Acting Financial Secretary's speech

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Following is the transcript of the SI version of a speech by the Acting Financial Secretary, Mr Rafael Hui, at a motion debate in the Legislative Council today (Wednesday):

Madam President, first of all I would like to thank all members who have spoken. Of course, for those who oppose Mr Albert Ho's motion, I have to thank them all. Some members, in their speeches, affirmed the efforts and the contributions of the Hong Kong MA and the Government in maintaining the stability of the Hong Kong financial system. Since October last year, at appropriate junctures, the Hong Kong MA, having regard to the market situation, has adopted various measures to consolidate the dollar-peg system and mechanism. It has successfully stabilised the HK dollar exchange rate. When Asian currencies devalued, HK dollar and the renminbi were the only ones which were unmoved.

About the seven measures adopted by the Hong Kong MA, they have been welcomed by the financial sector and academia, and the interest rates have been stabilised, so it shows that these measures are very effective in strengthening our currency board system.

Since the government has participated in the market in August to stabilise the markets, there have been discussions and the move, apparently, has been controversial. At the FA Panel meetings and at the motion debate on 9 September, the FS and the Hong Kong MA's Chief Executive and the SFS altogether spent 18 hours to explain to members the background and the aims of government's intervention. And the voices of support for the government were heard both in and outside this council.

As for the views of Members, we have adopted an open attitude, given the circumstances. If members still think that the Hong Kong MA has erred repeatedly in maintaining the linked exchange rate and that there is a deficiency in the transparency and accountability of the Hong Kong MA, I don't think that these statements are substantiated. We welcome suggestions to maintain a high degree of transparency of the government and respect the accountability functions of the legislature. We will take criticisms. However, the government is also duty-bound to clarify statements which are not in line with the facts.

Mr Ho said that the Hong Kong MA has erred repeatedly in maintaining the linked-exchange rate. He has said that the Hong Kong MA has not been able to detect the severity of the situation and lacked a crisis mentality, and that it has not come up with timely measures to consolidate the currency board system, and that excessive capital has been deployed.

The financial turmoil happened and we can trace it back to more than a year ago. Of course, with hindsight we can have a lot of comments. When we recap we can say that in October, in December, January, March, so how many people then were clairvoyant enough to come up with preventive measures so that the financial problems would not be deepened? We can mention the finance ministers, the central bankers and bodies like the IMF. It is only quite recent that they have been able to draw certain conclusions. They say that this is the most serious financial crisis since the Second World War.

Actually, a few years back, the Hong Kong MA already took visionary measures to strengthen and consolidate the monetary system in order to enhance our capability to withstand adverse impact. So in terms of vision and crisis mentality, we don't think that the Hong Kong MA has erred as alleged by Mr Ho.

After the financial turmoil got out the Hong Kong MA has been keeping tabs on the situation and has taken action accordingly to maintain the stability of Hong Kong's system. In March and April this year, that is around the time when the Financial Markets Review Report was out, the HK dollar exchange rate or rather interests rates eased, the spread with US dollar was narrowed, and there were two major principles. First, we had to stick to the principles of the currency board system. And also we had to maintain the free-market economy system.

If it is not necessary, the government should not and will not take action lightly to change the present arrangements. In August this year, the government still stuck to these two principles as parameters for our consideration. However, the situation deteriorated drastically, so on the one hand we had to participate in the market and on the other hand we had to take follow-through action.

If we ask why the government had not taken early action, well it would be futile to talk about that because the special temporal situations were different and if we talk about the financial sector, for Hong Kong we have to look at the external situation and also the domestic situation, so we have to look at the trend, as it were. If the trend is not favourable, then measures may not be effective. Early this year or around April or May, and even in early summer, hedge-funds and multinational companies which engaged in business activities and speculative activities, and leading western countries, had their views on the financial turmoil. And isn't it true that their views now are somewhat different? So we should not disregard this sort of factor. We have to monitor the trends and the objective environment. So, maybe, we have our own blueprints but we have to be very cautious and we have to choose certain opportune moments to come up with measures, or sometimes we have to come up with measures when it is inevitable to do so. We should not take action lightly. We are a responsible government.

I would like to tell members what we do actually. We have mentioned to members about the circumstances under which we took action. In mid-August the situation was very severe. We took action. We wanted to stop double-play. The stability of the market was jeopardised. And then in early September we had seven measures to strengthen the currency board system and to reduce the adverse impacts from double-play by speculators.

Up to now, according to our observations, with market action and with the strengthening measures of the currency board system, the approach has been effective. Whether we intervene in the market is a very difficult decision. The government understands that this counter action may give rise to a misunderstanding that the government is trying to prop-up the stock market. We have repeatedly clarified that. Of course, some people may not accept our explanation. It's because we take different positions, so we cannot convince others sometimes.

