TNAG-1520-FCO40-2081-Employment-in-Hong-Kong-1986 — Page 42

COMEIDENTIAL

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32.

From a monetary standpoint, the appearance of an institutional investor of this magnitude would have a major impact on financial markets in Hong Kong. The nature of this im ct is difficult to foresee and would depend upon the investment strategy of the CPF. The fund would undoubtedly hold an investment portfolio very different from tre one which contributors to: it would otherwise collectively hold in the absence of a CP F, in which case the impact is likely to be disruptive. For example, a a desire to

to invest a substantial proportion of available funds in foreign currency assets would be likely to have a major adverse impact upon the foreign exchange and money markets. This would take the form of unset ling pressures on the exchange value of

the exchange value of the Hong Kong dollar and on interest rates and it would almost certainly be necessary for the Exchange Fund to take a more active role in order to restore and maintain monetary stability.

33.

Constraints could be imposed upon

imposed upon the investment strategy of the CPF in order to minimise the disruptive effects upon financial markets. The CPF might, for example, be required to concentrate its investments in the domestic market. In this case, however, there are insufficient first class Hong Kong dollar assets to absorb the volume of funds likely to be available and there danger, therefore, that the Fund would

would be obliged to invest in lower quality assets.

the

is a

investment

34.

Constraints of this k ind u pon strategy of

of the CPF might accordingly have an adverse effect upon the rate of return achieved. If the effect on benefits were to be compounded by erosion of their real value resulting from a period or periods of high inflation, then there might well be discontent on the part of recipients leading to pressure

for "topping up" of benefits payable from the CPF.

Public service implications

35.

The establishment of a CPF would add to existing pressure for the funding of civil service pensions and the introduction of provident fund type arrangements for the civil service. Although serving civil servants might continue to be covered by existing pension arrangements it would be very difficult to argue aga st extending a CPF to cover newly recruited civil servants at least. An extension of the scope of the CPF to the civil service would have financial implications. Even if membership of the CPF was restricted to new I cuits, the cost at current prices, assuming an employer's contribution of 5%, is estimated to be $13m. in year 1 rising to $266m. in year 10 and $586m. in year 18.

CONFIDENTIAL