Greater diversity in the use of major currencies for settling transactions in Hong Kong - facilitated by our sophisticated and expanding clearing systems - help both to manage financial risks and to develop our position as an international financial centre.
Yet another initiative for promoting monetary and financial stability in this fragmented region is, where appropriate, to facilitate the greater use of the G-3 currencies - the US dollar, the euro and the yen - in financial transactions, including financial intermediation activities. In an externally oriented, small and open economy, and particularly in an international financial centre, many of the large financial transactions, as against the day-to-day, domestic transactions of the community, need not involve the domestic currency at all.
In the case of Hong Kong, there is, for example, no reason why the listing and the subsequent trading of red chips on the Hong Kong Stock Exchange need be denominated in Hong Kong dollars. This is particularly so if the investor base of such a listing in Hong Kong is predominantly an international rather than a domestic one. Of course, the choice of currency denomination of financial transactions must be left to the parties undertaking them. But I am sure if the swapping in and out of the domestic currency when a foreign investor participates in an IPO in Hong Kong, together with the risks involved and the costs of managing those risks, can be avoided, he or she would generally be happier. There is, of course, the possible exception of the "investor" also wishing at the same time to engage in a currency play, as in the old days when the payment system was less sophisticated, taking advantage of the exchange rate or interest rate volatility associated with the IPO. But we do have an opinion on currency speculation in Hong Kong and in any case this is no longer a popular play - the efficiency of our Hong Kong real time gross settlement payment system took care of that. Anyway, the bona fide investor in such an IPO, and the subsequent trading of the shares, would prefer both to be denominated in, say, the US dollar instead of the Hong Kong dollar. This could be the view of the issuer as well, particularly an issuer whose business is not predominantly in Hong Kong.
The same argument applies to the large import and export sector of Hong Kong, equivalent to over twice the size of our GDP. The exporter may wish to retain his export earnings in foreign currencies, pending, for example, the discharge of his future foreign currency liabilities, instead of switching them back to Hong Kong dollars. He would do so if there were diversified channels, conveniently and cost effectively for him in Hong Kong, for parking his foreign currencies, short-term, for a relatively more attractive yield, compared with how he could deploy his Hong Kong dollars, for example, in repaying bank loans.
Thus, in the interest of maintaining the stability and integrity of the monetary and financial systems of Hong Kong, we should encourage diversity in the use of currencies in financial transactions in Hong Kong. This, importantly, should include facilitating financial intermediation in foreign currencies. This is the principal reason for our having spent so much effort in developing our financial infrastructure to facilitate the efficient and safe clearing and settlement of foreign currency transactions in Hong Kong. Of course, this effort also has the effect of developing Hong Kong as an international financial centre.
But, lest anyone should become concerned about the effect of this on the standing of the Hong Kong dollar, this is not dollarisation and there is no concern whatsoever about the role of the Hong Kong dollar. We are largely talking about international financial transactions conducted in Hong Kong and on the wholesale rather than the retail level. Even if, in the end, much of our banking, debt and equity market activity is denominated in foreign currencies, this should be seen as a reflection of our success in the development of Hong Kong as an international financial centre while safeguarding monetary and financial stability in Hong Kong. The great majority of the assets and liabilities of the banks operating in the City of London are not denominated in sterling. And we will certainly all continue to pay our bills and receive our salaries in Hong Kong dollars, as long as this is what we prefer, and the Hong Kong dollar, as specified in the Basic Law, is the legal tender in Hong Kong.
Joseph Yam
22 August 2002
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