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Distinguished guests, friends, ladies and gentlemen,
It was Dr Samuel Johnson who said that 'when a man is tired of London, he is tired of life'. I never tire of visiting London, and I will never tire of life and all the challenges and opportunities that its presents. But I must admit that I am physically tired after almost three weeks on the road talking about the Hong Kong economy first in Europe, then the US and now here in the UK. Thankfully, I have a couple of days off this weekend to refresh myself with a drive into the countryside, which I always enjoy. I might even treat myself to a medicinal pint of ale in a little country pub. Living out of a suitcase for so long, as many of you know, also makes you appreciate just how difficult it is to produce a well-ironed business shirt day after day.
During the past 18 days I have met central bankers, finance ministers, investment bankers, fund managers, credit ratings agencies, think-tanks, academics, business groups and industrialists. I attended the IMF/World Bank Annual Meetings and the G-22 meeting called by President Clinton in Washington on October 5. Here in London, I have a similarly full programme, as in such an important and vital financial centre. On Monday we head to Edinburgh for a chat with some fund managers. I arrive back in Hong Kong on October 20 after 23 days on the road. It has been one of my longest business trips and also an important one.
Today I would like to give you an overview of what has happened during this trip. I hope you find it useful and interesting, as much of what we take for granted about Hong Kong is often a source of misunderstanding elsewhere in the world. British businesses, naturally, are more enlightened and more informed about Hong Kong. I am often in touch with the British Consul General, the British Chamber of Commerce in Hong Kong, and its members, and their outlook for Hong Kong and China is very positive. The British Chamber of Commerce will be in the UK soon with their own roadshow to promote Hong Kong as a 21st Century city and the premier gateway into the rapidly-growing markets in the Mainland of China. As someone who has just spent the past three weeks reassuring half of the Western world about Hong Kong's future, I am glad that my confidence in the future is already shared by UK business.
The focus of my trip, of course, has been the Asian, or indeed global, financial crisis and its effect on Hong Kong. The global village is a reality, but many still do not fully understand the consequences of living in such close quarters. We are all in the same boat. We need to row in the same direction if we are to achieve sustainable and soundly-based economic growth in the future. Think about it - four Asian countries have resorted to IMF funding; Russia has defaulted on its loans; there is capital flight in Latin America, in particular Brazil; South Africa and some Scandinavian countries are getting nervous; the US economy is starting to show the first signs of strain. Japan is still in recession, but there are positive signs that her much-needed bank reforms will finally begin. The Euro 11 are preoccupied with economic convergence - but that, too, will put additional strain on those 11 economies at a time when their exports to Asia have begun to dry up and imports from Asia have risen. It is clearly a global crisis.
During the trip there has been tremendous interest in Hong Kong, in our economy and in particular our incursion into the stock market in August. I am happy to note that your Chancellor Gordon Brown supported our actions. I met him yesterday and his exact words were it was 'the right thing and a bold decision'. Elsewhere I have encountered similar endorsements from bankers, business and finance ministers - I think they have taken the pragmatic view, like we did, that it is far better to have a market, in which to invest, than to have no market at all. The collapse of LTCM has deepened people's understanding of the phenomenon of hedge funds. The US Fed's decision to help bail out this particular hedge fund to prevent systemic risk underlines the same point - an ironic twist if ever there was one.
I do not want to rehash all of the details but I would like to make a few points. First, everything we have done, all the pain we have endured, has been to protect our linked exchange rate which has served us so well since it was introduced in 1983. We did not want to buy shares. We did not want to taint our free market reputation. But we were faced with a severe manipulation of our stock and money markets which threatened to create the very conditions which led to a run on the Hong Kong Dollar back in 1983. At that time, I am sure some of you here will remember, housewives were dumping their Hong Kong Dollars for anything and everything - rice, edible oil and finally toilet rolls. That was the sort of scenario we saw developing in August if we did not act to stop the manipulation and the pressure on our currency. Second, we did not buy shares to support the market at a particular level - indeed the market has gone up and down since we effectively left it at the end of August. We had to buy shares to squeeze out the manipulators. Third, we are acutely aware of concerns about the government's holdings in Hang Seng Index constituent stocks. We are setting up a separate company- at arm's length from the government - to professionally manage our portfolio. This company will abide by all the laws, rules and regulations relating to the security industry in Hong Kong - the government will not seek any exemptions. Government officials involved in the regulation or monitoring of the money or securities markets will not be allowed to have anything to do with the management of the portfolio. If we decide to liquidate any of our holdings we will do so over time so as not to create any market disruption or to influence asset pricing. We have a good portfolio of blue chips. I think they are a good investment. But we will take a completely passive position in the market.
On the global front, my thinking has become more focused. The IMF/World Bank Annual Meetings in Washington helped to distil all sorts of financial and economic woes into an essence of key issues.
First and foremost, is the pressing need to help Brazil, which accounts for 40 per cent of total trade in Latin America. Brazil is to South America, as Japan is to Asia. The rest of Latin America will face a hard time if a backup package is not delivered very soon. That of course has flow-on effects for US trade and investment banks, which have considerable exposure in South American markets. If Brazil can not be pulled from the brink, then the world is on the brink of a 1930s-style global recession. The Brazilian problem also illustrates my previous point about a global village. South Korea was big investor in both Brazil and Russia. South Korea first, then Russia, and now maybe Brazil. This is how the Asian 'flu has turned pandemic.
