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· 11.
Erb (Deputy Managing Director) asked Smith whether, in retrospect, the US dollar had been the best currency to link the Hong Kong dollar to in
1983. Smith said that. with hindsight, the Yen would have been less
inflationary. However, the past was little guide to the future, and the Hong Kong people were very comfortable with the US dollar link. I added that in my
opinion, the US dollar would probably still be chosen if the decision were
being made again today. The US was in 1983, and remains today Hong Kong's
largest export market (about 30 per cent). Only about 5 per cent of exports go to Japan. In addition, much of Hong Kong's money supply is in the form of
US dollars.
12.
In my closing statement, I said that Hong Kong was a shining example
of the benefits of capitalism, free and open markets, and limited state
intervention and regulation. Over the past 20 years the growth rate of per
capita income in Hong Kong has been two and a half times the developing
country average. Average per capita income was now about 30 times the level in China. The benefits of this free market approach were already spreading
across the border. I welcomed Wei's reaffirmation of China's commitment to
'one country, two systems' after 1997. But, personally, I wondered whether
mainland China might increasingly draw the lesson from Hong Kong's economic
success, and pursue economic reform to the point where the differences between
the two economic systems begin to disappear. Ultimately, this could be a most
welcome outcome of the transfer of sovereignty back to China in 1997.
13.
Turning to the shorter-term, I pointed out that we should not forget
that the inflationary problems, around which most of the discussion had been
based, were temporary. Whatever its defects. the exchange rate mechanism in
Hong Kong guaranteed that, if the anchor currency was managed properly, there
could be no collapse into an upward inflationary spiral. The real risk for
Hong Kong was not a continuing steady rate of inflation in the non-traded
goods sector. The real risk was an external event leading to a collapse in
the currency that the authorities could not stem. This would lead to domestic
inflation, and a further fall in confidence. Keeping the exchange rate link
unchanged was the best way to guard against that. I agreed with Abbott that the inflationary pressures were structural in origin, and the supply side
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