The current debate revolving around government intervention in
the stock and futures markets to deter currency manipulation
brought a feeling of nostalgia to me. It made me recall the many
debates on government intervention there were within the
administration when Sir Philip Haddon-Cave was financial
secretary.
I was then, in the late 1970s, a young economist in the Economic
Services Branch of the Government Secretariat, with little
responsibility and a lot to learn. Those debates were, somehow,
rather more healthy and more intellectual. There was certainly less
mud being thrown around.
But the contrast is understandable. Today, this is a
controversial issue. There are interested parties airing their
grievances through punchy and articulate expressions of their views
on this philosophical issue of interventionism. This is also an
issue in which, in a more politicised environment and at a time
when the community is enduring the pain of economic adjustment, the
politically minded see great political mileage. A government with
the whole of the legislature arguably in opposition makes a
vulnerable target.
It is so easy to wave the banner of free markets and condemn any
government intervention, and be seen to be righteous and
knowledgeable; notwithstanding that the government concerned has
been so successfully running the freest economy in the world. But
we must be humble and thank those wanting to lecture us on free
markets, if only for the purpose of keeping us on our toes.
Hong Kong is changing and one would expect any dynamic city to
be different after the passage of 20 years. But, surprise,
surprise, the policy of positive non-interventionism has not
changed. Many may have chosen to ignore or forget the true meaning
of this policy, but not the administration of the HKSAR. Certainly,
I have not forgotten it. And, having worked continuously and
closely with five financial secretaries in succession, I can vouch
for all of them in their firm adherence to this policy of positive
non-interventionism. It applies also to the specific case of the
current intervention in the stock and futures markets. As a firm
believer in such a policy, I am responsible for conducting the
intervention.
The nostalgia has prompted me to take time off watching the
markets to read some of the long-forgotten literature on positive
non-interventionism. This gives me great pleasure, particularly
when I see the rare sentences and, if I am more fortunate,
paragraphs attributable to my drafting that survived the final
texts. Yes, Sir Philip was a great financial secretary with a great
mind. Even many of our critics hold him in high regard. I hope that
in quoting him, our stance in the stock and futures market can be
put into a context that our critics may be able better to
appreciate.
As early as November 1973, at the Conference on Managers in a
Changing Hong Kong Environment, Sir Philip spoke on, amongst other
things, the role of public policy. He said that, "the Government
must accept such responsibilities as are necessary to ensure that
management decisions are not frustrated by imperfections in the
operation of the market mechanism, leading to economic inefficiency
or social distress which only the Government can remove."
In September 1979, he talked about interventionism and the
adjustment mechanism, amongst other things, in a speech on the Hong
Kong Economy in Transition. He said that: "A pragmatic view
dictates an admission that interventionism can be relevant to the
maintenance of economic stability in Hong Kong even in the general
context of a philosophy of positive non-interventionism". In the
same speech he cautioned against taking for granted the "efficiency
with which [the] essentially automatic adjustment mechanism
operates in restoring equilibrium". He then went on in the same
speech to identify areas that could be collectively referred to as
market imperfections which justifies market intervention.
But it was the speech he made to the Federation of Hong Kong
Industries in December 1980 (and as Principal Assistant Secretary
for Economic Services then it was my honour to have a hand in
drafting part of the speech) in which he made abundantly clear his
stance on the policy of positive non-interventionism. Here I quote
two paragraphs of his speech in full.
Sir Philip said: "I have frequently described the Government"s
economic policy stance as being one of "positive
non-interventionism". Not surprisingly, perhaps, some have claimed
that this is really just a fancy term for laissez-faire or, less
kindly, that it covers up a "do-nothing" approach. This is simply
not so: positive non-interventionism involves taking the view that
it is normally futile and damaging to the growth rate of an
economy, particularly an open economy, for the Government to
attempt to plan the allocation of resources available to the
private sector and to frustrate the operation of market forces, no
matter how uncomfortable may be their short term consequences."
Sir Philip added: "But in my description of our economic policy
stance, I do qualify the term 'non-interventionism' with the
adjective 'positive'. Perhaps in the past I have not spelled out
the implications of this adjective clearly enough. What it means is
this: that the Government, when faced with an interventionist
proposal, does not simply respond that such a proposal must, by
definition, be incorrect. Quite the contrary.
"Generally speaking, or so I would like to argue, the Government
weighs up carefully the arguments for and against an act of
interventionism in any sector of our economy and on the demand or
supply side in the light of present and likely future
circumstances. The Government then comes to a positive decision as
to where the balance of advantage lies. It is true that, more often
than not, we come to the conclusion that the balance of advantage
lies in not intervening; and, I must confess, I would be alarmed if
we didn't. Yet, in all cases, the decision is made positively, and
not by default, and it is not the non-outcome of a do-nothing
approach. But, there are many examples of the Government deciding,
usually on the advice of its boards and committees, to intervene,
in one way or another, in the free play of market forces."
