TNAG-2515-FCO40-3669-Future-of-Hong-Kong-International-Rights-and-Obligations-Sub-1992 — Page 11

CONFIDENTIAL

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Nevertheless, strong inflationary pressures persist.

Indeed, while

monthly inflation rates are subject to volatility, the most recent outturn

for September shows a considerable pickup in core inflation (excluding food

for home use). Furthermore, the labor market has tightened again in recent

months and, with the economy operating at full capacity, the risk of a

renewed uptick in wage and price increases in the coming months is ever-

present.

Looking ahead to 1993, growth prospects are favorable. A gradual

recovery in the industrial countries is expected, trade frictions between

China and the United States have abated with the recent bilateral agreement,

and China's commitment to continued reform has recently been affirmed.

There is some concern that the political disagreements with China and the

dispute over the new Hong Kong airport could lead to a reversal in

confidence and a deterioration in the investment climate.

We hope that

no further

these problems are resolved and, in particular, there are

significant delays in the construction of the new airport which is critical

for enhancing the economic growth potential of both Hong Kong and the

southern China region. On that assumption, we expect growth next year to be

at least as rapid as in this year. Consequently, the containment of

inflation pressures remains the key immediate policy concern.

We agree that the current inflation problem stems in part from ongoing

structural changes that have been taking place in Hong Kong. The increased

outprocessing of manufacturing activities to China and the surge in demand

for financial and trade-related services offered by Hong Kong in support of

China's growing external trading relationships have accommodated relatively

(2)