However, ultimately, the government decided to take action. If we had not taken action the risks would have been higher. In mid-August, if the government had not taken drastic action, then the stability and integrity of the financial markets in Hong Kong would have suffered greater shocks and the public would have lost their confidence, and we would have faced major systemic risks.

But some members asked why the Hong Kong MA did not present the seven measures before intervention, or why the Hong Kong MA had not taken the seven measures earlier, so that the government did not have to intervene in the market. In the actual consideration, that is from the middle of last year when the financial turmoil started, up to now, as I said, Madam President, there have been external factors which are changing.

Say, in March this year, the Hong Kong dollar exchange or the interest rate eased and the spread with the US dollar was narrowed, and at that time there were no clear indications that there was double market play. But in August there were clear indications that the manipulators made use of double-play and there was an unprecedented attack. The manipulators already got a reserve of Hong Kong dollar capital, so the rising interest rates would not jeopardise them. Actually, it would be favourable to their short position in the stock and in the futures markets. And so that must bring about adverse impact that might bring about systemic risk, so the government took action. And so the government used market methods to solve market problems to remove the systemic risk.

And the urgency of putting forward the seven measures - I can cite you another example about the negative implications of the measures. Now, these measures do contain the rise in interest rates might be misinterpreted by the national sector that Hong Kong was not willing to shoulder the pain of interest rates arising from the currency board system, and the foreign currency reserves of the government might experience fluctuations and that might slow down the development of the debt markets in Hong Kong. So the government should not take the seven measures lightly, as it were.

Decision makers have a heavy burden of responsibility and we have to be more prudent than those who advocate certain measures. We have to take a global view so that we know that the measures are essential and that they have a great chance of success and that the risk is acceptable. And that even if a price has to be paid, it has to be worthwhile.

About today's debate, a lot of views were about transparency and accountability, so I have to explain that here. About transparency, since June this year we have taken measures all through the year. The Hong Kong MA has been working hard to enhance transparency. Under the RTGS in June, we started to disclose the aggregate balance to the banks and also the Hong Kong MA has published the financial statistics monthly and the Hong Kong MA quarterly. And also, the Hong Kong MA, every year, has submitted annual reports to LegCo and has attended FA Panel meetings to explain the work of the MA. Say for the past year, the Hong Kong MA, on nine occasions attended Panel meetings to explain policies and work and legislative proposals. The Hong Kong MA will be happy to receive monitoring from LegCo through these channels.

As Members may be aware, in terms of monitoring the Hong Kong MA, the arrangement is like this. The Hong Kong MA is accountable to the FS through the Exchange Fund Advisory Committee. The EFAC is just like the board of the Hong Kong MA. The credibility and the performance of the Monetary Authority depends on the autonomy in terms of enforcing monetary management and banking supervision.

The most important thing is that the monetary authorities will only get minimum political interference or intervention. Of course, if I say there should be no intervention politically, well I won't be able to have a successful sales pitch.

As for disclosing the minutes of EFAC, I cannot agree with that because the minutes involve investment strategies and performances of fund managers. Even for central banks overseas it is very rare that they disclose this sort of information, and for normal central banks, they have the power to decide on interest rates but this is non-existent for our dollar-peg system, so it is not on a par.

Given the recent experience of Hong Kong and the financial crisis of Asia, it showed that the present international monetary order has several problems. The flow of international capital, well, with a high leverage rate, has changed the investment and the trade configuration globally, and the speed of flow of capital across national boundaries has come up with vast implications for different countries. The largest economies will also be involved.

Certain fund managers want to get higher returns, so they will want to pay any price to opt for attacks in terms of investment. And also given the globalisation of markets, say even for the emerging markets, the stability has been affected. Hong Kong cannot solve the problem single-handedly. For the long term we need a new international monetary order to promote better and strengthened supervision of markets in a more open manner, so that we can reduce cross-border manipulation.

Hong Kong is trying to fight for international support to establish this new order. And it is only quite recently that the US has admitted that these kind of fluctuations are global - so it is only quite recent. And for any economy, even if it is very stable and large, it cannot be exempted from this sort of situation. The leaders of the Hong Kong MA, the FS last year starting from December, mentioned that at international forums. At that time, people might think that we were naive and the international arena did not want to talk about that at that time. So when we deal with the financial turmoil, the Hong Kong officials, on the international scene, have put in efforts but we have encountered difficulties.

If you look back at the development of the monetary system in Hong Kong, in October 1983 we adopted the dollar-peg and since then the Monetary Authority, at appropriate junctures, has adopted measures to perfect the currency board system. In 1988, the Monetary Affairs Branch came up with the accounting arrangements so that the definition of our monetary base became clear. In 1996, the Hong Kong MA presented a real time gross settlement system. Given the RTGS, all licensed banks had to open accounts with the Exchange Fund through the Hong Kong MA. This would ensure that our monetary base was in line with the principles of the currency board. It strengthens the dollar-peg.

