ENG-1976 — Page 26

TWO DECADES OF ECONOMIC ACHIEVEMENT

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economy which is clearly reflected in both M1 and M2. In the second half of 1967, M2 dropped below the level of the first half. But it recovered by the end of the first quarter of 1968 to a level that was a little higher than the level recorded in March 1967. The corresponding drop in M1 lasted two quarters longer and it was not until Decem- ber 1968 that the series was above its previous peak.

After 1968 the two series grew strongly, with M1 growing by an average of 18 per cent a year between 1968 and 1971 and M2 by 21 per cent a year in the same time. But the way in which the money supply increased from early 1972 until the stock exchange collapse of 1973 suggests the two series are reflections of different developments in the economy. Both grew rapidly. Between March 1972 and March 1973, M1 grew by 70 per cent and M2 by 25 per cent. The decline from these two peaks was much more marked for M1, which subsequently up to 1975 showed relatively greater variation than M2. The latter grew steadily after the 1973 decline apart from a pause between the third and fourth quarters of 1974, after which strong growth resumed.

It is likely that a higher proportion of savings and time deposits are held by non- residents. It is also possible that the strong growth of M2, which includes time and savings deposits, may reflect the rapid expansion of the financial sector and in partic- ular Hong Kong's role as a financial entrepot. In contrast, M1 reflects the domestic economy as a whole and in particular the 1974-5 recession-as is clearly seen in the stagnation in the first half of 1974 followed by decline before growth resumed in 1975.

Financial Entrepot Trade

The growth of the financial entrepot trade can be more clearly illustrated by the changes in the assets and liabilities of the banking sector. From 1968 there was a development in banking that was no passive following of the demands of industry but rather an independent financial development. The industrial trading success of Hong Kong, combined with an absence of exchange controls, made Hong Kong especially attractive for international financial activity. Some evidence of this can be found in the banking statistics; during the 1970s there was a very rapid growth in one category of the banks' liabilities-the amounts due to banks abroad. At the end of 1970 the amount of this liability was $2,212 million. By the end of 1975 the amount outstanding was $21,253 million and this accounted for 32 per cent of all liabilities. Similar evidence of this activity can, of course, be found on the assets side of the banks' con- solidated statement of liabilities and assets.

This development in Hong Kong has its roots in the earlier development of manu- facturing and the export of the products of this sector. Export success is a pre-condi- tion of a strong currency, which is one of the reasons why Hong Kong has become a leading financial centre for the region. But it was also the growing maturity of a large economy which produced an environment for business and financial services that made a further growth of the financial sector a logical step in development.

An associated but as yet unrecorded development was the rapid growth in non- bank financial institutions. Some are associated with the licensed banks and some are new to Hong Kong. They are specialists in lending overseas and, although some have Hong Kong based liabilities, much of their funds come from outside Hong Kong.