CONFIDENTIAL
5. Assuming 5% growth, Yeung now believed that there would be no rundown in fiscal reserves before 1997, leaving a "cushion" of some HK$48 billions above the HK$25 billions minimum. This would provide adequate protection against several concurrent reverses growth of only 3%, equity calls
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by MTRC, a HK$15 billion contribution to the MTRC.
6.
I
It is clearly right to move towards a tighter fiscal policy, with monetary policy pre-empted by the dollar link. suspect that rather more tax increases will be needed in future years to damp the economy - past experience suggests that once it picks up, it does so faster than expected, and there will be the added stimulus of ACP. Moreover, the labour market remains relatively tight, Professor Edward Chen, a member of Legco whom I met in Tokyo, thought that this and increasingly aggressive behaviour by the unions would result in a continuing inflation problem. Macleod and others were more sanguine. Labour imports would help to relieve the problem. Moreover, if the labour market remained tight, expatriation of some services as well as goods output to neighbouring China would not be a disaster at all. The availability of property there, too, was a potential safety valve against excessive price escalation in Hong Kong. There was some support (inter alia from Anson Chan, who blamed the property developers) for the view that the land supply was unduly restricted and hence overpriced. However, Macleod identified the main threat to the economy as protectionism in the United States against Chinese exports, on which Hong Kong's prosperity ultimately rested.
The Airport
7. In the time available, I was unable to obtain a clear and comprehensive picture of progress to date on the many components of the project. The most recent summary of estimated cost and programme is that contained in the submission to Legco at the beginning of last year. A revised version of this, together with the Business Plan for the PAA, and of the key underlying assumptions (notably traffic flows) is expected to be available in the next fortnight. I was promised a copy immediately it was available.
8 =
Both Allen and Chan said that everything was substantially on schedule, and that costs had escalated by no more than 5% on the original estimate, which they considered to be very reassuring. The key contracts were the airport platform and the Lantau Fixed Crossing. The tender period for the former had been extended to 12 March, but it would be let on time. Some pre-ordering of equipment had already taken place. On the latter, the bids and associated financial proposals were being evaluated. The MTRC awaited only Chinese acquiescence to get on with the airport railway.
CONFIDENTIAL
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