ENG-1983 — Page 81

52

THE ECONOMY

followed by increasing interest rates by two to three percentage points effective from September 27. These steps had a calming effect and the exchange rate settled above its worst levels, albeit somewhat nervously, as markets awaited a further official announcement.

On October 15, the Financial Secretary announced two measures to stabilise the exchange value of the Hong Kong dollar. The first measure was the revised arrangement for the issue and redemption of certificates of indebtedness described above. The second was the abolition, also effective from October 17, of the 10 per cent interest withholding tax on Hong Kong dollar deposits. This meant that there was no longer any tax advantage to members of the public in holding foreign currency deposits or in holding Hong Kong dollar deposits offshore. Companies, however, continue to pay profits tax on Hong Kong dollar interest receipts. The Financial Secretary said that he expected to be able to propose more lasting reforms in these fields of taxation in his 1984 Budget.

These measures have been effective. On the first two days of their implementation, there was some confusion, but thereafter the exchange rate stabilised at around US$1 = HK$7.80 where it stayed for the rest of the year. This nevertheless represented a depreciation of 16.5 per cent when compared with the exchange rate of $6.515 to the US dollar at the end of 1982. The trade-weighted exchange rate index recovered following the measures to about 67.5. It fluctuated during the rest of the year between 67.5 and 68.7, reflecting largely the movement of the US dollar against the other foreign currencies included in the calculation of the index. At the end of 1983, the index stood at 68.3, representing a depreciation of 14.1 per cent when compared with the corresponding index at the end of 1982 of 79.5.

Developments in other areas of the financial sector were, however, less volatile. Insofar as the monetary sector was concerned, the two-year transitional period for the establish- ment of the three-tier structure for deposit-taking institutions came to an end in June 1983. The problems experienced in the registered deposit-taking companies sector around the beginning of the year, which led to the revocation of several registrations by the Commissioner of Deposit-taking Companies, subsided. Although the sharp depreciation of the Hong Kong dollar during the third quarter of the year did create rumours about difficulties being experienced by some banks, as the exchange rate stabilised such rumours also subsided. Meanwhile, Hong Kong continued to develop as an international financial centre. More foreign banks applied and were given licences to operate in Hong Kong.

There was, nevertheless, an isolated incident of particular significance in the banking sector the takeover of the Hang Lung Bank by the government. In early September 1982 there was a run on the Hang Lung Bank, which appeared to have been sparked off by unfounded, possibly malicious rumours. A month or so later the Hang Lung Bank's position again came under attack as a result of the failure of a registered deposit-taking company with which it had links. During this period the government, together with the two note-issuing banks, kept a close watch on developments at the bank.

On the morning of Tuesday September 27, 1983, the Hang Lung Bank reported to the Commissioner of Banking that it was unable to meet in full its liabilities to the Clearing House in respect of cheques drawn by its customers. There was therefore a possibility that cheques worth a very large amount would have to be returned to the banks submitting them for clearing, thus creating a destabilising situation in the banking sector. The government believed that it would be unacceptable, both domestically and internationally, to allow this bank a sizeable local bank with 28 branches - to fail, which would involve considerable loss to depositors. Because of this, as an emergency measure, the government undertook that morning to cover the position for one day to avoid cheques being dishonoured. This was followed by the rapid enactment of the Hang Lung (Acquisition) Ordinance

-