However, the potential for political in- stability makes Hong Kong's financial po- sition more fragile than is the case in
puntries. If a devoro political crisis leads to a major drop in confidence, there could be a flight from the H.K. dol- lar, a plunge in real estate values, a fall in budgetary receipts, and much stress in the banking sector. Such a crisis oc- Curred in 1902-64, in a context or great uncertainty about the China's intentions over the colony. In this period, the H.K dollar depreciated from 4.6 per U.S. dol- lar to 9.6:1 (although it ultimately was stabilized at 7.8:1), the payment system came under severe strain, and the gov- ernment had to engage in a bank rescue operation. In that instance, China seems to have supported Hong Kong's financial stability by providing loans to the banking system a significant signal of its atti tude toward the colony. Unfortunately, there may be cintamsiances in which support from China may not be available.
These extreme scenarios, however, are unlikely and should become even less probable in the future if integration with China proceeds smoothly,
Finally, there is a third layer of Hong Kong creditors. As a major financial cen ter, Hong Kong banks intermediate cani. tal flows in and out of the region. Foreign liabilities of the banking sector were US$446 billion in September 1992 - an amount thai makes Hong Kong the largest hanking center cucide OECD countries. To the extent that Hong Kong acts simply as a booking center for loans, then assets and liabilities to foreigners may be considered as being offshore – largely insulated from local crises, and thus representing little risk to foreigners. Because insulation is not complete, how- ever, there remains some sovereign risk even to offshore balances in the extreme scenario presented above.
8 Hong Kong
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