CONFIDENTIAL
In the government cannot afford a slump which would cause revenue growth to slow down. There would also be a real risk. of a foreign exchange crisis, resulting from a large balance of payments deficit.
16.
A cautious revaluation (say 5%) might be helpful, but the benefit might be insufficient to justify the risk of undermining the credibility painfully built up in recent years. On the related question of whether the US dollar is the best currency for the link, the argument at the end of para 2(a) above is a valid but not conclusive one. Hong Kong's main market remains the United States, and the short term disruption arising from wobbles in the US dollar could be just as disruptive to Hong Kong's trade with the HK dollar linked to, say, the SDR as they are at present.
17. This leaves us with the existing system, which has the advantage of credibility and the disadvantages set out in para 2 above. I would take a lot of convincing that it should be - modified at this stage, but the forthcoming review should
certainly look into the issue further.
18.
Some annexes underpinning these arguments and commenting on the paper sent by the Financial Secretary are being prepared, and I will let you have them, if they are finished, before your departure.
SH Broadbent
CONFIDENTIAL
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