TNAG-2467-FCO40-3591-Economic-situation-in-Hong-Kong-1992 — Page 2

PERSONAL AND CONFIDENTIAL

нив очень

22 December 1992

BY FAX

Martin Dinham Esq

Government House

HONG KONG

LAST PAPER

RECT

'STRY

-2 FEB 1993

INDE

(63)

SHARE PRICES: HOW FAR CAN THEY FALL?

We were grateful for Richard Hoare's letter of 4 December, enclosing a copy of the CPU report on the above.

1.

2. This was timely, since we have also been considering very discreetly, with the Treasury and the Bank of England, the possible implications of economic problems in Hong Kong for British interests. I should emphasise that this exercise, which is only known to a very few officials in Whitehall, is not evidence of panic at this end. It was a Treasury initiative, to ensure that we are prudently equipped to answer questions from Ministers. Given the uncertainties, we would not want to be caught in the position of having failed to think ahead in a sensible way in order to identify possible troublespots. We do not have the figures here to do any serious research on the following questions. Any help you can give will be appreciated. We quite understand that many of the questions are imponderable, and anyway fall mainly into HKG's bailiwick.

Indicators

3.

The main indicators of confidence are clearly the Hang Seng Index, the exchange rate, money market rates, the futures market, and property/land prices. So far, there have been no real signs of weakening in the exchange rate;

and money market rates have not moved unduly. But we have seen reports that the property market is weakening (volume of transactions down dramatically, signs of mainland companies pulling back from deals). Do SPEL have any analysis on when this might feed through into property values?

Stock Market

4. The reports we have seen on falls in the Hang Seng Index earlier this month suggest that they were due mainly to local and mainland Chinese investors selling their shares. If foreign investors decided to follow suit, the Hang Seng Index could fall substantially, possibly to the levels identified in the CPU paper.

Is any analysis available on the effect on the

leu.let.ADM

SLM

PERSONAL AND CONFIDENTIAL