TNAG-2749-FCO40-3964-Economic-situation-in-Hong-Kong-1993 — Page 23

03-NOV-1993 09:41

HKMA

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presently, HKMA might be hard put to maintain equilibrium in the event of a rush to redeem HKD bank notes, or a currency crisis in China.

13.

Mr. Anthony Nicolle, General Manager of the Standard Chartered Bank, analysed the prospects for Hong Kong in a regional perspective. He commented that the emergence of the Asian Pacific region as an engine of world economic growth was an important factor in the development of Hong Kong's financial sector. Hong Kong was competing with Singapore and Tokyo as regional financial centres. Tokyo was less attractive in terms of its high operating costs, restrictions on foreign entry and the relative lack of English. Hong Kong and Singapore had different competitive advantages. They served different regional markets. Other financial centres, including Taiwan, Malaysia, and Thailand, also sought to share the regional financial business. Hong Kong compared favourably with these centres. While Shanghai might become an important financial centre in China over time, HK's role as an international financial centre should remain even after 1997, given her good business infrastructure. He concluded that it was essential to have exchange rate and financial stability to sustain Hong Kong's status as an international financial centre. The establishment of the Hong Kong Monetary Authority was helpful. However, he reminded that the liberal financial policy must also continue and the system should not be overregulated.

14.

Mr. Anthony Latter, Head, International Division, Bank of England, gave a historical summary of the colonial currency board system. Hong Kong returned to such a system in 1983, but from an unprecedented starting point (i.e. not evolving from the metropolitan currency) and with certain operational features peculiar to Hong Kong. Partly perhaps because of the idiosyncrasies of the Hong Kong system, practical. experience diverged from theory and the market exchange rate had ranged up to about 1% on either side of the link. Monetary instruments were eventually acquired to enable the authorities to actively underpin the link. The success of the present system was supported by the high degree of flexibility of the domestic economy and continuing fiscal discipline, which fed on itself in a virtuous circle. It was a system which served and suited Hong Kong extremely well. The authorities had displayed a strong commitment to retaining the link, and there were powerful arguments for retaining it.

15.

Mr. Latter then discussed in broad terms the four considerations for a country deciding whether or not to adopt a fixed exchange rate: (i) homogeneity between the domestic economy and that of the pegged currency; (ii) the degree of mutual support, including cross border transfer of real resources, between the two economies; (iii) flexibility in cost structures and production base; and (iv) stability of the anchor. He commented that homogeneity and mutual support were not so evident in the three existing currency board systems - Hong Kong, Argentina and Estonia. Nevertheless, all three had