TNAG-2619-FCO40-3810-Official-visits-from-the-UK-to-Hong-Kong-1992 — Page 146

Good

5.

Some

residential

But others I spoke to were

rather less sanguine. (including one banker) argued that the 70% limit on property advances was being widely ignored by some lenders. Strong underlying upward pressures on property demand were identified, including break up of the extended Chinese family leading to extra household creation. Most of those concerned

about the property position linked their doubts to the overall inflation position, and the implications this had for HK's future competitiveness.

6.

A striking feature here was the contrast between price

movements in the manufacturing and services sectors. Manufacturing prices seemed to be rising at around 2% per annum, with service price inflation far higher. The more sanguine

identified this as evidence that in tradeable goods HK's competitive position was being maintained. The less sanguine

argued that, with HK becoming increasingly a services-based economy, it could not afford to allow service sector inflation

continue; there were plenty of Pacific rim competitors eager to

take the business. Others expressed worries

distributional effects of regular 10% inflation; it was bringing about large shifts of income eg away from the old and towards profits.

7.

to

about the

one

I explored with several people the extent to which the

exchange rate link to the US dollar, and the recent low interest

rates necessary to defend it, was to "blame" for inflationary

pressures. There seems no doubt that the loose monetary stance

has been unhelpful in this respect, although most thought it had

played only a small part in the inflationary process estimate suggested it accounted for 20%. Were there to be a long and sustained period of upward pressure on the exchange rate, there might be a case for considering whether the link was still

worth it. But it was very clear to me that the establishment and

maintenance of the link during the 1980s has been fundamental to

economic confidence in HK. To break the link would be a profound blow, and certainly not a step to be taken lightly. I saw no reason to differ from the near-universal judgement that, short some major crisis, the link should be retained.

of

2