Opening Address at the Asia-Pacific Issuers and Investors Forum
Speeches
07 Dec 1999
Opening Address at the Asia-Pacific Issuers and Investors Forum
Tony Latter, Deputy Chief Executive, Hong Kong Monetary Authority
- As we leave the twentieth century behind, the major regions of
the world economy appear to be in quite good shape. North America
is buoyant; Europe is positioned for more solid growth than of
late, albeit only by its own rather modest standards; Japan may be
moving forward, even if we have seen too many false dawns to be
entirely confident; and the rest of Asia has recovered from the
1997 setback more strongly and quickly than most people
expected.
- Meanwhile, major stock markets look set to end the millenium at
or near all-time highs, with the notable exception of Japan, where
the Nikkei is still at only about half its peak of more than ten
years ago.
- It is also a confident end to the decade, century and millenium
for "markets" in a broader sense. The 20th century has witnessed a
considerable ebb and flow of fashions in economics, between
allegiances to systems which afford primacy to market forces and
those which yield varying degrees of control to the state. As it
turns out, the former have held sway. We see this not just from the
collapse of the Soviet Union and the extreme forms of socialism
which it and its satellites practised, but also, in a subtler
sense, from the fact that, among economies which have throughout
been part of the free world, those which have been least burdened
with high marginal taxation, state intervention in industry and
commerce, massive social security programmes and so forth, appear
to have come out on top in terms of growth and full employment. The
USA, the UK, Hong Kong and some others in the Asia-Pacific region
now exemplify this point. By contrast, Japan and much of
continental Europe remain saddled with a greater number of
structural and bureaucratic problems, which, arguably, have been a
brake on growth.
- But commitment to the market is far from sufficient to ensure a
prosperous economy. The commitment must be accompanied by
transparency, accountability and freedom from corruption, and by an
infrastructure of laws which match the needs of the market economy,
are respected and, when required, are enforceable. Absent those
conditions, you end up with economic anarchy, which is perhaps what
best describes the current situation in a number of countries which
switched with much acclaim to the market paradigm during the past
decade or so.
- Another example of the ascendancy of market-based economics
can, I would argue, be found in the realms of corporate governance.
At times during the 1970s and 1980s, when the so-called anglo-saxon
model of relatively unbridled financial markets was not delivering
particularly good results in terms of economic growth, there was
some envy of what one might depict as the institutional model of
corporate ownership, as evident in Germany and Japan for example.
In this model much of the equity of major businesses is closely
held by friendly groups of long-term investors including one's
bankers and associate companies.
- It has been argued that this arrangement provides the best
environment for long-term growth and stability, in contrast to the
situation where businesses are exposed fully to the cut and thrust
of the stock markets, which are characterised as being populated by
people seeking only short-term profit and ever alert to
opportunities for takeovers, asset stripping and the like. But
experience of the 1990s does not support that view. Germany and
Japan have been the laggards of the decade. The true cost to Japan
of the longstanding cosy relationships between banks, industrial
corporations and government ministries has become apparent. And we
watch in some amazement the reaction among some sections of the
political and business communities in Germany to the
Vodafone/Mannesmann takeover battle - an almost unprecedented (for
Germany) hostile bid, no more palatable for being from abroad -
along with the government's efforts to save the Holzmann
construction group, not to mention the authorities' stout defence
of the largely state-owned domestic regional banking network
there.
- Thus, the more open and aggressive equity market environment of
the anglo-saxon model seems to have delivered ultimately the fitter
economy. But we should remember that the stock market doesn't serve
everyone who is looking for equity finance. There is a large
population of smaller and medium-sized businesses which cannot
aspire to access the market. Nevertheless they are important
contributors to the economy and need equity funding. Few, if any,
economies have been able to match the USA when it comes to
enterprise culture and the relatively abundant sources of funding
available to SMEs. Even in Hong Kong, where we pride ourselves as
being highly market-oriented and enterprising, we cannot claim that
life is a bed of roses for SMEs. But I am encouraged by the launch
of the Growth Enterprise Market - the stock exchange's second board
- which fills a particular gap, albeit only one, in the needs of
smaller or younger companies.
- The final years of this century have also seen inflation
largely conquered across much of the world economy. Low inflation
should provide a propitious climate for the issuance of medium and
long-term debt instruments. In Hong Kong the debt market has been
growing, although more at the short end than the long, and the
secondary market is not greatly active, except for Exchange Fund
bills. There is of course nothing wrong in investors wanting to
hold instruments to maturity; indeed, in one sense it may be
interpreted as a sign of confidence. But the investor base for any
particular issue will be that much larger if secondary market
liquidity is assured.
