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HONG KONG URBAN COUNCIL

persuade the Government, which, unfortunately, seems to be lacking in finan- cial expertise, that this is the wrong way to preserve Hong Kong's prosperity and reputation as a financial centre. In fact, the introduction of negative interest rates would be a major mistake and could cause a major financial disaster in Hong Kong.

Let us hope that everybody will think again and think positive, not negative!

Yours faithfully

W. M. SULKE

Article for the Hong Kong Press By W. M. SULKE, OBE, JP

Appendix C

I think everyone at senior level in Government must by now be aware that for the last 12 months I have been pushing to alter the US/HK$ link, substituting instead a basket, which I have suggested could consist of 40% US$, 30% ECU, and 30% Yen. The only reaction so far has been an off the cuff, by the way remark from the present Financial Secretary that it is too difficult to fix the contents of a basket, which, in my view, is a very defeatist sort of attitude to express. But before I go into that I think I should probably repeat the reasons why I believe a HK$ link to a basket of a mix of weak and strong currencies is absolutely essential for the well being of Hong Kong's economy.

I think everyone must be clear that in the end the market always has its way. Artificial linkages, whether they be of gold or currencies, or limits on the fall or rise of share prices, etc. etc., can only mitigate and slow but cannot reverse the trend of the market, and if there is no 'give' then the link will invariably break with often disasterous consequences. I do not want to get into the economic argument as to whether the link is a good or bad thing, in our case it is a political fact, and whatever we think (and I have been told that two of our previous and very successful Financial Secretaries think that we should let the HK$ float), we will certainly have to live with it. But, of course, the idea of the link was to keep the HK$ at a certain level, and because of the accelerating fall of the USS, the HK$ has not been held at a desired level, and has, in fact, been devalued to such an extent that it is now detrimental to our export competitive- ness because although our main customers are US$ customers (and I include China in this description), a very great percentage of what we manufacture is based on raw materials imported from non-US$ trading partners, and especially from Japan, which means that our cost of manufacture is increasing rapidly and that therefore our prices to our customers also have to be increased. It also means that we are importing inflation, and I don't think I have to explain why inflation is a very bad thing for us. Enough people living here can remember what inflation did in China for that to be self-evident.

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I am a salesman, and one thing I have learnt the hard way is that if you annoy your customer, you don't make a sale. At present we are annoying our best customer, namely the United States, quite considerably. The US accuses us of artificially depressing our currency to their detriment, and this could easily lead to protective measures, and protective measures would literally kill some of our industry. In this connection, it is quite useless to argue, as the FS did the other day, that we are the best behaved of the 'little tigers'. For better or worse we are lumped together with Taiwan, Korea and Singapore. At least we should show good will and meet our best customer half-way by revaluing. And since the Government is apparently so scared of revaluation, their argument being, apparently, that once you move the peg then people expect it to be moved constantly (which is, in any case, fallacious because when the peg comes under pressure as it is at the moment it will move sooner or later no matter what any Government does, and everyone knows it, so that a move by Government in good time will show that the peg only moves in extremis), they should peg to a basket as the basket itself will take care of the level of the HK$ and no artificial movement by Government will be required. That is the whole idea of pegging the HK$ to a basket because as the US goes down so the Yen and the ECU go up (although the ECU may well act as a balance since inside the ECU currencies like the Italian Lire and French Franc may be weak as against the strong German Mark and Dutch Gilder), and the HK$ will then remain at the level chosen without the need of further Hong Kong Government interference, and that, after all, is what the Government is trying to achieve. And don't forget: In economics nothing ever stands still, and it is still only a matter of time before the Ying and the Yang change position and the Yen comes down and the US$ goes up. If then we are tied to the US$ we will certainly lose our competitiveness and will have to move the peg because the HK$ will become too strong. Being linked to a basket of currencies would prevent this.

Quite apart from the fact that revaluation by making the import of raw materials and fuels cheaper and keeping inflation down and therefore labour costs down will enable our manufacturers to hold or reduce prices, the revaluation itself will be quite acceptable to our buyers in hard currencis. The general view in Central Europe and Japan is that as long as our currency is not revalued to a higher level than that of Taiwan or Korea, our customers there will be quite prepared to pay an additional 10% or 15% since even at those price levels we would still be very competitive against the rest of the world, especially when taking our quality of manufacture into consideration. And the proof of that particular pudding can be seen in Taiwan's export success and the fact that even Japan's extreme revaluation is hardly affecting their exports.

I believe that linking the HK$ to a basket of weak and strong currencies is commonsense and will be beneficial while keeping to the present link at present levels of the USS will lead to disaster.

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