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One Country, Two Monetary Systems

by Joseph Yam, Chief Executive, Hong Kong Monetary Authority

(Speech at Group of Thirty International Banking Seminar)

22 September 1997

  1. 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.
  2. 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.
  3. 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".
  4. 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.
  5. 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?
  6. 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.
  7. 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.
  8. 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.
  9. 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.
  10. 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.
  11. 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.
  1. 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.
Last revision date: 1 August 2011
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