TNAG-2515-FCO40-3669-Future-of-Hong-Kong-International-Rights-and-Obligations-Sub-1992 — Page 62

CONFIDENTIAL

- New Monetary Arrangements.

HK press reported in May that following discussions with Bank of England, HK was planning to amalgamate central banking functions of different government departments (mainly banking commission and exchange fund) into new central monetary authority. This referred to confidential review undertaken by Bank at Financial Secretary's request, into HK's monetary arrangements. Further progress on this expected later this year.

Background

Limited relations with IMF. Article IV consultations held in October 1990 and 1991, with Board discussion in January of following years. Board supportive of HK economic policies. Chinese also generally supportive. Tentative plans for HK to host 1997 Annual Meetings.

Real GDP growth recovering (+3.9% in 1991, cf +3.0% in 1990 and +6.6% average in 1980s). Budget forecast is for 5% growth in 1992. Recovery fuelled by strong export growth (31% year-year in June), export growth fuelled by growth in re-exports (40% year-year in June), re-exports mainly to/from China and mainly related to out- processing in southern China. Further growth depends on recovery in markets for final exports (mainly US). Inflation has fallen (9.3% year-year in June, 12.3% in June 1991) but is threatened by low interest rates (prime lending rate 6%, 3-month interbank rate around 3%), due to exchange rate link with US$, and domestic supply constraints. Real wages rose (+3% in manufacturing, +6% in services in 1991) due to tight labour market (2% unemployment in 1991).

Chris Patten sworn into office as Governor in July expected to stay until 1997 retrocession. Patten's down-to-earth populist style (arrival in suit rather than uniform, tours by public transport, etc) well received by local press.

Key Statistics

1989

1990

1991

1992f 1993f

Real GDP growth %

2.8

3.0

3.9

5.0

5.0

Year-year Inflation %

10.2

9.8

12.0

9.5

8.5

Year-year M2 Growth %

19.9

22.4

13.3.

Fiscal Surplus, % of GDP

1.1

0.7

3.5

1.1

-1.1

Foreign Reserves $bn

19.1

24.7

28.9

Vis. Trade Account, % of GDP Current Account, % of GDP

1.1

-1.0

-2.5

-2.9

8.0

5.0

2.9

2.7

Note

-

Current Account data excludes IPD flows. No data on IPD flows or external debt. Forecast figures from HKG.