As for the seven measures put forward recently, they are part of this process of self-improvement. As for strengthening the stability of the monetary system, the Hong Kong MA has made substantial contributions. We want to develop the debt markets locally and we came up with the Exchange Fund Notes and Bills Programme, and we came up with the Reference Indices for our ten year note programme. The central money markets unit was a sophisticated system.

Before the Asian financial turmoil the Hong Kong MA advocated the expedition of the development of the debt market in Asia, so that we could have better financing and we could reduce external borrowing and we could reduce our risk. And we tried to liaise with the CMUs of other regional territories so that we made contributions in terms of the development of the debt markets.

As I said, before the G-7 admitted that the transparency of the attachments should be enhanced, the Hong Kong MA, at international forums, advocated that already. So the Hong Kong MA has a very sharp sense of crisis as an international player.

The views of some members that since the Hong Kong MA is sticking to the current spot it should not take up the jobs of other central banks, otherwise it would jeopardise the currency board system. I would like to point out this. The responsibility of the Hong Kong MA is to stabilise the monetary system and monitoring banks and developing the debt markets and setting up the Mortgage Corporation are jobs based on this major principle. It does not run counter to the principles of the currency board.

In passing, I would like to say this also - like the US. Well, there were two mortgage corporations Fanne Mae and Farine Mac. For these two corporations for residential property mortgages in the US. So they were taken care of by the central bank, as it were, and after three decades they were hived-off as listed bodies.

For the Hong Kong MA, two years ago we set up the Mortgage Corporation and we said that at the appropriate point in time we would follow the US model, so that our Mortgage Corporation will be hived-off through listing. So for a lot of jobs we cannot say that we stick to the currency board, so we cannot do a lot of things, otherwise we will not be favourable to the integrity of the monetary system.

Some members also said that in order to intervene in the markets the Hong Kong MA has forgotten its role in maintaining the monetary order. It is said that the Exchange Fund and the economy have suffered. The FS has repeatedly explained that the aim of intervening in the stock and futures markets was to drive away the speculators who engaged in double-play. We have to keep the integrity of our monetary system, so it was necessary to tap the Exchange Fund. After government action the stock markets and the futures markets and the currency markets stabilised. It is conducive to Hong Kong's well-being.

Lastly, I would like to talk about the structure of the Hong Kong MA. First of all, I really admire some members, especially through the press releases and the press conferences. They have shown that they have done a lot of research in terms of our legislative framework, our administrative framework, and also the structures of central banks internationally, and things like that. I am also glad that the members have reached the point of the objective of the legislation for the Hong Kong MA. That is it is not to jeopardise its autonomy, it is to confer clear powers to the Hong Kong MA, to delineate its role, obligations and organisational chart and finances, and that it is to ensure that the Hong Kong MA can independently discharge its duties and can enhance its transparency and accountability. These are all constructive comments and these are similar to the thoughts of the government.

For the past two years - about two years ago, I would say - internally, within the government, we started to deliberate on this issue. As members said, presently, in terms of supervision of banks by the Hong Kong MA, the Banking Ordinance has set out the obligations clearly. As for monetary management and monetary policy, they are governed by the Exchange Fund Ordinance. The Ordinance clearly sets out the three objectives of our monetary policies. It is to maintain stability of the exchange rate and public confidence in the currency. It is to maintain the stability and integrity of our financial and monetary system. And it is to promote and maintain Hong Kong as an international financial centre. So these three major objectives.

The Ordinance empowers the FS to appropriately use and manage the Exchange Fund, after listening to the EFAC, and stipulates that the Monetary Authority - in fact it is the Chief Executive for the Hong Kong MA - the Authority is to be accountable to the FS. Of course, the Monetary Authority is a person - the CE of the Hong Kong MA. So the best way is to amend the law so that we can lay down clearly the rights and the responsibilities of the Hong Kong MA. This will enhance the independence of the Hong Kong MA. It will help it to discharge its duties with respect to the three major objectives. And it will ensure that it will not be subject to substantial political sway in enforcing monetary policies and banking supervision.

As yet, we have not had any firm conclusion in this regard and before the total coming of the financial turmoil, it is not the right time to put forward legislative amendments to LegCo. But one day, when the government proposes legislative amendments to LegCo, I hope that Members can still remember what they have said today. That is, today Members generally, by and large expressed support for the Hong Kong MA to enjoy greater autonomy and I am sure members will recognise that a certain degree of supervision and independent operations can coexist.

However, when we enhance the autonomy, what should be the extent of monitoring and supervision? This is a simple truth. In other advanced and democratic countries they are adhering to this sort of principle in formulating structures - like Germany, the US, and the UK.

Madam President, the government is of the will that Mr Albert Ho's motion is not in line with the facts. Throughout the years, the Hong Kong MA has established a good reputation and status locally and internationally, and this kind of status and position are supported and substantiated by performance and facts. I believe that this kind of status will not and should not be affected by these sort of statements. Thank you.

End/Wednesday, September 30, 1998

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