Monetary Arrangements Under "One Country, Two Systems"
Speeches
20 Sep 1997
Monetary Arrangements Under "One Country, Two Systems"
Joseph Yam, Chief Executive, Hong Kong Monetary Authority
(Speech at Institute of International Finance)
- The resumption in the exercise of sovereignty over Hong Kong by
China took place 82 days ago when the Hong Kong Special
Administrative Region was formally established. It was a most
important event for China as a whole and particularly for those of
us in Hong Kong. As the flags of Britain and the Colonial Hong Kong
Government were lowered and those of the People's Republic of China
and the Hong Kong Special Administrative Region were raised within
a minute or so at mid night on 30 June 1997, the impact on those of
us at the ceremony, and many watching it on television, was
intense.
- There was, understandably, some nostalgia. This is to be
expected at the end of any political era marked with economic
success, regardless of the extent of the causal relationship
between them. There was also, I think, much enthusiasm at the dawn
of a new era which promises many opportunities, challenges and
therefore even greater success. Then there were those of us,
including myself, whilst greatly moved by the atmosphere, who
quietly felt a sigh of relief that everything seemed to be going
well and as planned, and that after all the celebrations we could
all go back to our desks and continue to perform our respective
roles so that Hong Kong could continue to prosper in much the same
way as it had in the past.
- You may be surprised to hear this: the past 82 days have been,
to those of us at the Hong Kong Monetary Authority, a lot less
demanding than any period in the ten years or so before the
Handover. It is true that the preparations for the events on the
occasion of the Annual Meetings of the International Monetary Fund
and the World Bank have occupied quite a lot of our time. Recent
turmoil in Asian financial markets and the ongoing discussions on
strengthening Asian monetary cooperation also demanded our
attention. But they are not as intellectually challenging as the
preparatory work, undertaken well ahead of the Handover, for
ensuring monetary and financial stability over a highly sensitive
period of political transition.
- Indeed, for the transition, a lot of low key, but elaborate and
behind the scene efforts have been put in, which accounted for the
excessively grey hair that I wear at this age. But with much
support and cooperation from all those concerned, these efforts
have proven to be very rewarding. This is evident in the rather
uneventful transitional period on the monetary front. Currency
stability has been maintained, notwithstanding an abundance of
events which could have knocked our currency around - the 1987
stock market crash, the June 1989 events, the 1992 ERM crisis, the
1995 Mexican crisis and the attack on a number of currencies in
Asia in the middle of this year, to name a few.
- On the banking front, other than the unfortunate incident in
which the Hong Kong subsidiary of BCCI had to be closed, triggering
runs on a few banks, the transitional period has also been rather
uneventful. The banking system has remained healthy with high
capital adequacy ratios and low bad debt charges. Incidentally, all
depositors of the BCCI subsidiary in Hong Kong have now received
full repayment of their deposits.
- Ahead of the Handover, I have in fact expressed the wish that,
on the monetary and banking fronts, 1997 would, for Hong Kong, be a
rather dull year. I am glad that this has, more or less, turned out
to be the case. Even the volatility of Asian currencies did not
affect the Hong Kong dollar.
- Many will say of course that these are early days yet. I accept
that and one must obviously not be complacent. But it is
nevertheless pleasing to see that things are generally going well
for Hong Kong. Economic growth continues to be robust. Inflation
remains subdued. Unemployment remains very low. The fiscal position
remains in substantial surplus. The balance of payments position
looks healthy. Our foreign reserves remain among the highest in the
world in absolute and in per capita terms. The exchange rate
remains very stable. Our banks continue to be well capitalized.
Although property prices look to new comers exceedingly high, that
is the price of scarce land and prosperity.
"One Country, Two Systems"
- The Hong Kong Special Administrative Region of the People's
Republic of China has therefore made a very good start. This is an
encouraging indication that the principle of "one country, two
systems", which is enshrined in the many provisions in the Basic
Law, prescribing the systems to be practised in Hong Kong, is
entirely appropriate for our circumstances.
- There has, nevertheless, been much skepticism about the
practicality of the principle of "one country, two systems" ever
since it was first laid down by the late Deng Xiaoping for dealing
with the question about Hong Kong. This is understandable as the
principle is untried and goes against the traditional understanding
of what goes on in any one country.
