One Country, Two Monetary Systems
Speeches
22 Sep 1997
One Country, Two Monetary Systems
Joseph Yam, Chief Executive, Hong Kong Monetary Authority
(Speech at Group of Thirty International Banking Seminar)
- It has been 84 days since the resumption in the exercise of
sovereignty over Hong Kong by China, and as you can probably see
and feel, things are going well here in Hong Kong, in as much the
same Hong Kong style as you have known in the past. Nothing much
has changed, other than the rather visible flags and emblems of the
People's Republic of China and the Hong Kong Special Administrative
Region, which have themselves increasingly been met with pride
rather than apprehension amongst the people of Hong Kong. The
principle of "one country, two systems" has thus worked well so far
in the preservation of stability and prosperity in Hong Kong. It is
of course early days yet, but the early indications are very
promising indeed.
- There has been much skepticism about the practicality of this
principle ever since it was first laid down by the late Deng
Xiaoping for dealing with the question about Hong Kong. This is
understandable. Afterall, it involves an untried concept. It goes
beyond traditional understanding of what goes on in one country.
And so it takes time for anyone to appreciate just how appropriate
this principle is under the circumstances. This is not made easy
when there is so much focus and great expectation, particularly
amongst the international financial community, on what is going on
in Europe, where one is talking about, by contrast, the creation of
one common system for many countries.
- But that comparison does not necessarily imply that one
approach must be right and the other must be wrong. If anything,
there is a high degree of consistency between the two approaches,
at least in terms of their philosophy. Try and apply the Maastricht
criteria to Hong Kong and the Mainland of China and you will gain a
better appreciation why. There is, as you would expect, much
difference between Hong Kong and the Mainland of China, on all
dimensions. Hong Kong has been recognized by many as the freest
economy in the world. It is very much a success story and a
textbook example of how a free market economy works. The Mainland
of China, albeit going through a process of reform and
liberalization, has a very different economic structure. They are
therefore not exactly the most likely candidates for a successful
economic and monetary union of the kind envisaged in Europe.
Forcing such a union would risk tremendous disruption and trauma,
as there is no common basis on which meaningful economic
convergence could be established. So in order that Hong Kong can
continue to be successful, the ingredients for its success in the
past must be preserved. In other words, whilst going for political
union, it would be essential to retain legal, social, economic,
fiscal and monetary segregation, thus the principle of "one
country, two systems".
- It is perhaps not well appreciated how far the principle of
"one country, two systems" goes, particularly for the casual
observers from a distance who may also have a tendency to look at
it through tinted glass. Put simply, "one country, two systems", as
enshrined in the Basic Law, provides for Hong Kong to have autonomy
in almost anything other than defence and foreign affairs. There is
autonomy for Hong Kong people to run Hong Kong and all the autonomy
that it takes for Hong Kong to continue to be as successful as in
the past. In the monetary area, for example, "one country, two
systems" provides for Hong Kong to keep our own independent, freely
convertible currency with no exchange controls and free flow of
capital. It provides for autonomy in the determination of financial
and monetary policies, and regulatory and supervisory policies and
practices.
- Furthermore, and this is again not well appreciated, there is
in fact more autonomy for Hong Kong now than before the resumption
of sovereignty. This is evident if one carefully compares the
provisions in the Basic Law with those in the Royal Instructions
from the Queen to the Governor of Hong Kong under the Colonial
Administration before 1 July 1997. For example, previously under
the Royal Instructions, the Governor under the former British
Administration shall not assent "to any Bill affecting the Currency
of the Colony or relating to the issue of Bank notes", or "any Bill
establishing any Banking Association, or amending or altering the
constitution, powers, or privileges of any Banking Association"
without previously obtained the approval of the Secretary of State.
Under the Basic Law, however, there is only the corresponding
general requirement that "laws enacted by the legislature of the
Hong Kong Special Administrative Region must be reported to the
Standing Committee of the National People's Congress for the
record". Furthermore, it is specified that "the reporting for
record shall not affect the entry into force of such laws". If Hong
Kong worked well as a British Colony with the autonomy defined
under the Royal Instructions, why should it not work equally well,
if not better, with the greater autonomy defined under the Basic
Law?
