as the opportunity arises. Mr Riley thought that the Net Direct and Portfolio investment change in 1996 was too high. Mr Lund explained that this was due to buoyant prospects in China but agreed it could be toned down. Action: it was agreed to assume that the nominal exchange rate link would be maintained and that
the retrocession would essentially go smoothly. Even so, there
might still be some capital outflow ahead of 1997 reflecting
portfolio adjustments. Mr Lund to revise the forecast and review
the forecast for foreign direct and portfolio investment.
15 TRADE ACCOUNT Mr Lañe noted that there would be a fiscal
surplus in 1993/4 and lower inflation resulting in a more gradual decline in the surplus. He asked if out-processing trade was more
effected by China than non-OP trade and Mr Lund confirmed this. Mr
King asked why HK's overall trade position with China could remain
constant whilst it deteriorated elsewhere. Mr Lund explained that
Hong Kong trade was becoming increasingly related to China and that Hong Kong would allow its (currently high) margins to decline in
order to compensate for any loss of competitiveness. Mr Lane thought that in the early years of the forecast domestic export
growth should be reduced and re-exports increased. Mr Lane pointed
out that re-exports were tied in with China's cyclical demand. Mr Durrance noted that there was, a strong growth in the export of
luxury goods and Mr Lund suggested these would be even more
vulnerable to China's cycles. It was therefore agreed to smooth the
out-processing exports so they were weakly related to China's
cycles. The Bi-lateral trade surplus with China was assumed to
remain constant and it was agreed to leave the trade account.
16 INVISIBLES Mr Lund noted that the data is in cif form, not
netted out. This means the surplus on invisibles and the deficit on
trade were overstated. It was agreed to show the impact of this in
the revised forecast. Mr King commented that the forecast reflected a substantial realignment in Hong Kong's trading pattern towards services and away from invisibles. While this picture was
plausible, it required something of an act of faith to the extent
that there was very little data on the invisibles sector. It might
be worth noting this uncertainty in the risks section.
17
CAPITAL ACCOUNT
Mr Riley thought the commercial bank spread over libor was a bit low. Mr Lund suggested the interest rate could
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