45. Except for one or two temporary aberrations the exchange rate of the Hong Kong dollar against the US dollar has remained stable around the linked rate of HK$7-80 to US$1 during the year. However, reflecting the depreciation of the US dollar, the effective exchange rate index of the Hong Kong dollar fell from 70-6 in end-December 1985 to 64.8 in end-December 1986.
46. Despite the depreciation of the Hong Kong dollar. the rate of inflation has remained. low. Consumer prices increased by an average of 2-7 per cent in the first 11 months of 1986 over the same period last year.
47. As a result of the improved economic performance in recent months the forecast growth rate of the gross domestic product (GDP) for 1986 was revised upward from 4-5 per cent at the time when the budget for the 1986-87 financial year was announced to 5.6 per cent in mid-September, and even this revised forecast may prove to be conservative. In contrast, in 1985 the estimated growth rate of the GDP was 0-8 per cent.
(b) Investment
48. Capital investment in Hong Kong is mainly undertaken by the private sector. The role of the Hong Kong Government is largely confined to ensuring the provision of the necessary infrastructure, and the preservation of a favourable investment environment within which private business enterprises can seek to maximise their returns. In addition to providing much of the physical infrastructure, the Hong Kong Government seeks to ensure that adequate support is provided to investors in the availability of new industrial technology and of a well-trained and well-educated workforce.
49. After declining in the second half of 1985 and in the first half of 1986, retained imports of capital goods picked up in the third quarter of 1986. Of particular note were the retained imports of industrial machinery for use in the manufacturing sector, which grew by 23 per cent in real terms in the first nine months of 1986, after a decline of 4 per cent in 1985 as a whole.
50. In the property market, demand for most types of private sector property has been strong this year reflecting a revival of interest in property investment generally. Following a strong recovery in the property market in 1985, prices and rentals held firm, while trading in property was active.
(c)
Trade Relations
51. Hong Kong's longer term economic performance remains dependent on external forces. The threat of protectionism in Hong Kong's major export markets, particularly the US, remains. While prospects for exports to China appear good in the longer term given China's modernisation programme, Hong Kong's domestic exports and re-exports to China have been affected by tighter Chinese control on imports since April 1985.
52. The Hong Kong Government will continue to make every effort to counter protectionist pressures and to defend Hong Kong's trading interests. The past year has seen the satisfactory conclusion of several new agreements of vital importance to Hong Kong's textiles and garments industries. These include the extension of the Multi- Fibre Arrangement until July 1991 and bilateral agreements on textiles with the US and with the European Community.
53. As from 23 April 1986 Hong Kong has been a separate contracting party to the General Agreement on Tariffs and Trade and, in that capacity, has supported the launching of the Uruguay round of multilateral trade negotiations in November. In the forthcoming discussions Hong Kong will lend particular support to efforts to bring about trade liberalisation and improved market access: it has considerable interest in negotiations on trade in services, a sector of growing importance to the Hong Kong economy.
(d)
54.
Public Finances
The Hong Kong Government budget returned to surplus in the financial year 1985-86 after three years of deficits. For the financial year 1986-87, higher yields from earnings and profits tax are expected, and the income from land sales will also be higher.
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