- For example, one would expect there to be free mobility of
labour within a country, but this is not the case under "one
country, two systems". One would expect a high degree of uniformity
in social and economic policies for different regions in a country,
but this is not the case under "one country, two systems". One
would also expect any region within a country, however autonomous,
to have to contribute to the public finances of the State and
therefore be subject to some fiscal influence of the State, but
this is again not the case under "one country, two systems".
- And one would expect macro monetary policy and other currency
matters to be determined by the central government and applied to
all regions within a country. So when one hears of the idea of
having two separate currencies in one country to be separately
managed, particularly against the background of the very sharp
focus in international monetary affairs on EMU, where it is
intended there should be one currency for a number of countries, a
skeptical reaction is indeed likely.
- But the principle of "one country, two systems" is one that
breaks away from tradition and cannot therefore be assessed against
traditional understanding. As with all innovative ideas, one needs
a fairly open mind, the time and patience, and understanding of the
totality of the situation that one faces, to be able to appreciate
the grandeur of that idea.
- There is much difference between Hong Kong and the Mainland of
China, in terms of quite a lot of things - anything that one cares
to think of. For example, they are not exactly the most likely
candidates for a successful economic and monetary union. I have
often asked the skeptics to try and apply the Maastricht criteria
to Hong Kong and the Mainland of China, and recommend a way
forward. They invariably would come to the view that, if there is
to be a smooth resumption of sovereignty by China over Hong Kong,
then there should be as much segregation between the legal, social,
economic, fiscal and monetary systems of Hong Kong and those of the
Mainland as is politically acceptable. The "one country, two
systems" principle is precisely designed for this purpose. Other
than in defence and foreign affairs, Hong Kong has autonomy. Hong
Kong people are to run Hong Kong on their own.
- Another aspect which I often like to alert skeptics to is the
fact that constitutionally, Hong Kong's autonomy as a Special
Administrative Region of the People's Republic of China is higher,
I repeat, higher than as a British Colony before the Handover. This
is particularly the case in the monetary area and is evident when
one compares carefully the relevant provisions in the Basic Law
applicable after the Handover with those in the Royal Instructions
from the Queen to the Governor of Hong Kong under the Colonial
Administration before 1 July 1997. Furthermore, in order that our
monetary legislation is consistent with the Basic Law, quite a
number of amendments had been introduced, much ahead of 1 July 1997
to remove the need to refer matters to London before the Handover
and to have the relevant powers in that monetary legislation
localized. This in effect removed the implied need in the
legislation to refer matters to Beijing after the Handover, which
is consistent with the autonomy promised for Hong Kong and
enshrined in the Basic Law.
The Basic Law
- Perhaps you will be interested in knowing a little more about
the monetary arrangements for Hong Kong under "one country, two
systems". The starting point is naturally the Basic Law which
contains five articles in the monetary area.
- First, the Government of the Hong Kong Special Administrative
Region shall provide an appropriate economic and legal environment
for the maintenance of its status as an international financial
centre (Article 109).
Second, the Government of the Hong Kong Special Administrative
Region shall, on its own, formulate monetary and financial
policies, safeguard the free operation of financial business and
financial markets, and regulate and supervise them in accordance
with law (Article 110).
Third, the Hong Kong dollar, as the only legal tender in Hong Kong,
shall continue to circulate, and the existing currency issue
mechanism shall continue (Article 111).
Fourth, the Hong Kong dollar shall remain freely convertible, with
free flow of capital and no exchange control (Article 112).
Fifth, the Exchange Fund, which holds the bulk of Hong Kong's
foreign reserves, shall be managed and controlled by the Government
of the Hong Kong Special Administrative Region, primarily for
regulating the exchange value of the Hong Kong dollar (Article
113).
- These monetary provisions in the Basic Law are clearly designed
to safeguard the continuing development of Hong Kong as an
international financial centre, the maintenance of Hong Kong's
monetary autonomy, its supervisory framework of internationally
accepted standards, its freely convertible currency and its control
over its own foreign reserves. Supplementing this constitutional
framework is of course our own local monetary legislation with
localized powers equivalent in nature and effectiveness to those of
other central banks. This includes the Exchange Fund Ordinance
which gives the necessary powers for operations to ensure currency
stability, for the development of financial markets and their
infrastructure, and for facilitating the further development of
Hong Kong as an international financial centre. There is also the
Banking Ordinance which gives the necessary powers to me, as
Monetary Authority, to promote the stability and integrity of the
banking system.
