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a longer-term perspective. hgcal reserves have been accumulated to provide a buffer against the
possibility of unfavorable internal and external shocks. Were reserves to grow in line with
economic activity, this would both ensure the high credibility of fiscal policy and maintain a
sizeable cushion to deal with possible shocks. Such an approach would also provide a buffer
against the sensitivity of revenues to changes in the volume of asset transactions. In light of these
short- and medium-term considerations, and constraints on the ability of monetary policy to
manage demand pressures, measures that would either raise current spending in relation to trend
output or lower tax revenues should be avoided
Large capital inflows and the consequent increases in asset prices over the past year also
create challenges for policies. In addition to possible demand pressures stemming from wealth
effects, prudential supervision of the financial sector is of particular importance. In this context,
strengthened surveillance of securities markets in recent years should help protect against a
recurrence of past problems. Although property loans account for a sizeable proportion of Hong
Kong banks' domestic assets, their balance sheet position appears, on the whole, to be favorable,
in contrast to the situation in some other countries that have experienced sharp movements in
asset prices. Capital adequacy and liquidity ratios are high, profitability strong, and exposure to
exchange rate and interest rate risks weil monitored. At the same time, given the underlying health
of the system, and the desirability of furthering Hong Kong's role as an international financial
center, we would encourage you to phase in more comprehensive public disclosure requirements
for banks. Indeed, such a step would be consistent with the broad approach of allowing market
forces to allocate financial resources efficiently.
On other issues, Hong Kong's strong support of the Uruguay Round and its commitment to
an open world trade environment is commendable, and provides an example for other countries.
We also welcome the steps that have been taken toward compiling data on investment income
flows, and, at a future stage, on other components of the balance of payments. Such data should
be of particular use in analyzing Hong Kong's role as a conduit of international capital to China
and other rapidly growing areas in the region.