Index (A). (Raw materials prices from China have not been so restrained.) Even if the economy still has some spare capacity, and output can respond in the impressive way it has done in the past, a pick-up in inflation must be on the cards, as HKG acknowledge, but it is hard to judge whether the 1-2% increase they have in mind is realistic, or whether permanent damage will result if it goes higher.
8.
Inflation is highly relevant to the question of the exchange rate link. It is an article of faith that even to think of changing the rate against the $ would provoke a crisis of confidence, and that it is an essential bastion against occasional political But this has some ripples. I am sure that this is correct. economic consequences and some questions for policy which need to be thought about; indeed, such people as David Nendick and Alan McLean
If an external imbalance seemed quite keen to turn these over. If an external emerges in HK (and some would argue, on the basis of four consecutive years of apparent current account surplus, that this is already happening), monetary policy changes are ruled out by the need to keep interest rates at a level (vis a vis US rates) which HK could adjust by maintain the exchange rate parity with the $. losing competitiveness through domestic wage inflation, but this might prove an unattractive option, and cause permanent damage if it went too far: This leaves adjustments in fiscal policy; adjusting expenditure is difficult in the short term and perhaps undesirable, since frequent shifts tend to be inefficient; tax changes, on the other hand, are constrained by the somewhat limited range of instruments available. Moreover, a fiscal policy change might
I do not know what the actually worsen the external imbalance. right answer will be in particular circumstances, but I should think that the policy debate within HKG will grow in coming months, and that this might not be a bad thing. I also suspect that it may put the link under fresh scrutiny.
9. Financial institutions. The long drawn out climb to stability among HK's financial institutions seems at last to have been achieved, and there was some justified satisfaction that the last of the fires seem to have been put out (although the government still, of course, owns three banks). This provides the opportunity to focus more attention on longer term issues. I suppose that this will in practice raise once again all those questions which went under the unmentionable heading of Central Banking, whether this is done by developing the role of the SMA or by creating new institutions. In the past, the argument was, I think, that a Central Bank was unnecessary and unacceptable to China. should imagine that the role of the HKSB in issuing notes and providing a clearing system will become increasingly invideous and that thought will be given to whether this will continue to be appropriate
But I
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