TNAG-2814-FCO40-4060-Future-of-Hong-Kong-International-Rights-and-Obligations-(IR-1993 — Page 22

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WOULD BE INCOMPATIBLE WITH SUSTAINING THE LINK TO THE

DOLLAR, AND AS SUCH WOULD DEMAND A POLICY RESPONSE. ABBOTT NOTED THAT THE EXCHANGE RATE REGIME THUS PUT AN UPPER BOUND ON INFLATION. ALL SPEAKERS ALSO STRESSED THE NEED TO BE WILLING TO RELAX LABOUR AND LAND CONSTRAINTS AS NEEDED TO HELP CONTROL INFLATION.

4.

I SAID THAT THE HONG KONG AUTHORITIES BELIEVED THE STAFF SIMULATIONS OVERSTATED THE IMPACT OF A SHIFT IN THE FISCAL BALANCE ON INFLATION. MOREOVER THE SHIFT ITSELF COULD WELL TURN OUT TO BE OVERSTATED. NONETHELESS, THE AUTHORITIES WOULD WATCH THE INFLATION SITUATION CAREFULLY AND BE READY TO ACT IF THE FISCAL SITUATION TURNED OUT WORSE THAN EXPECTED, AND TO INCREASE LABOUR IMPORTS AND TAKE OTHER SUPPLY SIDE MEASURES IF NECESSARY.

5.

ZOCCALI (ARGENTINA) COMMENTED ON THE CONCERNS OF HONG KONG OVER THE SUCCESS OF THE URUGUAY ROUND, UNJUSTIFIED DUMPING ACCUSATIONS, AND MFN STATUS FOR CHINA. THESE COMMENTS WERE HELPFULLY REFLECTED IN THE CHAIRMAN'S SUMMING UP OF THE DISCUSSION (TEXT TO FOLLOW BY FAX). CHE (CHINA) EXPRESSED IN HIS BUFF STATEMENT (ALREADY SENT BY FAX) CONCERN OVER THE TOTAL CONSTRUCTION COST OF THE AIRPORT PROJECT, SUGGESTING THAT THERE WAS PLENTY OF ROOM TO CONTAIN CAPITAL COSTS. HOWEVER, THE FINANCING OF THE

ACP WAS NOT RAISED IN THE DISCUSSION.

6.

PERETZ

FULL REPORT TO FOLLOW BY SAVINGRAM.

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