ENG-1986 — Page 75

THE ECONOMY

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new property in the private sector during the year, the vacancy rates for practically all major types of property were lower at the end of 1986 than a year earlier. The demand for most categories of residential property remained strong. This was particularly evident for small and medium-sized flats in convenient locations and in better-planned developments. Moreover, there was renewed interest in the pre-completion purchase of property. Improved economic conditions and the successive reductions in the mortgage rate during the year helped to boost interest in acquiring property. Prices and rentals of residential property firmed up. Prices and rentals of other types of property, particularly commercial property in the main business districts and the main shopping areas, also increased during 1986.

Reflecting the uptrend in prices and rentals of finished property, land prices rose during 1986. Most government land auctions met with favourable responses, indicating continued confidence in the property market among developers.

The Financial Scene

Under the linked exchange rate system, the Hong Kong dollar remained stable against the US dollar during 1986, moving for most of the time within a narrow range of HK$7.775 to 7.825 per US dollar. This was achieved despite general volatility in the foreign exchange market and the substantial depreciation of the US dollar against most major currencies. Over the course of the year, along with the US dollar, the Hong Kong dollar depreciated by 20.1 per cent against the Japanese yen and by 20.6 per cent against the German deutschemark. On the other hand, it appreciated by 16.9 per cent against the Renminbi. Largely reflecting these developments, the trade-weighted exchange rate index of the Hong Kong dollar declined by 8.2 per cent. The depreciation in the value of the Hong Kong dollar, particularly against the European and the Japanese currencies, has greatly helped Hong Kong's export performance in these markets.

One of the consequences of the linked exchange rate system is that the Hong Kong dollar interest rates will be broadly in line with the corresponding US dollar interest rates. In 1986, the interest rates administered by the Hong Kong Association of Banks were adjusted three times. Of these three adjustments, two were downward. Market interest rates were also lower, to the benefit of many sectors, including the property development sector.

Over the year, deposits with deposit-taking institutions and the money supply increased by 25.3 per cent and 24.8 per cent respectively. The foreign currency component of the deposits continued to increase faster than the overall deposits, reflecting in part the devel- opment of Hong Kong as an international financial centre. At the end of 1986, about 44 per cent of the total deposits were in Hong Kong dollars. Loans and advances made by deposit-taking institutions increased by 14 per cent during the year. Of the total outstand- ing loans by these institutions at the end of 1986, 54 per cent were for use within Hong Kong. As part of an international trend towards the securitisation of debt, and taking advantage of the lower interest rates and of liquidity in the monetary sector, financial institutions continued to increase the issue of negotiable certificates of deposit, in particular, fixed rate certificates denominated in Hong Kong dollars. But the outstanding value of these certificates still constituted only a small part of either total deposits or the money supply.

During the year, several money market funds were launched, providing small investors with higher rates of return derived from the wholesale money market.

In the banking sector, 1986 witnessed difficulties in four local banks. The government intervened on a pragmatic basis, in some cases providing short-term liquidity and in others merely playing a catalytic role while commercial solutions were worked out. These measures were aimed at safeguarding the integrity of Hong Kong's financial system and

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