Hong Kong’s experience of earlier crises is helping it weather the current one.
The maintenance of monetary and financial stability in a free and open international financial centre with considerable market liquidity to attract international investors and fund raisers is an especially challenging task. Unlike jurisdictions with controls over, for example, access to financial markets and cross-border mobility of capital, Hong Kong cannot rely on administrative measures to limit the impact of adverse developments in global finance. Indeed, Article 112 of the Basic Law forbids foreign-exchange controls in Hong Kong and requires the Government to safeguard the free flow of capital within, into and out of Hong Kong.
Unlike the developed financial markets of the US, Europe and Japan, Hong Kong's financial markets are small compared with the volume of international capital. As a result, the movement of an amount of capital that only makes ripples in the developed markets may make waves in the Hong Kong markets, to the extent of presenting greater risks to monetary and financial stability.
To safeguard monetary and financial stability in Hong Kong, we need to ensure that our monetary and financial systems are more robust than those of other economies. This is quite demanding. It requires Hong Kong not only to adhere to international standards of prudential supervision of financial institutions and regulation of financial markets, but also to be always ready to identify risks that may impair the robustness of the systems and take pre-emptive action promptly. The fact that we in the HKMA have for some time introduced elements of a macro-prudential approach to financial supervision and regulation in parallel with the traditional, micro-prudential approach is part of this effort.
It is encouraging that the monetary and financial systems of Hong Kong have demonstrated a high degree of robustness that is, regrettably, rare in other parts of the world against the background of the once-in-a-century global financial crisis. Hong Kong’s monetary system has continued to function well under very stressful international conditions, with the exchange rate of the Hong Kong dollar against the US dollar remaining very stable while the exchange rates of other currencies, particularly emerging-market currencies, have exhibited considerable volatility. Our financial system, in particular the banking system, has continued to function normally, providing valuable support to economic activity in Hong Kong and therefore helping to limit the impact of the sharp economic downturn on the community. This is in great contrast to the banking systems of the developed markets where, despite their having been nationalised to a considerable extent, normality has yet to return and economic prospects remain weak.
The stability of monetary and financial systems is closely related to the day-to-day interests of our community, even if its importance for our daily lives is not always obvious to everyone. If, however, we recall the public sentiment during the monetary and financial crises of the eighties, we can more readily appreciate its importance. For example, in September 1983 there were queues in supermarkets where the shelves of rice and toilet paper were quickly emptied as the exchange rate of the Hong Kong dollar depreciated sharply; and in the subsequent years the community was very worried about the safety of their deposits with banks as a number of near bank failures occurred, necessitating a series of bank rescues. Put simply, the community – in the form of depositors, investors, mortgagors and other borrowers – suffers if our monetary and financial systems are not stable.
So while we continue to do our best in our micro-prudential tasks with a view to providing a measure of protection to depositors and investors, we will also continue with our macro focus on maintaining monetary and financial stability. We have learnt valuable lessons in the financial crises of the eighties (the monetary crisis in 1983, the banking crises in 1983-85, and the stock-market crisis in 1987) and the early nineties (the closure of BCC(HK)); we dealt with the Asian financial crisis of 1997-98; and now, while the developed markets are learning lessons about the potency of free markets, the free flow of capital and financial innovation, we can use that experience to help us weather the current storm and avoid damage of a systemic nature.
Joseph Yam
30 April 2009
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