TNAG-2814-FCO40-4060-Future-of-Hong-Kong-International-Rights-and-Obligations-(IR-1993 — Page 26

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DOCUMENT OF INTERNATIONAL MONETARY FUND AND NOT FOR PUBLIC USE

UNITED KINGDOM OFFICE ROOM 11-120

0412

Statement by Mr. Peretz on the United Kingdom

Executive Board Meeting 93/16

February 3 1993

BUFF/ED/93/13

February 1, 1993

Hong Kong

General

Hong Kong's economic success results in large part from its favorable investment climate and business environment, which reflect a free international trade and finance regime, limited domestic regulation, low taxation and a sustained record of fiscal discipline. Under the Sino- British Joint Declaration, the Hong Kong Special Administrative Region (HKSAR) will, after 1997, remain an international financial centre, maintaining the free flow of capital into and out of the territory, and the Hong Kong dollar as a freely convertible currency. The HKSAR will have full autonomy in its external commercial relations and will remain a separate customs territory.

Since the last Article IV discussion, economic growth in Hong Kong has been strong, underpinned by strong private demand and increases in exports, especially re-exports. The authorities now expect GDP growth to reach the official forecast of 5 per cent for 1992 and the prospects for 1993 remain favorable.

China's continued commitment to economic reform and the strengthening of Hong Kong's economic links with southern China have enhanced Hong Kong's role in providing essential financial and trade-related services to China. Moreover, the expansion of productive capacity in southern China, has led to the transfer of many labour-intensive manufacturing activities--and also a limited amount of labour intensive service activities--from Hong Kong to mainland China.

Monetary and Exchange Rate Policies

I welcome che staff's clear support for Hong Kong's continued commitment to the linked exchange rate system which has served as the cornerstone for financial stability and confidence in Hong Kong since 1983. The link has again proved its worth over the last year as a needed anchor of financial stability for Hong Kong.

The Hong Kong authorities acknowledge the accompanying implications of the linked exchange rate policy: the current negative real interest rates

and, more generally, the constraint on the use of monetary policy to contain inflation. However, Hong Kong's inflation arises mainly from resource