will have been diverted into the CPF in the first place. The existence of extra loanable funds would not
not necessarily induce additional private investment, however, unless interest rates fell or lenders
lenders became less critical in their appraisal of investment risks.
28.
Under the linked exchange rate system, the potential for domestic interest rates to fall relative to US dollar rates is
is limited. One likely reaction to
to the provision of extra loanable funds in the domestic money market is, therefore, an increased outflow of funds with consequential implications for other components of the balance of payments. It is not possible to be precise about which components would be affected and in what way, except to say that as the balance of payments must by definition balance
a net counter-balancing inflow would have to be generated.
29.
If, as is quite likely, the counter-balancing inflow arose from an increased surplus on the balance of trade, this might well be achieved by a reduction in the level of imports brought about at the cost of a slowdown in economic activity generally. This would probably be a transitional phenomenon diminishing in effect as
effect as payments in to and out of the CPF approached balance, but it would take place over a fairly lengthy period of years at the cost of a set back to economic performance which might not be recovered.
30.
Similar effects to those described above would result if the CPF were authorised to invest some part of its funds overseas rather than in Hong Kong. In that event, a direct rather than indirect outflow of funds would occur, leading to the same process of adjustment.
Monetary and investment implications
31.
-
Contributions each year to a CPF would amount to a very substantial sum
equivalent, on the basis of maximum coverage and a 10% combined rate of contribution, some $10 billion in 1985 (see paragraph 24). These funds would be invested by the CP F managers and macroeconomic impact of this has been discussed above.
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