ENG-1985 — Page 77

THE ECONOMY

The Financial Scene in 1985

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The behaviour of the Hong Kong dollar and of local interest rates during the year reflected the working of the linked exchange rate system adopted since October 1983. Despite the volatility in the international foreign exchange markets, the exchange rate of the Hong Kong dollar held steady against the US dollar, most of the time within half a per cent on either side of the linked rate of $7.80 per US dollar. During the year, the Hong Kong dollar was the strongest against the US dollar on July 18, reaching $7.72 (closing middle market telegraphic transfer rate), amid speculation of an imminent revaluation. But it moved back close to the linked rate after the government's determination to maintain it at $7.80 became clear to the market. The trade-weighted exchange rate index for the Hong Kong dollar generally followed the movement of the US dollar against other major currencies: it peaked at 79.1 in March, before declining steadily to close the year at 70.6, a depreciation of seven per cent since the end of 1984.

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The stable performance of the Hong Kong dollar was accompanied by frequent changes in local interest rates. The interest rates administered by the Hong Kong Association of Banks were adjusted nine times during the year, mostly downwards. Hong Kong dollar interest rates were generally lower than the corresponding US dollar rates.

During the year, deposits in banks and deposit-taking companies and the money supply aggregates increased at rates of between 20-25 per cent, with the foreign currency components mostly increasing at a faster rate than the corresponding Hong Kong dollar components, partly reflecting lower Hong Kong dollar interest rates. About half of the total deposits were in Hong Kong dollars. As part of a wider trend, and taking advantage of the lower interest rates and liquidity in the monetary sector, financial institutions increased the issue of negotiable certificates of deposit, in particular, Hong Kong dollar denominated certificates. But these deposits still constituted only a small part of the total deposits or the money supply.

In the monetary sector, the year was marked by the failure of a local bank, the Overseas Trust Bank. It was taken over by the government on June 7, to safeguard the integrity of Hong Kong's financial system and so to maintain stability in the exchange rate of the Hong Kong dollar. It also served to protect the interests of the bank's depositors. Despite this incident, the sector as a whole expanded further during the year with three more licences being granted to foreign banks, besides three additional deposit-taking company licences and six new registrations of deposit-taking companies. There were, over the same period, a number of revocations and suspensions of deposit-taking companies registrations because of cessation of business, or failure to meet statutory liquidity requirements.

The turnover on the four stock exchanges in 1985 was: Far East Exchange, $30,923 million; Hong Kong Stock Exchange, $19,984 million; Kam Ngan Stock Exchange, $24,783 million; and Kowloon Stock Exchange, $118 million. The total turnover of $75,808 million was 55.4 per cent higher than in 1984. The Hang Seng Index ended the year at 1 752.45 (July 31, 1964 = 100), compared with 1 200.38 at the end of 1984. The highest point reached during the year was 1 762.51, recorded on November 21.

There were six instances of companies going public, raising a total capital of $1,034 million, and 11 rights issues, raising $2,068 million; 20 reconstructions of companies and re-activations of shell companies took place in 1985.

The total number of authorised issues of commercial paper and certificates of deposit at December 31, 1985 was 90, representing a substantial increase of 87.5 per cent over 1984.

In 1985, the turnover on the Futures Exchange was: sugar, 210 515 lots of 50 long tons each; soyabeans, 340 545 lots of 30 000 kg each; and gold, 5 977 lots of 100 troy ounces each.