Cooperation and Consultation
- I hope you are satisfied with these monetary arrangements for
Hong Kong under "one country, two systems". If so, then I am glad;
but I must confess that I did myself have some hesitation when I
was first exposed to these various provisions in the Basic Law. Not
that there is anything that I did not like. My initial hesitation
arose from the recognition, on the one hand, that nothing is
absolutely black and white, and that the different shades of grey
that in practice we all see could conceivably be subject to
different interpretations. I also recognized, on the other hand,
the risk of overly elaborate legal provisions presenting Hong
Kong's monetary and financial system with a rigid strait
jacket.
- It is obviously a difficult balance to strike and so in
practice one must accept that there is always a need for close
cooperation and consultation. I have full confidence that all those
concerned would always bear in mind the spirit of the underlying
principle of "one country, two systems" when approaching the
occasional issues where there might be an element of doubt, and for
such issues, as and when they arise, to be effectively and
expeditiously resolved.
- Indeed, this has always been the case, insofar as the monetary
and financial areas are concerned, ever since the enactment of the
Basic Law. The close cooperation and consultation have yielded
pleasing results, with the monetary and financial system of Hong
Kong going from strength to strength, even against a background of
volatile international financial conditions, and notwithstanding
the rather sensitive period of political transition where
differences of opinion in other areas often hit the news headlines.
Furthermore, for the benefit of those with a business interest in
Hong Kong, and having regard to the fact that we are dealing with
the very new concept of "one country, two systems", there is a
willingness to lay down additional principles and policies
consistent with the Basic Law whenever it is felt that grey areas
may present unhelpful uncertainties.
Mutually Independent Relationship
- There have, for example, been concerns about the exact
relationship between the two monetary systems under the principle
of "one country, two systems", notwithstanding the autonomy defined
for the monetary system of Hong Kong in the Basic Law. Some felt
that if the relationship between the two monetary systems is not
clearly defined, there is risk that the rather more politically
minded might wish to apply the otherwise "Natural" political
relationship between the Central Government and the Special
Administrative Region Government, thus subordinating Hong Kong's
monetary system to that of the Mainland.
- This would be a pity. It would clearly not be in the interest
of Hong Kong as an international financial centre, and indeed for
the continuing reform and liberalization of China, for there to be
the slightest possibility that the Hong Kong dollar might be
considered to be of less importance to China than the Renminbi, or
the monetary system of the Mainland to have precedence over that of
Hong Kong, or the Hong Kong Monetary Authority to be taking
instructions from the People's Bank of China.
- The relationship between the two currencies, the two monetary
systems and the two monetary authorities has now been described as
a mutually independent one, which is entirely sensible given the
significance of Hong Kong's currency and other financial markets,
in terms of their relative size to those of the Mainland and their
level of sophistication. In this connection, the Mainland
authorities have also confirmed in no uncertain terms that monetary
legislation and regulations of the Mainland shall not be applicable
to Hong Kong.
- There have also been concerns, more so on the part of the
Mainland authorities, about the extent to which Mainland entities
of all dimensions, in pursuing their own interests, would wish to
get involved in the monetary and financial affairs of Hong Kong,
cutting special deals and making special arrangements, in a totally
uncoordinated manner, which may in the end undermine the stability
and prosperity of Hong Kong, the integrity of its financial markets
and its development as an international financial centre.
- This concern is not unjustified, given the size and complexity
of the Mainland, and the stage of economic development that it is
going through. It was felt, therefore, that there was a need for
administrative discipline to be exercised on the part of the
Mainland, through laying down principles and policies to be
observed by Ministries, Departments and Provinces in the Mainland.
As far as Hong Kong is concerned, it can be argued that the free
market philosophy of Hong Kong and the clear rules of the game
could be relied upon to impose the necessary discipline. But on
balance a regulated and coordinated approach on the part of
Mainland interests seems beneficial to Hong Kong, particularly in
respect of dealings at the official level.
- Yet another grey area which has been the focus of internal
attention is the extent to which the international financial
affairs of Hong Kong involve foreign affairs in which Hong Kong
does not have autonomy, and how issues of this nature are to be
dealt with in order that Hong Kong's development as an
international financial centre would not be undermined.
Monetary Arrangements - Principles and Policies
- With close cooperation and consultation, a number of basic
principles and policies addressing these concerns have been
emerging recently, although they are still subject to the final
endorsement of the State Council. Let me attempt to outline my
understanding of what they are to you.
