TNAG-2749-FCO40-3964-Economic-situation-in-Hong-Kong-1993 — Page 115

CONFIDENTIAL

2.

Economic Advisers consider that the telegram does not

emphasise sufficiently the very close relationship between GDP growth in China and in Hong Kong. They think the statement in paragraph 6 that Hong Kong has since the 1950s recovered from

China induced shocks neglects the fact that in recent years the level of integration between the Hong Kong and Chinese economies has risen exponentially. If China's growth rate declines, there

is bound to be a knock-on effect in Hong Kong. If Chinese

monetary policies are not effective, it may not just be a downward blip. The Economists agree with Hong Kong that the psychological impact of economic problems in China will be important. I would agree that, logically, the Chinese should in those circumstances value a successful Hong Kong more highly.

But equally they could turn inward, and if there is leadership

turbulence, it could be more difficult to get any decisions

taken on Hong Kong. And the reference to a "boost to investor

confidence" in para 6 looks uncomfortably sanguine. Surely

economic slowdown in China is more likely to lead to a loss of investor confidence in Hong Kong?

3.

There was some discussion of the Hong Kong economy at a

lunch hosted by Bank of England officials last week to which the

Treasury and ourselves were invited. The Treasury noted that Hong Kong's economic problems are the reverse of those in the UK

(ie relatively high inflation, large budget surpluses, and labour shortages). Surprisingly, Hong Kong's inflation has not actually translated into higher prices for exports to the United

States. This is mainly because Hong Kong manufacturers have successfully avoided inflationary price rises in Hong Kong by taking advantage of cheap labour in Southern China. Although China itself has a serious inflation problem, absolute salary levels are so low that this has not lead to any significant

increases in prices, and such rises as have taken place have

been off-set by the recent devaluation of the RMB. The Hong

Kong Government Economist who was in London earlier this week

heat.min.ADM

SLM

CONFIDENTIAL