*02-NOV-1993
09:39
HKMA
2
852 878 8130
P.03
5.
Mr David Peretz, Executive Director of the IMF and the World Bank, highlighted the political and economic changes that had occurred in the world in the past decade. He identified three main risks to the present world economy. First was the threat to free trade should the Uruguay Round fail. Second was the slow pace at which developed countries removed domestic obstacles to faster growth; and third was the reluctance of some developing countries and formerly centrally planned economies to implement policies needed for success. On the question of how monetary stability was achieved, he noted that a number of countries, such as Argentina and Estonia had successfully used the currency board arrangement, which has proved right for Hong Kong. The currency board system has the benefit of credibility, but a cyclical downturn or period of overheating cannot be countered by reducing or raising interest rates. The government needs to look to other instruments for such stabilization, mainly fiscal policy.
6.
Professor Steven Cheung of the University of Hong Kong discussed the choice of a banking system for China. He said that the present financial structure in China was out of step with the rapid transformation of the real sector. The system retained features of central planning and did not facilitate macroeconomic management. The banking system was subject to a state guarantee and therefore had incentives for moral hazard, corruption and excessive credit creation. He felt that private property rights and enhancing efficiency through competition should be the right way forward. He suggested that China should establish separate currency boards in different regions. The franchise to operate the currency boards should be auctioned to the private sector and the currency in each region could be backed by a basket of currencies. However, he himself doubted whether this was politically feasible.
7.
Nobel Laureate Professor Milton Friedman addressed the issue of whether central banks were needed in his luncheon talk. He considered that the currency board system that was introduced in Hong Kong in 1983 had worked very well for Hong Kong. It was desirable that it be continued. A small country was better off linking its own currency to that of its major trading partner. That meant substituting the policy of the major country for its own in determining monetary conditions.
8.
As a matter of principle, Professor Friedman argued that neither Hong Kong nor any other economy in the world needed a central bank. Policy discretion exercised by a central bank did more harm than good, because the market had to second guess what the central bank was aiming to achieve. The 'lender of last resort' function was also badly performed by central banks. Commercial banks were tempted to behave in an irresponsible fashion when they were assured of a bailout under the 'too big to fail' formula. Professor Friedman believed that establishing an anchor of a fixed nominal quantity of high-powered money was superior to having a central bank. (In other words,
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