TNAG-2461-FCO40-3582-Relations-between-Hong-Kong-and-Commonwealth-countries-1992 — Page 30

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HM TREASURY: 1992 IMF/IBRD ANNUAL MEETINGS

HONG KONG: Briefing

Financial Secretary: Hamish McLeod

Secretary for Monetary Affairs: David Nendick

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Welcome recovery in economic growth and improvement in inflation. Endorse fiscal prudence, especially with respect to Airport project.

Line to Take

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Stress importance of fixed exchange link.

Confidence resulting from stable link outweighs disadvantages from smaller role of monetary policy in combatting inflation. Past prosperity and balance of payments surpluses resulted from sound economic management, including fixed exchange link.

Note inflationary pressures.

Note persistent inflation generated by tightness in labour market and shortage of land. Property prices and real wages still rising although recent wage-settlements more flexible between sectors and unemployment has risen to 2%. Increased use of cheaper resources in Southern China, selective labour importation scheme and continued fiscal restraint should cushion against further inflationary pressures.

- Note high level of foreign reserves.

Recently published (previously secret) figures show foreign exchange reserves US$28.9 bn - 12th largest in world and second largest in per capita terms.

Defensive

-

Airport financing row with China needs to be resolved.

1991 MOU (Memorandum of Understanding) on Airport temporarily unstuck over question of contingent liabilities (translated as "probable debt" by Chinese) which China wants included in MOU's HK$5 bn debt ceiling. Airport land reclamation and site preparation contract recently provisionally awarded despite row. Likely that China is delaying, pending clear views on Governor Patten's stance on HK domestic politics.

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