-
First, all monetary legislation, regulations, policies
and management directives enacted and practised in the Mainland
shall not be applicable to the Hong Kong Special Administrative
Region. The Hong Kong Special Administrative Region shall on its
own lay down monetary legislation and regulations, and on its own
determine and implement monetary policies.
Second, all departments of the Mainland authorities shall not
interfere with the monetary affairs of the Hong Kong Special
Administrative Region. The monetary authorities of the Mainland and
Hong Kong shall be mutually independent. The Mainland authorities
shall not establish any organization that undertakes the roles of
monetary management in Hong Kong.
Third, financial businesses between the Mainland and Hong Kong are
considered in the Mainland as external transactions and, where
applicable, supervised as such within the framework of the relevant
laws and regulations of the Mainland, and the Basic Law. Should any
department in any province in the Mainland intend to promulgate
policies and regulations which have a bearing on monetary affairs
in Hong Kong or the monetary relationship between the Mainland and
Hong Kong it shall first seek approval from the monetary
authorities in the Mainland and the Hong Kong and Macau Affairs
Office of the State Council. Important issues shall be referred to
the State Council. All departments and provinces shall not sign any
monetary agreement with the Hong Kong Special Administrative Region
without approval.
Fourth, The Hong Kong Special Administrative Region shall continue
to maintain current arrangements for the issue and management of
its currency. The Renminbi and the Hong Kong dollar shall circulate
as legal tender in the Mainland and Hong Kong respectively. The
Renminbi shall be considered as a foreign currency in Hong Kong and
the Hong Kong dollar shall be considered as a foreign currency in
the Mainland.
Fifth, the monetary authorities of Hong Kong and the Mainland shall
independently exercise their own authority in approving the
establishment and the supervision of each other's financial
institutions in each other's territory, and for this purpose shall
continue to strengthen links and cooperation. The monetary
authority of the Hong Kong Special Administrative Region shall
independently conduct supervision and regulation in accordance with
the laws of Hong Kong. Mainland financial institutions establishing
and operating in Hong Kong shall be subject to the approval and
supervision of the monetary authority of Hong Kong in accordance
with the uniform standards applied in Hong Kong. Hong Kong
financial institutions established in the Mainland shall be
considered as foreign financial institutions.
Sixth, financial transactions between the Mainland and Hong Kong
shall be dealt with in accordance with internationally accepted
rules and practices. Claims and liabilities between the Mainland
and Hong Kong shall be regarded as external claims and liabilities.
Disputes arising from financial transactions of the two sides shall
be dealt with by reference to international standards. In respect
of cases presented in the Mainland for arbitration or litigation,
the relevant provisions in the laws of the Mainland concerning
external issues shall apply.
Seventh, Mainland enterprises listing in the Hong Kong Stock
Exchange shall be considered as an overseas listing. Mainland
companies listed in Hong Kong shall observe the relevant securities
legislation of Hong Kong and be supervised by the relevant
supervisory authorities of Hong Kong.
Eighth, the Hong Kong Special Administrative Region may, in
accordance with the provisions of the Basic Law and under delegated
authority of the Central People's Government, on its own, using the
name "Hong Kong, China", maintain and develop financial and
monetary relations with foreign states and regions and relevant
international organizations, including the conclusion and
implementation of multilateral and bilateral financial and monetary
agreements, the establishment of official and semi-official
representative organizations in foreign countries, and the handling
of matters concerning external monetary relations. For activities
of international financial organizations, the participation of
which is limited to sovereign countries, the Central People's
Government shall, having regard to the circumstances, appropriately
involve participation from the Hong Kong Special Administrative
Region. China shall positively protect Hong Kong's interest in
multilateral and bilateral financial activities conducted in
international forums, with a view to maintaining and developing
Hong Kong's status as an international financial
centre.
- These principles and policies are very clear and helpful. They
are entirely consistent with the guiding principle of "one country,
two systems" and with the relevant provisions in the Basic Law
concerning financial and monetary affairs in Hong Kong. As Monetary
Authority I feel very comfortable working within this framework. As
I mentioned earlier, this framework gives us a higher degree of
autonomy than before the Handover. Its clarity will also enable us
robustly to defend our autonomy in the unlikely event that this is
in any way challenged. I am hopeful that the international
financial community, many of whom are members of your Institute,
will also feel as comfortable as I am, operating from Hong Kong,
contributing to and benefiting from the economic prosperity of this
Region, particularly China. I look forward to your continued
presence in Hong Kong. Thank you for listening to me.