Indeed there are many examples of intervention. We built the
airport because, without government intervention, it would simply
not have been economically viable. We built roads and bridges. We
provided public housing, medical services, the list is long. But we
tend to do less than other jurisdictions and so the size of our
public sector in relation to gross domestic product is one of the
smallest in the world.
Specifically in the monetary and financial systems, there is
significant intervention in the form of the regulation of financial
markets and the supervision of financial institutions. This is
precisely because we feel that, in the words of Sir Philip, 'the
balance of advantage' lies in so intervening and because
'imperfections in the operation of the market mechanism [may lead]
to economic inefficiency'.
In very much the same spirit, we intervened in 1996 and built a
real time payment system because the private sector was not able to
come up with this highly desirable piece of financial
infrastructure. We have been intervening since the beginning of
1990 to develop the Hong Kong dollar debt market, again because the
market was considered essential for effective financial
intermediation, and, regrettably, the private sector was not able
to develop one that is properly structured.
The linked exchange rate system is also a product of the policy
of positive non-interventionism. The Government intervened to fix
the exchange rate because we found out in 1983, and since, that
there is a need for a monetary anchor. In the absence of such an
anchor, the value of our currency will be, in mathematical terms,
an indeterminate. In other words, it is not something that the free
market can determine in the best interest of the community without
intervention.
We have had four speculative attacks on our currency since the
outbreak of financial turmoil in the region in the middle of last
year.
It is very well known to almost everyone in the market that a
handful of hedge funds have on each occasion conducted a double
play in the stock futures market and the currency market. We have
come to realise how this double play works, although it has only
become apparent, at least to us, in the third and fourth attacks in
June and August this year respectively.
On each occasion, interbank interest rates were pushed higher,
to varying degrees, with a view to engineering a sharp fall in the
stock index futures.
While the August episode is still being played out, it is clear
that these currency attacks, or manipulations, have introduced a
large interest rate premium for the Hong Kong dollar over the US
dollar. This currency manipulation premium amounts to around three
to four percentage points. With the community already in
considerable pain, having to go through the inevitable, and already
very sharp, economic adjustment necessitated by financial turmoil
in Asia, we can do without the pain being disproportionately
exacerbated by those manipulating our currency in order to benefit
from their short stock futures positions. There is further the
serious risk of this double play creating a situation of
over-shooting in the stock and other asset markets, undermining the
stability of our otherwise robust financial system.
I must emphasise, however, that I am in no position to judge
whether or not there has been overshooting and, if so, the extent
of the overshooting. But we can all see that markets can overshoot
badly and uncontrollably if we just look around us in the region.
Whatever accusations one can throw at the Indonesians - "crony
capitalism, nepotism, corruption, racism, poor macroeconomic
management, neglect of financial development" - even if all these
were true, they still do not justify the extent of the meltdown of
their currency and their financial system, and the distress they
are in. But the brutal reality is that they are now in that
position.
Markets panic and overshoot, and if we are not careful, we can
easily be pushed into that situation. And the culprits would be the
handful of hedge funds having little or no interest in Hong Kong,
not to mention in our well being, other than it being a free market
which they can manipulate and from which they can take money,
somewhat like an ATM machine, as others have put it.
The HKSAR administration is run by people who have put Hong Kong
on the map as the freest economy in the world. It is clear to us
that there are, again quoting my great teacher Sir Philip,
"imperfections in the operation of the market mechanism", possibly
leading to "economic inefficiency" and "social distress". So the
administration decided to intervene to deter currency manipulation,
to get rid of the unnecessary and unfair pain that has been
inflicted on the community as reflected in the currency
manipulation interest rate premium, and to avoid market adjustments
overshooting in panic into an uncontrollable tailspin.
Consistent with Sir Philip's view that interventionism should be
"relevant to the maintenance of economic stability in Hong Kong",
and with Exchange Fund Advisory Committee backing, Financial
Secretary Donald Tsang Yam-kuen made the order to intervene in the
free play of market forces.
There has been no departure from the long established policy of
positive non-interventionism that has served Hong Kong so well in
the past. Those who think that we have so departed should try and
refresh themselves of what this policy really means.
And no one needs to take my word for it. Those are the words of
Sir Philip, the architect of that policy and someone who commanded
and still commands a lot of respect.
Indeed as Monetary Authority chief, I have no responsibility
over that policy. It rests on the broad shoulders of Sir Donald
Tsang who is carrying it bravely. Let us all make a little effort
to give him the support that he needs, spiritual or otherwise, by
trying to gain a better appreciation of what the policy of positive
non-interventionism really means.
Whilst on the subject of intervention, may I reiterate that our
intervention in the stock and futures market to deter currency
manipulation does not imply any weakening of our resolve to adhere
to the linked exchange rate system. This resolve has never been
stronger. Indeed, as I have mentioned elsewhere, there simply is no
better alternative for Hong Kong. The experience of many of our
neighbouring economies in the past year or so underlines why.
As the financial storm in this region spreads to almost
everywhere now, and with increased intensity, the discipline of
currency board arrangements of our linked exchange rate system is
our best safeguard for our long-term prosperity and stability.
