TNAG-2977-FCO40-1469-Economic-policy-in-Hong-Kong-1982 — Page 85

G.F. 326

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9.

Between

end-February

and

end-July

foreign

customers with banks

and

currency deposits of

deposit-taking companies in Hong Kong increased by 135%,

from HK$32.5 billion to HK$76.3 billion, while Hong Kong

dollar deposits of customers went down by 4%, from

HK$134.5 billion to HK$129.4 billion.

10.

It is difficult to tell precisely how much of

these changes is attributable

attributable to varying

to varying factors, but it

seems likely that the major part of the increase in

foreign currency deposits represented a net addition to

deposits with Hong Kong institutions as foreign currency

deposits were moved in from other centres, motivated by

the tax change. At

same time, largely reflecting the

tax change, the after-tax interest differential between

US$ and HK$ moved by about 2% in favour of the US$ between

end-February and end-July, which suggests that some

switching out of HK$ must also have taken place. Finally,

it is likely that there would have been some natural

growth in foreign currency deposits even if there had been

no tax change.

11.

Thus

business that was at least partly being

carried on outside Hong Kong is now being transacted

entirely within Hong Kong and the foreign currency deposit

base of the monetary sector has been strengthened.

Although on the face of it a degree of switching from Hong

Kong dollar deposits to foreign currency deposits puts

CONFIDENTIAL #