TNAG-2749-FCO40-3964-Economic-situation-in-Hong-Kong-1993 — Page 5

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FM HONG KONG

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HONG KONG: IMF ARTICLE IV CONSULTATIONS 1993.

1.

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THE CONSULTATIONS WERE CONDUCTED ON 1 TO 10 DECEMBER BY A STAFF MISSION LED BY GUY MEREDITH, DEPUTY DIVISION CHIEF, CENTRAL ASIA DEPARTMENT. THE MISSION'S FINDINGS WERE DISCUSSED WITH HKG REPRESENTATIVES ON 10 DECEMBER. RICHARD ERB, DEPUTY MANAGING DIRECTOR, IMF, PRESENTED THE FINDINGS TO THE FINANCIAL SECRETARY ON 15 DECEMBER.

2. THE MISSION CONFIRMED THE VALIDITY OF OUR BROAD POLICY

APPROACH. IT CONTINUED TO GIVE FULL SUPPORT TO THE LINKED EXCHANGE RATE SYSTEM AND THE ESTABLISHMENT OF THE HONG KONG MONETARY AUTHORITY (HKMA). IT EXPRESSED CONCERN, HOWEVER, OVER THE CONTINUING HIGH INFLATION RATES WHICH MAY REDUCE THE LONGER-TERM COMPETITIVENESS OF HONG KONG'S ECONOMY AND EMPHASISED THE NEED TO MAINTAIN A PRUDENT FISCAL STANCE. WE ARE SENDING YOU BUT NOT OTHER RECIPIENTS A COPY OF THE CONCLUDING REMARKS BY CONFIDENTIAL FAX. A SUMMARY OF THE DOCUMENT IS SET OUT BELOW.

ECONOMIC GROWTH AND PROSPECTS.

3.

HONG KONG'S ECONOMY HAS PERFORMED FAVOURABLY, WITH ROBUST PRIVATE CONSUMPTION AND FIXED INVESTMENT, FULL EMPLOYMENT, STRONG CONFIDENCE AND RAPID GROWTH IN RE-EXPORTS. NOTWITHSTANDING FUTURE UNCERTAINTIES, THE CHANGES IN THE EXTERNAL ENVIRONMENT COULD BE ABSORBED WITHOUT A MAJOR IMPACT ON ACTIVITY, GIVEN THE RESILIENCE OF THE HONG KONG ECONOMY. BUT THIS EXPOSURE UNDERLINES THE NEED FOR HONG KONG TO PREPARE FOR ANY DOWN TURN BY PRESERVING ECONOMIC FLEXIBILITY.

INFLATION.

4.

INFLATION, WHILE STILL HIGH, HAS MODERATED FROM THE PEAK IN 1991, WHICH MIGHT BE ATTRIBUTED TO LOWER IMPORT PRICES AND STABLE GROWTH IN WAGES. GIVEN THE LIKELY CONTINUATION OF BUOYANT DOMESTIC SPENDING AND THE INCREASING DEMAND FOR DOMESTIC RESOURCES

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