Co-operation with the Mainland on Hong Kong's monetary and financial affairs began 20 years ago.
The start of the celebrations of the tenth anniversary of the establishment of the Hong Kong Special Administrative Region brought my memory back to 1987 - 10 years before the resumption of the exercise of sovereignty. It was a very eventful year indeed for Hong Kong on the monetary and financial front.
The first event that comes to mind must of course be the worldwide stock market crash in October 1987, which led to a four-day suspension of trading in the local stock market because of concerns about possible failures in the settlement of positions taken in Hang Seng Index futures. This is a well documented event in the history of the Hong Kong stock market. It spurred fundamental reforms in the governance of the stock exchange and led to the formation of the Securities and Futures Commission.
Less well documented is perhaps the "lifeboat" facility provided by the Hong Kong Futures Guarantee Corporation, which guaranteed payments on all contracts executed on the Futures Exchange, pulled together at the premises of the then Monetary Affairs Branch of the Government Secretariat on the 24th floor of Admiralty Centre. The late David Nendick, then Secretary for Monetary Affairs, did a good job of "locking up" a dozen representatives from the private sector on Sunday 25 October 1987 to prepare for the reopening of the stock market the next day. As the then Deputy Secretary for Monetary Affairs, while feeling fortunate that a 10-day acting period as the Commissioner of Banking had just ended, I was only able to help by running errands, including seeking legal advice on the intended use of the Exchange Fund for the rescue facility.
One of my responsibilities was to keep a running total of the "lifeboat to be", as each of the private-sector parties put down a figure and signed against it on a piece of paper, at the top of which was written: "We hereby agree to underwrite the provision of a drawing facility of HK$500 million in the proportions set out below, and to be provided substantially on the terms contained in the attached letter. In the event of oversubscription, each participant shall reduce its commitment pro-rata". The names of the institutions, the amounts and signatures followed. I think the exact wording of the note was drafted by one of the private-sector representatives at the meeting. A copy of this scrap of paper, which incidentally showed an under-subscription, is in my records. The facility, including the contribution from the Exchange Fund, amounted to HK$4 billion, of which only HK$1.8 billion was actually used.
But this was not really the event of the year in terms of its historical significance, at least in my opinion. Crises come and go, and we all learn from them. And the lifeboat facility was, in the fullness of time, completely repaid, with interest. Crisis prevention is always more valuable in terms of its implications for future events, although the behind-the-scenes efforts are often not noticed, precisely because no debilitating crisis occurs.
The more significant event actually occurred earlier in the same year, in early May, when the then Financial Secretary Piers Jacobs and David Nendick made a trip up north. I had no idea where exactly they were going; it was probably Beijing. All I was asked to do was to co-ordinate the production of a set of background briefs on monetary and financial matters in Hong Kong and continue to act as Secretary for Monetary Affairs in the absence of Mr Nendick, who had just been to the Annual Meeting of the Asian Development Bank. I produced 10 such briefs, including a crucial one on the functioning of the Linked Exchange Rate system. Less than four years had passed since the Linked Exchange Rate system had been introduced in October 1983, and I had some concerns about how the system had been operating. As a result, that particular brief was considered by those making the trip to be too frank and had to be toned down. But I sensed a general agreement with my view on the subject and received assurances that it would be one of the main themes of the visit – the need to make the monetary system robust enough to cope with the increasingly sensitive period of political transition was obviously on everybody's mind.
I remember feeling dejected at having to prepare briefs for a visit, presumably to discuss subjects dear to my heart, that I was not to take part in. With the benefit of hindsight, it was immature of me, given the sensitivities at the time; and to punish myself I decided not even to try to find out where Sir Piers and Mr Nendick actually went and whom they met. I still don't know. What is important, of course, is that the visit marked the beginning of a very constructive and successful dialogue on the monetary and financial affairs of Hong Kong that lasted for 10 years, in which the many reforms instrumental to safeguarding monetary and financial stability in Hong Kong in the lead-up to 1997 and beyond were frankly discussed and agreed, with a clear sense of purpose of promoting the stability and prosperity of Hong Kong.
If my memory does not fail me, perhaps I shall find time to share with readers more about this pleasing chapter of co-operation with the Mainland.
Joseph Yam
3 May 2007
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