ARZACU (2)
CONFIDENTIAL
Background
(a) THE HONG KONG/US DOLLAR LINK
1.
The link was introduced in 1983 following a period of severe
exchange rate instability and has ever since played an important part in maintaining stability and confidence. The Hong Kong Government believe the link will remain essential in the run-up to
1997 and that to break or alter the link just once would encourage
speculation, with damaging effects on confidence. Some
economists have argued that overheating and inflationary pressures in the economy necessitate adjustment and that this is
best achieved by revaluation. However evidence of overheating is
not clear cut and the Hong Kong Government have indicated that they
will accept some inflationary adjustment.
2.
The Hong Kong Government have therefore resisted all pressures, both international and speculative, for a revaluation. Recent measures, including the threat to impose "negative interest
rates" on large Hong Kong dollar deposits, have been effective
against speculators. There has also been some evidence suggesting
that the growth of the US/Hong Kong trade deficit has been reversed.
Pressure for revaluation has therefore receded a little, at least
for the time being.
(b)
HONG KONG AS A NIE
3.
―
The United States Government has attacked the Asian NIES,
including Hong Kong, for exchange rate policies which in US eyes
maintain the value of their currencies at artificially low levels.
In the case of Taiwan and possibly South Korea, there may be grounds
for criticism. But we do not believe that there is any case against
Hong Kong, which is a free trader and has no overall surplus on visible trade. Hong Kong is understandably sensitive about the tendency to lump it together with the other Asian "dragons": in our
contacts with the US we have argued strongly that it is quite
different and should be treated in a distinct way. Recent US statements have recognised the value of Hong Kong's open trading
CONFIDENTIAL
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