TNAG-2749-FCO40-3964-Economic-situation-in-Hong-Kong-1993 — Page 70

HONG KONG

GENERAL ISSUES

13 ASSUMPTIONS

Mr Lund explained that data on the Hong Kong capital account was scant. Wherever possible, he had used the last ESG forecast as a basis for estimating the capital account flows. He had also used the trade module from the last forecast to ensure

that the Chinese and Hong Kong forecasts were consistent. The

changes agreed in the discusion on China would, obviously, have an impact upon the Hong Kong forecast. Fiscal deficits projections

were taken from the Hong Kong government's latest plans and allow

for infrastructural developments. The exchange rate link is assumed

to be maintained and inflation remains higher than in the US. The base case assumed that 1997 was something of a non-event with only a small element of capital flight (the forecast showed China at a

cyclical high point around that time which helped to offset any 1997 effect). After 1997 HK stronger fiscal surpluses were expected as the major infrastructure projects were completed.

although.

14 Mr Lane felt, also relations between China and the UK would

probably remain under strain there was little chance of a turbulent

retrocession. Mr Muckersie suggested that the argument with the UK

over the airport was brinkmanship and the chance of a disaster

scenario was minimal although there could be an effect on

confidence. Mr Riley suggested that if the problems were between the UK and China then this may only have a limited impact upon relations between HK and China. Mr King asked what the nature of a

pre-1997 confidence crisis might be. Mr Lane thought that there

could be a gradual erosion of the framework underlying HK's

capitalist economy in the longer term but that this was mainly a risk for the post-1997 period. Mr Lund suggested that people may expect this gradual erosion so would loose confidence before 1997.

Mr Lane thought that the impact of 1997 had already been

effectively discounted in the markets. Mr King commented that,

although the private sector had obviously considered how they would

respond to 1997, that did not mean that they had already acted. It

was quite possible that a Hong Kong investor might have decided to transfer part of their portfolio abroad but that they would wait

for favourable market conditions before carrying out this shift.

Mr Hope thought that it was quite possible that there might be a gradual outflow of funds in the run up to 1997 as people re-invest