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Opening Remarks at Hong Kong Institute for Monetary Research Conference on Currency Arrangements in Asia: Post-Crisis Issues

by Joseph Yam, Chairman, Hong Kong Institute for Monetary Research

17 December 1999

1. I am delighted to welcome all of you to today's conference on 'Currency Arrangements in Asia: Post-Crisis Issues.' This is the inaugural conference of our newly established Hong Kong Institute for Monetary Research. As Chairman of the Institute, I am very pleased to see an audience and a programme of speakers who are not only distinguished in their own fields but who also represent a wide variety of professions and jurisdictions. The opportunity that today's conference provides for bankers, policy-makers, academics, analysts, fund managers and journalists to focus together on practical and theoretical issues embodies two of the main objectives of the Institute: to encourage interaction between the financial and academic communities and to promote interflow between policy and research. This idea of interaction and interflow is neatly shown in the Institute's emblem, which is on display for all to see today for the first time. I might add, for the reassurance of the journalists who have been covering my career as a coin designer, that I played no part in its design.

2. Not so long ago, the research capabilities of the HKMA were quite undeveloped compared with those of many similar organisations around the world. Many of us tended to take the view that, since we operated a rule-based currency board system linked to the US dollar, we could simply enjoy a free ride on the decisions made by Alan Greenspan. That view now no longer applies. In 1998 we expanded our research facilities by creating a new Research Department within the HKMA. We also established a Sub-Committee under the Exchange Fund Advisory Committee, tasked, among other functions, with recommending improvements to the Currency Board system and promoting a better understanding of it. With a view to further developing our research capabilities, in August 1999 the HKMA established the Hong Kong Institute for Monetary Research to conduct studies in the fields of monetary policy, banking and finance that are of strategic importance to Hong Kong and the Asian Region. The Institute will invite scholars, both local and overseas, to undertake research on a project basis. In addition, we hope to promote more general intellectual discussion and debate through organising conferences and workshops of the kind that we see today.

3. The Asian financial crisis underlined the need for these expanded capabilities: it reminded us of the enormous importance of accurate, sophisticated and speedy analysis to our weighing of options in a rapidly changing and very difficult situation. More positively at this time of recovery and reassessment, the many and diverse opportunities available to Hong Kong must be properly understood and constantly re-examined if we are to continue to develop as an international financial centre. We must be ready to devote the time, resources and imagination to exploring, questioning, and challenging old assumptions and to developing new strategies for a rapidly changing environment. In a period of globalisation and of periodic instability, one of those strategies must include fostering understanding and co-operation among Asian economies, particularly in the monetary sphere: the regional perspective adopted by the Institute, and illustrated in today's programme, will, I hope make some contribution to that strategy.

4. The Asian financial crisis was triggered by a massive attack on the Thai baht, and it deepened as one currency after another tumbled. The relationship between currency arrangements, financial stability and economic performance has long been a controversial subject among economists and the experience of regional crisis has offered much food for thought. The calm after the storm - the return of financial stability to the crisis-hit economies and the general climate of economic recovery throughout the region - make this an appropriate time to reassess the various currency arrangements in the region from a number of different perspectives. In today's conference we focus on three aspects that have a general application.

5. The first of these relates to the performance of the Japanese economy and the Japanese yen, and their implications for the performance of other economies in the region. Over the past few years, Japan has undertaken various expansionary fiscal and monetary measures. Money market rates in Japan have been consistently close to zero. Yet the Japanese economy has been mired in a recession that has gone on for longer than most would have predicted. The impact of Japan's problems - and the solutions adopted - on the development of currency markets in Asia as a whole is a crucial question for all of us. For the first session, we are delighted to have the presence at this conference of Professor McKinnon of Stanford University to offer some insights into this question using his extensive research on the nature and implications of Japan's liquidity trap. With Professor Sakakibara and Dr Aghevli as discussants, this promises to be a highly stimulating session.

6. An equally burning issue is the question of whether capital controls are an effective tool for stabilising financial markets, along with the general question of their domestic and regional impact. Following the imposition of capital controls in Malaysia, we have seen a resurgence of interest in this topic, not least because, contrary to predictions at the time, these measures appear to have had some effect in restoring a measure of stability. At one extreme, some commentators argue that all small economies should adopt capital controls of one form or another as a preventive measure to deal with the volatilities of huge fund flows. Some take a middle position and regard capital controls only as a last-resort weapon against speculation. Others, at the opposite extreme, believe that capital controls should not be adopted in any circumstances, since they only serve to distort or retard a country's economic and financial development. The longer-term impact of capital controls remains to be fully assessed. Meanwhile, there is ample scope for debate about what, if anything, their purpose should be, and whether they are capable of achieving what they set out to do. For Hong Kong capital controls continue to be a non-option. But it is still important that we understand their implications, direct and indirect, on regional markets as a whole. We are honoured that Professor Dooley of the University of California, Santa Cruz, will be speaking, in Session 2, on the relationship between capital controls and financial crises. Dr McLeod and Mr Roger will be the discussants for this session, and I think we can all expect to hear some interesting perspectives on this subject.

7. The third aspect of the Asian financial crisis takes us from a regional to an international perspective. This is the need for a re-evaluation of the array of institutions, structural arrangements and collective policies that make up the international financial architecture. While there are differing views about whether minor renovation or complete rebuilding is required, there is at least strong consensus that the architecture we now have is not sufficiently storm-proof, and that we need to take a fresh look at the arrangements for channelling international capital flows. During lunch today, Dr Morris Goldstein of the Institute for International Economics, an expert in this field, will share with us his views on what is broken and what needs to be done to fix it.

8. These are all quite controversial subjects, and there is much scope for discussion. We have therefore scheduled a total of 45 minutes for open discussion and questions from the floor in addition to the more informal conversations over lunch and during the tea break. I look forward to hearing some lively debate, and I hope that you will also feel free to suggest topics for future events of this kind.

9. The smooth and swift establishment of the Hong Kong Institute for Monetary Research owes a great deal to the efforts of its Director, Guy Meredith. I take this opportunity to congratulate him and his able team of staff for the hard work and imagination they have all put into this project. Finally, may I thank you all for sparing the time at this busy period of the year for attending the Institute's inaugural conference. Your presence here gives us much encouragement, and bodes well for a rich and productive schedule of activities for the Institute.

Last revision date: 1 August 2011
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