September 1983 was a turbulent time in Hong Kong's financial history. One positive result of the crisis was that it marked the beginning of a process through which Hong Kong built up a robust monetary system and a credible monetary policy.
At around this time twenty years ago, Hong Kong was going through exceptionally difficult times. The Hong Kong dollar had been depreciating rapidly in the last month of its nine-year history of floating, as heightened concerns about the political future of Hong Kong took hold. Over two trading days in September 1983 the Hong Kong dollar depreciated by a further 15%, having already fallen substantially and continuously throughout the preceding year. With no effective control over either the price or the quantity of the monetary base - there was then no monetary management mechanism to speak of - the currency was heading for a free fall. Queues began to gather in supermarkets and the shelves for rice and toilet paper were quickly emptied. In one or two banks, other kinds of queues were quietly forming, making substantial withdrawals of interbank lines and deposits through the drawing of cheques, and threatening to take cash or cheques in bank branches. The property bubble had already burst, further threatening banking stability, as banks traditionally were highly exposed, directly and indirectly, to the property market and vulnerable to volatility in property prices. We did not then have the 70% guideline for the degree of risk that could be assumed by banks in residential mortgage loans. And so, inevitably, we had one of the worst monetary and banking crisis in Hong Kong.
Looking back after 20 years and having been there at the front line, or thereabouts, and stayed ever since, I hope readers will excuse my reminiscent mood this week. It was tough, and that is putting it mildly. I have a very bad memory, but the events of September 1983 are still etched in my mind as sharp as ever. Sitting now in the office early on a quiet Saturday morning in September 2003 trying to stock up on Viewpoint articles ahead of a period with heavy travelling commitments does make the mind wander. The grim faces on the street, the empty shelves in the supermarkets, the phone calls seeking inside information (firmly declined), the bigger and bigger foreign exchange orders placed with our agent banks to support the currency, the stoney silence in the corridors on the 24th floor of Admiralty Centre, where the then Monetary Affairs Branch was located, the hard push needed to close the iron shutter at the main door reserved for the last one to leave the office, the ever present members of the press downstairs - the images are all still vivid. And I did ask myself the question then and repeatedly afterwards: what could have prevented the crisis from occurring?
Everyone is wiser after the event and we all learn from living through crises. An effective monetary management mechanism was obviously absent then, but even if it were there I doubt whether confidence in the currency could have been enhanced to such an extent as to have pre-empted the crisis. I have no doubt, however, that a robust monetary system and financial infrastructure, a credible monetary policy and monetary authority would have helped. And so these have been among my preoccupations in my continuing involvement in this area since. Yet, no two crises are the same, and although monetary reform contributed to our ability to cope with the Asian financial turmoil we have to persevere in our effort to be ahead of the game in monetary management. The use of a non-discretionary system, of course, enhances credibility in it, but credibility also comes from being transparent in our operations so that we can be subject to market scrutiny, and from being able to explain and be accountable for our actions, when these are called for. And when the unforeseen occurs, which it will, even with the most meticulous contingency planning, we must be able to react expeditiously, professionally, authoritatively and in a manner that commands the confidence of the community. To be able to do this, we must equip ourselves with deep understanding of financial market dynamics and professional skills, and this is why considerable emphasis has been given in the HKMA to economic and market research.
At a time when risks to monetary and banking stability are probably higher than usual, given the rather adverse circumstances outside of the monetary and financial systems, some of which are specific to Hong Kong, there is an even greater need to be alert. We need a stable monetary and financial environment to facilitate the resolution of the problems that Hong Kong is now facing. I think we are better equipped now than we were twenty years ago, and we will certainly continue to do our best.
Joseph Yam
18 September 2003
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