ENG-1998 — Page 32

HARD LESSONS AND RADICAL REFORMS

urgent mission for all. Financial stability was gradually returning to many Asian countries, stirring economic recovery, although the outlook for growth in Latin America deteriorated.

Further meetings of the G7 nations were planned for early 1999 with a proposal to convene a Financial Stability Forum that would assess issues and vulnerabilities affecting the global financial system. It would then identify and oversee the actions needed to address them. At last, the world's strongest economies were paying serious attention to the severity of the Asian financial crisis and its impact on the global

scene.

A matter of survival

In August, during a concerted attack on our currency and equities markets, the government was forced to intervene to stop a contrived manipulation which could have brought Hong Kong to its knees. We mobilised $118.1 billion defending the economy. Just as swiftly we set up a separate company, the Exchange Fund Investment Ltd, to manage the equities that we acquired. We were totally transparent about this, and in fact did no more than most governments do on a regular basis. when they deal in their own bonds. I have commissioned professional studies on how to dispose of the shares the government owns and their reports will guide our actions in 1999.

The incursion was a matter of survival to preserve local community confidence, protect the integrity of the linked exchange rate to the US$ as well as restore a level- playing field to the stock and money markets. Despite Hong Kong's strong fundamentals, and rapid asset price adjustments, there was repeated malicious speculation. We detected a double play by a few over-aggressive players that did not reflect normal hedging activities. We have since strengthened our securities market regulations and our currency board regime by making them more transparent and robust to deter such double plays.

As an international financial centre and the premier international window for the Mainland, we are also committed to globalisation and open markets. We remain opposed to outright controls on the flow of capital but believe it helps everyone to see what is happening. These actions have left us with regulations similar to those in London and much less restrictive than, for example, on Wall Street.

The pain of reform

The net result of our reforms is that we have reduced the pain of extreme volatility in interest rates in maintaining the linked exchange rate during attacks on our currency. Essentially, we are accepting some fluctuations in the level of our foreign currency reserves in order to reduce volatility in interest rates. The Aggregate Balance of the banking system, a crucial part of the monetary base directly influencing interest rates, was merely US$250 million at the time of the incursion. By year's end, the liquidity buffer, including the cushion afforded by the discount window, was around US$7 billion. As a result, interest rates did not experience the wild swings associated with any pressure on our currency.

We are slowly emerging from the turmoil. There is a long and hard road ahead before we can return to the days of full employment and strong economic growth. It is a rebirth the chance for a new start for our economy that was bloated by