- I suppose there can be many cynical replies to this question.
Words are just words and promises are just promises. And we have to
accept that with all the good intentions in the world one must wait
and see whether the words and promises will be kept. I believe they
will, for afterall they do have legal effect. The Basic Law was
promulgated by the National People's Congress in 1990. The
principle of "one country, two systems" has been written into
China's Constitution and become a long-term irreversible national
policy.
- Furthermore, the economics of the whole situation is itself a
great incentive. On the one hand, the Mainland of China has
invested heavily in Hong Kong over the years. The success or
otherwise of the principle of "one country, two systems" has a
direct bearing on the value of these investments. On the other
hand, the continued prosperity of Hong Kong, particularly as an
international financial centre, is of tremendous value to the
economic development of China. Hong Kong's liquid and free markets,
and the sophisticated business and financial infrastructure,
coupled with, where appropriate, internationally accepted
regulatory and supervisory standards, its knowledge of China, being
of course part of China, are a great attraction to the
international financial community and investors, particularly those
wishing to take advantage of the many opportunities arising from
the rapid development of that huge economy of China. Hong Kong is
the catalyst in the process of reform and liberalization of China,
a window to let in the invisible hand, the markets, and the
financial technology and infrastructure. Hong Kong is the channel
for the effective and safe international intermediation of funds
between China and the rest of the world. China knows all this very
well. It is therefore in the best interest of China that Hong Kong
is maintained the way it is, and that the words and the promises
which are all part of the principle of "one country, two systems"
are strictly and transparently kept.
- But given the contrasts and many differences between the two
systems, there will no doubt be pressures in various areas, at
various levels and in various forms to try and benefit from those
contrasts and differences, whether or not through legitimate means.
These could have implications for the integrity of and the general
confidence in the "one country, two systems" principle. We are all
acutely aware of this. But just as we are also aware of the
inevitable existence of crime even in the most law abiding society,
the correct response is to try our best to prevent this from
occurring and when it does occur to deal with it robustly in Hong
Kong's best interest. I believe the Basic Law already provides a
clear framework for doing so.
- But where appropriate, I am sure it will be helpful for the
relationship between the two systems, whatever area they cover,
under the principle of "one country, two systems", to be more
clearly and specifically defined. At the political level, the Hong
Kong Special Administrative Region Government is of course
subordinate to the Central People's Government, but this should not
mean, and I am sure is not intended, for example, that the
financial and monetary systems of Hong Kong should by implication
be subordinate to those of the Mainland. This would be disastrous
to Hong Kong as an international financial centre.
- In arriving at any understanding concerning the appropriate
relationship between the two systems in any field, there is clearly
a need for a high degree of cooperation between those responsible
for their respective systems in the Mainland and Hong Kong. Much
work has been put into promoting this. The monetary fiels provides
a very good example. Through close cooperation between the People's
Bank of China and the Hong Kong Monetary Authority, the monetary
relationship between Hong Kong and the Mainland of China under "one
country, two systems" has been defined as one country, two
currencies, two monetary systems and two monetary authorities which
are mutually independent. Important principles for handling this
mutually independent monetary relationship have also been laid
down, covering a wide range of areas. Let me in conclusion draw
your attention to a few of these.
-
All monetary legislation, regulations, policies and
management directives of the Mainland shall not be applicable in
Hong Kong.
There is to be no interference from Mainland authorities on
financial and monetary affairs of Hong Kong.
Financial businesses between the Mainland and Hong Kong are
considered in the Mainland as external transactions.
The Hong Kong dollar and the Renminbi are considered as foreign
currency respectively in the Mainland and Hong Kong.
The Mainland and Hong Kong shall have their own supervisory systems
for their financial industries, and shall operate independently,
with each other's financial institutions considered to be foreign
financial institutions.
Claims and liabilities between the Mainland and Hong Kong are
regarded as external claims and liabilities.
- I hope this brief presentation on how Hong Kong and the
Mainland will interact in the monetary and financial area under
"one country, two systems" has been useful. I shall be happy to
answer any questions that you may have.
