ENG-1972 — Page 65

FINANCIAL STRUCTURE

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Following the meeting of the Group of Ten in Washington towards the end of December 1971, it was announced that the US dollar would be devalued by 7.89 per cent. This was accompanied by a series of adjustments of other major world curren- cies. However, both sterling and the Hong Kong dollar maintained their gold parity. In effect, this meant that the rate of exchange between the HK dollar and sterling remained unchanged at $14.55 to £1, while the HK dollar was revalued against the US dollar by 8.57 per cent. The official rate became HK$5.58 to US$1 whereas the previous rate had been HK$6.06 to US$1.

When the United Kingdom announced on June 23, 1972 that sterling was to be allowed to float, the Hong Kong Government decided for the time being to retain the rate of HK$14.55 to £1 until it became clear how the situation would develop. This meant that as sterling declined in value in international markets, so did the Hong Kong dollar and on July 6, 1972, the Hong Kong Government decided to restore the Hong Kong dollar almost to its previous exchange value by fixing a new rate of HK$5.65 to US$1, a devaluation of only 14 per cent from the previous US dollar rate of HK$5.58 to US$1. By quoting the rate in terms of US dollars rather than sterling, during the period while sterling was floating, Hong Kong avoids movements in the value of sterling automatically bringing about equivalent rises and falls in the value of the Hong Kong dollar.

The devaluation of both the US dollar and the pound sterling described in the previous two paragraphs have meant that although Hong Kong's sterling reserves have suffered a further significant fall in value, the terms of the British Government guarantee do not provide for any compensation since the value of sterling in terms of US dollars has not fallen below US$2.40 to £1, the value ruling when the agreement was signed. Nevertheless, the value of sterling in terms of Hong Kong dollars has fallen significantly and compensation payments will fall to be made to the Hong Kong banks concerned by the Exchange Fund. The amount of the payments will not be known until a new fixed rate is established for sterling.

At the same time that sterling was allowed to float, the United Kingdom also announced that the sterling area would henceforth be restricted to the British Isles. It is not expected that this exclusion from the sterling area will have any significant effect on Hong Kong, especially as the United Kingdom has made certain concessions regarding investments by British residents in those countries, such as Hong Kong, which were formerly members of the sterling area.

Banking

Bank deposits in Hong Kong increased again during 1972 to reach a new record figure of $24,613 million at the end of the year, representing a rise of 31 per cent over the previous year-end figure.

Loans and advances increased to $17,726 million and, as a percentage of bank deposits, amounted to 72 per cent at the end of the year, compared with 63 per cent at the end of 1971.