The crisis in Argentina has had little impact on Hong Kong - thanks, in part, to a rational understanding of the differences between the two economies by markets and commentators.
From the point of view of the regulator, one effective way of managing risks to the stability of our monetary and financial systems is to draw attention to them, and to encourage open discussion about them. This is a very good way of promoting calm and rational market reaction in the event that those risks materialise in the form of financial market shocks. This is the strategy we used in the management of the risk of financial market contagion on Hong Kong that might arise from problems in Argentina - the debt crisis there putting pressure on its monetary system, which is structurally similar to our own.
We started two years ago to deliberately draw the attention of all concerned to the similarities between Hong Kong and Argentina, which are limited only to the structure of our monetary systems. We were both running a currency board system with the monetary base fully backed by US dollar reserves. We pointed out also that the similarities between the two economies ended there. And, with the necessary emphasis, we drew attention to the many important differences in, for example, the level of foreign reserves, the amount of external debt, the track record of fiscal discipline, the external orientation and the flexibility of the economies.
Supported by considerable research within the HKMA, we intensified open discussion on the subject in the first half of 2000. The Sub-Committee on Currency Board Operations of the Exchange Fund Advisory Committee examined it extensively and the details of its deliberations were published for all to see as part of the record of the meeting of the Sub-Committee in May 2000. On 1 June 2000, I also addressed the subject in a Viewpoint article, and have revisited it frequently in discussion with our press friends and with the financial community. In all this communication, we sought to encourage objective discussion, which we hoped would result in rational market reaction when the crisis in Argentina, which appeared then to us to be inevitable, eventually erupted. I feel sorry for the plight of the people in Argentina, but I must confess a feeling of relief that there was, here in Hong Kong and particularly in the past few weeks, indeed the type of rational market reaction that we had hoped and worked for.
The reason why I am pointing this out is not to take credit for any foresight on the part of the HKMA. We were merely doing our job. But I do want readers to understand how we seek to manage risks arising from possible irrational and adverse market sentiment that, if not properly managed and corrected, could undermine the stability of the monetary and banking systems. This is all the more important as a result of the globalisation of financial markets. The target audience is not just members of the Hong Kong public, but also international players operating in our financial markets and the analysts serving them. There are also those among the international financial community who have an interest in the stability of the international financial system, of which Hong Kong is an important part - for example, the International Monetary Fund, the Bank for International Settlements and other international financial institutions. Their views and words do have a material influence on market sentiment. For this reason, we play an active part in international financial forums and make use of appropriate opportunities to put our views across.
We in the HKMA will continue to do our best in the complicated task of identifying and managing the risks to the stability of our monetary and banking systems. We will be open in our approach to this work, because the international financial community and our financial journalists are knowledgeable and sophisticated enough to sustain rational and objective discussion on issues of this nature. And we will continue to support this approach with extensive and professional research. The global financial system is facing an unprecedented confluence of risks and, as a very open international financial centre, Hong Kong may get a disproportionate share of financial market volatility, particularly when some of those risks materialise. Against such a difficult global financial environment, it is crucial that we should retain, if not strengthen, our ability to identify, monitor and manage these risks as they affect Hong Kong and pose threats to the stability of our monetary and banking systems. We need the sympathetic understanding and support of the community in this work. And I hope that the relative calm in the monetary and banking systems of Hong Kong in the recent past has worked to strengthen such understanding and support.
Joseph Yam
24 January 2002
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