TNAG-2472-FCO40-3599-Confidential-talks-between-the-UK-and-China-regarding-financ-1992 — Page 51

Good

5.

Some

But others I spoke to were rather less sanguine. (including one banker) argued that the 70% limit on residential property advances was being widely ignored by some lenders. Strong underlying upward pressures on property demand were identified, including break up of the extended Chinese family leading to extra household creation. Most of those concerned

about the property position linked their doubts to the overall inflation position, and the implications this had for HK's future

competitiveness.

6.

movements

contrast between price

services

A striking feature here was the

in the manufacturing and

sectors. Manufacturing prices seemed to be rising at around 2% per annum, with service price inflation far higher. The more sanguine identified this as evidence that in tradeable goods HK'S competitive position was being maintained. The less sanguine argued that, with HK becoming increasingly a services-based economy, it could not afford to allow service sector inflation

continue; there were plenty of Pacific rim competitors eager to take the business. Others expressed worries about the distributional effects of regular 10% inflation; it was bringing about large shifts of income eg away from the old and towards profits.

7.

to

- one

I explored with several people the extent to which the exchange rate link to the US dollar, and the recent low interest

rates necessary to defend it, was to "blame" for inflationary pressures. There seems no doubt that the loose monetary stance has been unhelpful in this respect, although most thought it had played only a small part in the inflationary process estimate suggested it accounted for 20%. Were there to be a long and sustained period of upward pressure on the exchange rate, there might be a case for considering whether the link was still worth it. But it was very clear to me that the establishment maintenance of the link during the 1980s has been fundamental to economic confidence in HK. To break the link would be a profound blow, and certainly not a step to be taken lightly. I saw no reason to differ from the near-universal judgement that, short some major crisis, the link should be retained.

and

of

2