CONFIDENTIAL
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Foreign Exchange Market
Despite the June events, the subsequent crackdown and the uncertainty over Deng's health, the exchange rate of the Hong Kong dollar has remained remarkably stable against the US dollar. This is a reflection of the confidence people has in the Government's resolve and ability to maintain the link, at its present rate of 7.80. This confidence has been boosted by monetary reform measures introduced in 1988, which gave government more effective influence on monetary conditions. In recent weeks, however, there seemed to have been some outflow of funds from the Hong Kong dollar, necessitating slightly higher interest rates (relative to the US dollar) being maintained. The Hong Kong dollar may come under more significant pressure if the political scene in China were to worsen or if Hong Kong people were to lose heart in Hong Kong and invest or remit their funds overseas in greater volume.
Money Market
The run on the China related banks has subsided. The temporary injection of liquidity into the interbank system helped. For a period from around the middle of June to the beginning of August it was possible to cut interest rates successively (3 times) to ease monetary conditions and to provide a cushion for the likely downward adjustment in economic activity, without affecting the exchange rate. Since the middle of August, however, tighter monetary conditions have to be maintained to counter the effect of the gradual outflow of funds on the exchange rate. On 13 September, three month interbank interest rate for the Hong Kong dollar was around 9.25%, about 3/8% higher than the corresponding rate for the US dollar.
CONFIDENTIAL
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