Secondly, there is a need for greater transparency in international capital flows, which are now as dangerous as they are beneficial. I am not advocating capital control or a regulatory system as tight or elaborate as that for the banking system. We should first concentrate on monitoring. I would like to see greater transparency in terms of the financial position of investment funds, especially exposures in different markets, and the degree of their leverage. This is necessary because the cumulative exposures of these funds, either by herd instinct or by acting in concert, can be extremely large in smaller emerging markets. When these markets become thin and volatile, sudden shifts in exposures can be extremely disruptive to the real economy. Greater transparency would discourage potential manipulative and predatory behavior, since regulators and other investors would be able to monitor the build-up of positions. Technology has also increased the rate at which huge amounts of money can be moved around the globe; and the rate at which mistakes can be compounded. The movement of physical trade - the way in which many countries generate wealth - is now dwarfed by the movement of money. Daily foreign exchange trading is now about US$1.2 trillion, which is 50 times larger than the movement of physical trade.
The LTCM problem gave all of us, particularly the Americans, a wake up call in this regard. We were shocked at the extent of LTCM's debt exposure and just how highly leveraged these funds can be. At the same time it highlighted how secretive they are, how little transparency there is in regards to the enormous amounts of money they have at their disposal. LTCM has a capital of US$4.8 billion but debts of more than US$100 billion. South Korea needed US$68 billion in IMF funding when its economy ran into trouble last year. So this one fund - not the largest of them all - has an exposure considerably greater than the 11th largest trading country in the world. Something is not right.
There is a widely-held view that hedge funds are best regulated by their lenders. However, as the LTCM experience shows, the shareholders and supporters of these funds include banks that have granted considerable credit to the funds. Indeed, we know also that some investment houses handling the large and lucrative transactions of these funds also have proprietary positions that add to the bandwagon effect of speculative behavior. The temptations are high to gain from insider information and collusive behavior.
A third point - a long-term issue - is that we need to look at the Bretton Woods legacy in light of globalisation. Globalisation offers tremendous benefits, with the advantages of free trade and capital flows. But globalisation also has costs, in terms of building a global framework of transparency, strong financial systems and a uniform set of rules for competition, for entry and exit etc, that are fair for all.
A key lesson from Asia is that many national balance sheets have been devastated by high real interest rates and exchange rate devaluation as a result of excessive short-term domestic or foreign debts. Consequently, a real question is whether there is adequate international burden sharing in assisting the devastated economies to recover without worsening moral hazard.
Globalisation requires co-operation and consensus, not just self-interest and preaching. One problem that led to unilateral action by various economies, such as exchange controls, is the perception that global problems are not shared equally. Because funding to the IMF is delayed, there is a belief, right or wrong, that the IMF offers painful medicine to program countries without adequate funding. The whole purpose of the IMF, under its original Bretton Woods mandate, was to internationalise the burden of adjustment. However, G-3 economies cannot, for their own internal reasons, co-ordinate their monetary policies. Nor can they contribute towards IMF funding quickly enough. The burden of adjustment thus falls immediately on the smaller economies.
As an international financial center, Hong Kong was the first to ratify the New Arrangements to Borrow, which still cannot be activated because the large nations have difficulty persuading their legislatures to approve such funding. Hong Kong will play by the global rules and will participate, co-operate and contribute in whatever way it can within its resources towards international financial stability.
It is also important to recognise that the strength of a global market lies in its diversity as much as its harmony. There is no strictly right or wrong path towards development. There is, for example, a growing dogma that flexible exchange rates are much more suitable for a world of change because they introduce two-way risk and allow for more macroeconomic policy flexibility. However, flexible exchange rates pass internal adjustment costs abroad, and can be highly destabilising when competitive devaluation is triggered.
For small, open economies like Hong Kong, which cannot determine their own exchange rates, very high fiscal and productivity discipline is imposed through a fixed exchange rate regime. There is nothing inferior in such a fixed exchange rate regime. Whatever kind of exchange rate system a small economy may like, its life has been made extremely difficult when the major G-3 currencies have even higher volatility than the minor currencies. Global stability requires that there is currency stability amongst the major reserve currencies.
Whatever the framework we must harness market forces in its aid. To counter-act the growing credit crunch, we need to develop deep domestic bond markets to mobilise domestic savings and foreign investments. I strongly believe that the multilateral development banks have a role in acting as catalysts or intermediaries for the development of these markets. And the development of a deep debt market in Asia is something I have proposed and would very much like to see pursued.
The view that the Asian crisis is a crisis of exchange rates is an aberration. It is a crisis of confidence and covert capital flows. In some countries, the problem has been exacerbated by crony capitalism, corruption and a lack of transparency in the markets. I am confident that with Hong Kong's high savings rate, tremendous entrepreneurial spirit and deep reserves, we will be able to adjust and restructure our economy. Indeed, we have already. The Chief Executive's Policy Address last week set out major new initiatives to improve productivity and to increase competition and innovation. For example, we have taken very important steps to reduce the monopoly in fixed line telecommunications, and increase competition in media and transport. We are investing huge sums in education and infrastructure. We now need to build an international consensus on monitoring capital flows.
I want to re-iterate Hong Kong's commitment towards free markets, even though I may already be speaking to the converted:
We believe that small government works;
We believe that the market works; but the government has a
role in maintaining the stability and integrity in
markets;
We believe in soundly-based capital flows;
We believe in greater transparency, fair competition and a
global regulatory framework;
In short, we believe in making the market work better.
Thank you.
End/Thursday, October 15,, 1998
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