TNAG-1641-FCO40-2288-Budget-of-Hong-Kong-1987 — Page 29

stability and prosperity of Hong Kong itself. This and the fact

that we believe in and

in and practise free trade put us in a unique

position.

26.

The inflow of funds into the Hong Kong dollar resulted in an acceleration in the growth rate of the money supply during

1986. HK$M3, for example, grew by 12% in the second half of the

year, compared with 4% in the first half although the figure for

the second half was inflated by subscriptions to а new share

issue in December. The inflow has also resulted in a widening

of the gap between Hong Kong dollar interest rates and those for

the US dollar, making it expensive to keep idle funds in Hong

Kong dollars and inducing the necessary offsetting outflow. In

time, the acceleration in the money supply should work through

the economy resulting in increased imports of goods and

services, thus reducing or eliminating the net inflow of funds.

27.

A higher growth rate of the money supply is often believed to have unwelcome implications for inflation. I have

doubts, however, about the strength of this particular relationship in the context of our very open economy. Although in the last quarter of 1986, there has been a tendency for the

cost of living of those in the higher income brackets to

increase faster, I do not think that

we need as yet be unduly

concerned.

+

28.

Turning to banking and the securities market, the

latest fashion is what is described as "securitisation". As

with some other fashions, one is left with the feeling that the

wearer may be in danger of being over-exposed. She needs

adequate cover; otherwise she may catch a cold. Now that the

banking sector has been nursed back to health, it too must take

care to maintain adequate capital cover; otherwise it too may

Securitisation of debts exposes financial institutions to what is for them a new type of risk; a risk that

is characterised in particular by the replacement of assets

which are generally secured, by unsecured paper assets; and the

price of those

those paper assets is very often highly sensitive

catch а cold.

/changes

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