TNAG-2515-FCO40-3669-Future-of-Hong-Kong-International-Rights-and-Obligations-Sub-1992 — Page 167

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taxation, and non-interventionist policies that Hong Kong had been pursuing

successfully for years. The Hong Kong authorities should not now do what

others are trying to give up. He therefore suggested that new taxes should be

avoided, and the government should not introduce a deposit insurance scheme.

9.

Torres (Spain) agreed with, Vegh on the importance of maintaining the

exchange rate. The costs and risks associated with a change outweighed the benefits. Any appreciation of the rate would inevitably change perception of the likelihood of a future devaluation. However, he did support the

introduction of a deposit insurance scheme.

10.

In

In answer to questions, Smith (South East Asia Department) said that

it was important to see economic policy goals in a broader perspective than

narrowly focusing on inflation. The broader aim of the authorities was

maintaining long-term stability and prosperity. Anything which compromised

confidence would simultaneously undermine their long-term ability to maintain

low inflation. Hong Kong was a unique place, especially dependent on

confidence, and vulnerable to rumour--he could have quoted many examples.

1983, the Hong Kong dollar fell in value by 50 per cent in a week.

It was

against this background that the exchange rate anchor was introduced, and it

had proven its worth. He explained that the authorities saw the peg as a rock

of stability, essential to the maintenance of confidence. He said that the

authorities recognised the inflation problem, but the monetary mechanism

effectively placed a ceiling on inflation. It could not turn into runaway

inflation. While the staff were, it was true, less sanguine about the costs of

such an arrangement than they had been last year, they still saw the benefits

of the system. Smith confirmed that a deposit insurance scheme was now being

considered by the authorities, although if it was introduced he expected it to

be narrowly focussed, so as to minimise any moral hazard problems. Spencer

warned against the government underwriting the scheme. In answer to questions

by Tabata, Smith said that the capital adequacy ratios were currently higher

than the minimum level required by the BIS, and that longer maturity short-

term bills had been introduced recently.

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