ENG-1976 — Page 21

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TWO DECADES OF ECONOMIC ACHIEVEMENT

Financial and Commercial Background

The growth and changes in the population took place in an economy that had developed a large and diverse financial and commercial sector well before the move- ment away from an entrepot-based economy had started.

Although interrupted and damaged by the war years, the banking sector had become well re-established by the mid fifties. In 1955 there were 91 licensed banks with 94 branches. Over the next 20 years the size of the banking sector continued to grow as measured by the number of branches-some 750 at the end of 1976-although the number of licensed banks declined to 74. Within this number there was and con- tinues to be a heterogeneity that reflects the specialisation of banking services offered to the economy.

At one end are the large note issuing banks which used to be the three independent banks the Hongkong and Shanghai Banking Corporation, the Chartered Bank and the Mercantile Bank. (In 1959 the Hongkong and Shanghai Banking Corporation acquired the capital stock of the Mercantile Bank). These banks are not specialists- they are important deposit takers, lenders to the personal and company sector and, through their credit facilities, they have always played an important part in the financing of trade.

The other banks tend to some extent to be specialists. The banks from China facilitate China's trade with Hong Kong and the handling of the resulting foreign exchange and other overseas remittances, notably from Chinese living abroad. They also tend to specialise in deposit taking which forms the deposit base for amounts lent to banks in China. The local and overseas Chinese banks also specialise in deposit taking and are an important element in the inflow of capital into Hong Kong and therefore in the growth in the stock of money.

In contrast are the other foreign banks-the Hong Kong branches of major inter- national banks in America, Europe and Asia. Although they are active in all aspects of banking, their strength is more in lending than in deposit taking.

Monetary Change

There are two useful statistics that provide a record of monetary change and therefore a summary of Hong Kong's economic progress. One covers the legal tender notes and coins held outside the licensed banks and demand deposits within those banks (known as M1); and the other covers the first group plus time and savings deposits (M2). Chart D (between pages 10 and 11) shows the developments since 1961. The period can be divided into two sections-the years before 1967-8 and the years after.

In the first period both M1 and M2 grew smoothly, with M2 growing faster at an average annual rate of 16 per cent a year and M1 more slowly at 12 per cent a year. Apart from the pause in growth in both series in 1965, there was no marked volatility and both series broadly reflected the strong and relatively smooth growth in Hong Kong's transactions with the rest of the world.

The dividing point between the two series is 1967 and 1968. During these two years, the civil disturbances in Hong Kong had a marked if short-lived effect on the