TNAG-2466-FCO40-3590-Economic-situation-in-Hong-Kong-1992 — Page 53

JWL0086

M. Fun M5/6 Mh Short 8/6

HONG KONG FINANCIAL MARKETS: MAY 1992*

Prime Lending Rate reduced from 8.5% to 8% (wef 4 May) and to 7% (wef 25 May)

• HK$ strengthened from 7.758 to fluctuate rod, despite interest rate cuts

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· HIBOR fell below a stable US$-LIBOR, to a low of 3.4% (0.5% below US$-LIBOR)

HangSeng Index rises 13% in May to 6,080 points, 64% higher than a year earlier

Prime Lending rate was reduced twice in

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May from 8.5% to 8% on 1 May (wef 4 May) and again to 7% on 22 May (wef 23 May). This was facilitated by falling inflation and slightly improving trade figures, and (according to HK press) necessitated by upward pressure on the HK$.

Foreign Capital inflows continued unabated. Morgan Stanley's reweighing of HK from 1% to 10% of their global portfolio was followed by Fiduciary Trust Co's reweighing of HK from 1% to 7% of their portfolio. Others are expected to follow suit.

HangSeng Index rose by 13% in May to finish at 6080 points, 64% higher than a year earlier. The rise has partly been on the back of foreign investment, but has also been fuelled by local investors diverting away from a calming property market and falling bank interest rates.

HSBC share price rose in May in line with the HangSeng index, and has now recovered to above its pre-Midland-bid price.

HK$ strengthened from 7.76 to 7.74 in early May, following a short period of Exchange Fund intervention in the money market (to bring interest rates into line with US rates). Since 5 May, the HK$ has remained strong at around 7.74.

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Interbank rates fell in May, with 3-month HIBOR falling below 3-month US$ LIBOR on 12 May for the first time in five months - reflecting the large scale capital inflows which are also fuelling the stock market. 3-month HIBOR fell to a low of 3.375% on 20 and 22-25 May.

Exchange Fund Bill average yields fell in line with prime rates and interbank rates: 182-day yields fell to 3.22% by end-May, 77 bp down on the 14 April auction; 91-day yields fell to 2.84% by end-May, 99 bp down on the 14 April auction.

Liquidity Adjustment Facility discount window will be opened wef 8 June, to provide emergency credit to banks with liquidity problems. It is seen as a first step towards a centralised Monetary Authority.

CPI(A) inflation fell to 8.9% y-o-y for April, compared to 9.5% for March, and the lowest level for two years. This fall is, however, expected to be temporary. 1991 Q4 real GDP growth was 4.4% y-o-y, driven mainly by 25.7% growth in re-exports and with an implicit GDP deflator of 10.3%.

Developing World Division HO-3 Middle & Far East

2 June 1992

J W Lund (4483)

Jako's Sund

* Copies to Mr Crockett, Mr T A Clark, Mr Latter, Mr Page, Mr Elston, Mr Smeeton, Mr Sutherland,

Mr D A Ware, Mr Miles, Mr Milne, Mr A Bulley, ID Sections 6(FE) 9, BSD Group 18; Mr Ricketts (FCO), Mr Cox (FCO), Mr Lane (FCO), Mr MacIntyre (HMT).