- The significance of developing domestic debt markets has been
widely recognised elsewhere in this region too. It is perhaps
something that is of special importance for countries where there
is a clear advantage in expanding domestic financial intermediation
in order to reduce dependence on external debt. Hong Kong has
contributed to the APEC Compendium of Sound Practices for the
development of debt markets, which covers such topics as
regulation, transparency, risk control and so on. This will help
guide the establishment of best-practice infrastructure for these
markets, but that in itself is no guarantee that markets will
actually mature. In general, however, the prospects for the further
development of bond markets in the region in the new millenium look
promising.
- From the point of view of international investors, exchange
rates may also, of course, be a crucial element of the investment
equation. They are certainly so for the trader or short-term
investor. For long-term investors, however, the swings and
roundabouts may even out; it could be argued that much of the
movement of exchange rates reflects nominal impulses, which should
not unduly affect long-run real returns.
- If one tries to predict exchange rates in pursuit of a winning
investment strategy, one is likely to be as often disappointed as
elated. In a rather arbitrary exercise I have looked at the return
from investing in 7-10 year government bonds in different countries
from mid-1986 (selected only because it was the starting point of
the particular data set) to the present. The assumption is that the
non-dollar currencies were purchased out of US dollars at the
outset and changed back at the end, so that the comparison is on a
US dollar basis. It emerges that the average annual return for the
period was nearly 12% for Australia, 11% UK, 101/2% Japan, 10%
Canada, 8% Germany and 61/2% Switzerland - with the US itself at
8%. How many of you would have got this right ex ante? I hesitate
to try to draw any profound conclusions from this, other than that,
with US inflation averaging about 3%, there was clearly a
reasonable real return to be had everywhere. You did not have to be
greedy to survive.
- The argument of the monetarist school that - to put it in a
slightly condensed form - monetary factors do not have a lasting
effect on real developments, was especially fashionable during the
1970s when governments were criticised for conceding to inflation
in the mistaken belief that they could thereby sustain or stimulate
activity. Subsequent experience has proved, if anything, that the
optimal monetary stance is, quite simply, a continuing steady one,
and that variance on either side - whether too tight or too loose
and after allowing for any real shocks - may incur lasting economic
losses. Thus, today, the received wisdom is that central banks
should follow clearly articulated policies aimed at a stable
monetary environment. This in turn begs the question of how to
define a stable monetary environment. In Hong Kong, a highly open
economy with no capital controls, we focus on stability of the
exchange rate, but this regime itself requires a flexible economic
structure and a sound banking sector. I believe that Hong Kong
possesses those attributes, as demonstrated not least by the
adjustment of the past two years, and that the peg remains the
appropriate regime for us, but I would be the first to admit that
it is may not suit others.
- From the point of view of investors, it is the stability and
credibility of macroeconomic policy as a whole which probably
determines, or ought to determine, investment strategy. As
experience tells us, it can be a costly mistake to pay attention
only to particular parts of the policy regime, such as the exchange
rate, without scrutinising the wider context in order to be
satisfied that the overall design is credible.
- And so it is my pleasure to help to launch this conference
today, and to welcome those of you from outside Hong Kong. We pride
ourselves in being a place which offers not only a wide choice of
excellent conference facilities but also, more importantly, the
critical mass of financial and ancillary services which issuers and
investors require - and which many of you here today contribute to.
Much has been written of late as to whether costs in Hong Kong are
too high. Let me ask you to reflect on the following. Cities such
as London and New York have a reputation for being expensive. So
also do of a number of capital cities in former communist
countries. In a very general sense one can say that London and New
York are expensive as a consequence of success as business centres
and because, presumably, people still feel that there is value for
money there. I leave you to judge whether the others would fit that
description; to my understanding, some of them have become
expensive for rather different and less palatable reasons.
- I strongly believe that Hong Kong fits the London-New York
paradigm. Actually, our competitiveness (as measured by the real
effective exchange rate) is now back where it was in mid-1997
before the onset of the Asian crisis, thanks to the sharp
adjustment of property prices and reductions in labour costs, and
with help from a strengthening of other currencies, notably the
yen. Nevertheless, although costs may now be back closer to their
norm, Hong Kong will never be a cheap place. But when you take
account of what is on offer here and the high productivity of the
labour force, I hope you will agree that you get value for money.
Of course it is crucial for us all to pay continuing attention to
raising efficiency and containing costs, but let's not lose sight
of the fact that emergence as a relatively high-salary, high-rent
business centre is a symptom of success, not a reason for
failure.
- I wish you all an enjoyable and fruitful conference.