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HONG KONG URBAN COUNCIL

MR. WALTER M. SULKE (in English):—Mr. Chairman, I am very glad to see that the Vice-Chairman of the Finance Select Committee is here in case I need help.

CHAIRMAN (in English):—Well, it has just been pointed out as a matter of fact by VCUC that I can call on any member of the Council to help answer a question. This is under the Standing Order which has slipped my memory.

MR. WALTER M. SULKE, CHAIRMAN OF THE FINANCE SELECT COMMITTEE, replied as follows (in English):—Mr. CHAN has asked how the Council may be affected by negative interest rates. The declaration that negative interest rates might be imposed was a declaration by the Hong Kong Government of the bankruptcy of the present system of linking the HK$ to the US$. The link was originally instituted to save the HK$ from falling through the floor during the negotiations with China leading up to the Joint Declaration. The US$ was then the strongest currency in the world and the link to the strongest currency was sensible. Since then the US$ has become one of the weakest currencies and the link to a weak currency is foolish and deleterious to Hong Kong's economic situation, because it is the main cause of the inflation we are now suffering and of which members are very well aware, since we have just been told that our building costs are escalating at 3% per month which is about 40% a year, and I am personally convinced that our inflation rate this year will end up at somewhere around 12%.

Negative interest rates have been used elsewhere to try to control currency speculation. However, they have always only been used against foreigners. The last country to institute negative interest rates was Switzerland and the attempt to thus control speculation against the SF was spectacularly unsuccessful. In our case the Government, in my view immorally, and quite probably also illegally, will extend negative interest rates not just to foreign accounts, but to all deposits, including ours. This emphasizes just how bankrupt this policy is since they are imposing negative interest rates on rate and tax payers. As far as we know, no exceptions have been made, and if negative interest rates are instituted we will have to pay them. This situation is completely unsatisfactory as, although at the moment the threat has somewhat receded, the US$ is just as weak as it ever was and is very likely to weaken further, the general wisdom being that it will end up at about ¥110, in which case, we may well have to pay these negative interest rates. The simple answer would, of course, be to link the HK$ to a basket of currencies and to revalue it to its proper valuation, which is probably 10% above its present parity.

The second part of Mr. CHAN's question asks how much the Council would lose if we have to pay negative interest, and what methods there are to avoid negative interest charges? CTA informs me that our average deposits last financial year were about HK$450 million, so assuming a negative interest rate based on the Swiss model, which was somewhere between 2% and 3%, say 3%, this would be HK$13.5 million per annum, or HK$1.125 million per month.

HONG KONG URBAN COUNCIL

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But of course since there haven't been any negative interest rates and we don't know what the negative interest rate would be and imposed so far we haven't had any losses.

There are certainly quite a few ways to overcome such charges. The most straightforward way of doing that would be to change our deposits into foreign currencies. However, that would expose us to exchange rate risks and also we would probably have to ask Treasury for special permission. Another way would be to extend all our deposits for more than three months. This would make life very difficult for us because we never know when we need our money and we must therefore remain flexible, which is why most of our funds are on very short term deposits.

However, I am quite sure that if push comes to shove we will be able to come to some arrangement with some of our commercial bankers to overcome this Government foolishness, especially as I understand negative interest rates would not have the force of law, so finding loopholes would not expose us to any illegalities.

I am sorry I cannot give my friend a more satisfactory answer and I can only hope that the Central Government will have second thoughts about the imposition of such negative interest rates, especially as they affect tax and rate payers.

MR. JOSEPH Y. S. CHAN (in Cantonese):—Mr. Chairman, first of all I would like to thank Mr. SULKE for his detailed and professional reply. I am rather satisfied with the answer. Nevertheless, I have a question to ask if the Association of Banks is going ahead with the levying of the negative interest rate then firstly can we get exemption from the Association of Banks? Have we asked the Association of Banks for exemption. If no exemption has been granted, it means they have to levy on the Council, a non-profit making organization. Can we levy a special charge for collecting refuse near the banks to offset the negative interest rates that we have to pay?

MR. WALTER M. SULKE (in English): Mr. Chairman, yes, we did ask for exemption. Exemption was not granted. As far as the idea of charging extra for cleaning in front of banks is concerned, I would have thought that it isn't possible because our statutory duty is to clean in front of the banks just as it is to clean anywhere else. However, perhaps our bankers might listen to this sort of thing sympathetically because it obviously would be very bad publicity for them if they have to charge, not just us, not just the Urban Council, but non-profit making organizations and even charities would be charged.

9. MR. LAM CHAK-PIU asked the following question (in Cantonese):—In the summer of 1987, the Urban Council raised the admission fee of the swimming pools. Has the number of users hence decreased?

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