TNAG-2625-FCO40-3816-Visit-by-Douglas-Hurd--Secretary-of-State-for-Foreign-and-Co-1992 — Page 123

Serial No

10

Subject

The exchange rate link between the US and HK dollars should be reviewed.

DB Chairman who may raise the subject

Mr. YIP Wah, JP, Chairman, Yau Tsim District Board.

Background/Line to Take

Many argue that due to the exchange rate link, interest rates in Hong Kong have to follow those in the US closely irrespective of the local economic and financial situation. That is why interest rates in Hong Kong are now so low (prime rate at 8%) despite the high rate of inflation (9.5% for March 92 but consistently above 10% previously for more than 12 months). The negative interest rate is highly inflationary and is causing wild speculation in both the stock and property markets.

Line to take

The Government is firmly committed to maintaining the linked exchange rate system, as it is the cornerstone of stability of our financial system. Financial stability is crucial to the overall stability and prosperity of the economy. Inflationary pressures have mainly been generated by the strains and distortions involved in the structural changes of our economy, and government's strategy is to concentrate on tackling the supply side constraints such as labour shortage, etc.

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