TNAG-2515-FCO40-3669-Future-of-Hong-Kong-International-Rights-and-Obligations-Sub-1992 — Page 19

CONFIDENTIAL

132372

MDLIAN 9760

ENTRENCHMENT OF INFLATIONARY EXPECTATIONS WOULD INEVITABLY REDUCE OUR FLEXIBILITY AND INCREASE THE SUBSEQUENT COST OF RE- ESTABLISHING AN APPROPRIATE WAGE-PRICE STRUCTURE.

5. MEASURES ON THE SUPPLY SIDE REMAIN IMPORTANT IN ALLEVIATING INFLATION. THE LABOUR IMPORT SCHEME HAS CONTRIBUTED SIGNIFICANTLY TO EASING THE LABOUR MARKET SINCE 1990 AND THIS ARGUES FOR ALLOWING A FURTHER EXPANSION IN LABOUR IMPORT. ON LAND POLICIES, THE TAX AND REGULATORY MEASURES AND THE TIGHTENING OF MORTGAGE LENDING HAVE CONTRIBUTED TO COOLING DOWN ACTIVITIES IN THE RESIDENTIAL PROPERTY MARKET. THE MISSION WELCOMES INCREASED LAND SALES IN THE LAST TWO YEARS AND SUPPORTS FURTHER INCREASES IN

THIS REGARD.

MONETARY POLICY

6.

THE MISSION CONSIDERS THAT THE LINKED EXCHANGE RATE SYSTEM IS A TRANSPARENT POLICY THAT HAS SERVED AS THE LINCHPIN OF FINANCIAL CONFIDENCE AND STABILITY IN HONG KONG. IT FULLY SUPPORTS OUR CONTINUED COMMITMENT TO THE EXCHANGE RATE ANCHOR. WITH THE DECLINE IN US INTEREST RATES, A SIDE EFFECT THOUGH IS THE INCREASINGLY NEGATIVE REAL INTEREST RATES WHICH HAVE SUPPORTED THE BUOYANCY OF PRIVATE INVESTMENT AND CONSUMER SPENDING, THEREBY INTENSIFYING INFLATIONARY PRESSURES.

7. THE MISSION WELCOMES THE DECISION TO ESTABLISH A CENTRAL MONETARY AUTHORITY WHICH WILL ENHANCE THE EFFECTIVENESS OF MONETARY MANAGEMENT, AND STRESSES THE NEED FOR IT TO WORK CLOSELY WITH THE FISCAL AUTHORITIES. THE MISSION ALSO COMMENDS THE INTRODUCTION OF THE LIQUIDITY ADJUSTMENT FACILITY AND THE RECENT RELEASE OF INFORMATION ON THE ASSETS AND LIABILITIES OF THE

EXCHANGE FUND.

FISCAL POLICY

8.

THE MISSION IS CONCERNED ABOUT THE SHIFT IN FISCAL BALANCE FROM A LARGE SURPLUS IN 1991/92 TO A DEFICIT IN 1993/94 AND ITS EXPANSIONARY EFFECT ON THE ECONOMY. PART OF THE DEMAND GENERATED FROM THIS SHIFT WILL BE REFLECTED IN A CHANGE IN THE OVERALL DOMESTIC DEMAND, WHICH WILL INTENSIFY PRICE PRESSURES. LOOKING AHEAD, THE COMMENCEMENT OF LARGE SCALE SPENDING BY THE AIRPORT AUTHORITY AND MTRC WILL RESULT IN ADDITIONAL INCREMENTAL CLAIMS ON ECONOMIC RESOURCES FOR THE PUBLIC SECTOR AS A WHOLE.

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