Mr. Dai assesses the outlook for Hong Kong as Asia's financial centre
Speech by the Governor of the People's Bank of China, Mr. Dai Xianglong, at the luncheon
hosted by the Hong Kong Financial Secretary in Washington on 30/9/96.
The 1997 World Bank/IMF Annual Meetings will be held in Hong Kong next
year. Mr Liu Zhongli, the Minister of Finance and myself will be there welcoming you as the
host of the occasion. I foresee that the Annual Meetings to be held next year will be a
magnificent event which commands far-reaching historical significance. This is because the
Annual Meetings of the two important international financial organisations are to be held in
Hong Kong just a few months after China resumes the exercise of sovereignty over Hong Kong.
Representatives from various countries will have the opportunity to witness the realisation of the
principle of "one country, two systems" in Hong Kong. I believe that nobody will wish to miss
such an opportunity.
Mr Tsang has just expressed his views on the economy of Hong Kong before and
after 1997. I would like to say a few words from the perspective of the People's Bank of China
(PBOC). I have stated on many occasions that we are confident that after China resumes the
exercise of sovereignty over Hong Kong, the territory will not only remain prosperous and
stable, but its status as an international financial centre will also be further enhanced.
And I have good reasons for this confidence.
First, there are the strong economic fundamentals of Hong Kong and the
entrepreneurial and management skills of the people of Hong Kong. These form the basis for
Hong Kong's continued prosperity and stability and for maintaining Hong Kong's status as an
international financial centre.
As you all know, Hong Kong is an international trade, transport, financial and
information centre. With the rapid economic developments taking place in the Asia-Pacific
region, Hong Kong's role as an international financial centre will not be weakened; instead, its
importance will certainly increase. According to the "Joint Declaration of the Government of the
United Kingdom of Great Britain and Northern Ireland and the Government of the People's
Republic of China on the Question of Hong Kong" and "The Basic Law of the Hong Kong
Special Administrative Region of the People's Republic of China", Hong Kong will become a
Special Administrative Region of the People's Republic of China from 1 July 1997. It will enjoy
a high degree of autonomy with Hong Kong people ruling Hong Kong. Hong Kong will become
an independent tariff and trade region and an international financial centre in China but with its
own currency. In order to maintain its status as an international financial centre, Hong Kong will
inevitably face various challenges. However, Hong Kong will continue to have a sound legal
system, advanced communication facilities and infrastructures, professional and management
expertise, and strong foreign reserves. Currently, Hong Kong's foreign reserves rank seventh in
the world while China's rank second. With the backing of such strong economic strength, we are
confident that Hong Kong's status as an international financial centre will be maintained and
further enhanced.
Secondly, from the legal angle, the Basic Law assures the continuation and
enhancement of Hong Kong's status as an international financial centre.
Articles 109 to 113 of the Basic Law lay down specific provisions relating to
Hong Kong's status as an international financial centre, its monetary and financial policies, the
status of the Hong Kong dollar and the issuing arrangements, capital movements and the role of
the Exchange Fund. These principles establish the basic monetary relationship between China
and Hong Kong under the principle of "one country, two systems", and this can conveniently be
summarised as "one country, two currencies, two monetary systems and two monetary
authorities" within a sovereign state. It should be pointed out that the co-existence of two
currencies, that is, the Hong Kong dollar and the renminbi, is a clear demonstration of the
differences between the economies of Hong Kong and the mainland. It is therefore essential that
the two monetary systems should be mutually independent. The renminbi will not replace the
Hong Kong dollar. We are of the view that the co-existence of two monetary systems is
significant to the economic reform of China.
It follows from the two mutually independent monetary systems of the mainland
and Hong Kong that the two monetary authorities will also be mutually independent and one is
not superior to the other. The Hong Kong Monetary Authority (HKMA) will be accountable
solely to the Hong Kong Special Administrative Region Government from 1 July 1997. The
PBOC will not take the place of the HKMA and will not set up any branch office in Hong Kong.
I am glad that international organisations and other central banks also
acknowledge the mutually independent relationship between the PBOC and the HKMA.
Both the PBOC and the HKMA were offered membership in the Bank for
International Settlements in early September this year. This shows that the work done by the
PBOC and the HKMA are widely accepted and appreciated by the central banking fraternity.
This also shows that the international financial community fully supports the principle of "one
country, two systems" laid down by the Basic Law.
The Basic Law also states that the Exchange Fund shall be managed and
controlled by the Hong Kong government. It also states that the revenues of the Hong Kong
Special Administrative Region shall be used exclusively for its own purposes. In addition, the
Basic Law stipulates that the Chinese Government will not levy taxes in Hong Kong. These
three-fold safeguards are evidence that China will not interfere with Hong Kong's financial
matters. We have reiterated time and again that under no circumstances will China draw on or
resort to Hong Kong's Exchange Fund or other assets in any way or for any reason. On the
contrary, the PBOC will support the currency stability of Hong Kong. The PBOC and the
HKMA entered into a bilateral agreement on repurchase of US treasury paper early this year.
We also stand ready to provide funds to support the Hong Kong dollar, if necessary.
Thirdly, the economic development of the mainland has created excellent
conditions for the continuity and further strengthening of Hong Kong's prosperity and stability.
Economic development in the mainland provides a strong support to Hong Kong's economic
development. China is confident in Hong Kong's maintaining prosperity and stability after 1997
because we have full confidence in the economic development in China.
China is firmly committed to continuing with its economic reform and our
achievements are widely recognised. Currently, the macro-economic situation in mainland China
is steady. The various macro-economic indicators do meet our targets laid down early this year
and some even out-perform our expectations. It is anticipated that this year's economic growth
will be around 9%. The retail price is expected to rise by about 7% and is expected to remain
steady over the next two years or may even ease further. At present, our foreign reserves are
over US$ 90 billion and are expected to exceed US$ 95 billion by the end of this year. Since the
beginning of the second quarter this year, external trade has posted some steady growth. There is
a significant inflow of capital and our balance of payments is in a healthy position. Therefore the
exchange rate of the renminbi, which is determined by the market, will remain stable. The
renminbi, for all intents and purposes has become fully convertible in the current account. We
are in advance of our schedule in satisfying the requirement stipulated in Article VIII of the IMF
Articles of Agreement.
In the next five years, China will continue to adopt an appropriately tight
monetary policy. The adoption of this policy means firstly, we will have an appropriately tight
monetary stance to keep inflation at a level lower than the rate of economic growth. Secondly,
money supply should grow at an appropriate level. In the next five years, the annual growth rate
of M1 will be kept at around 18% and M2 at 21% to 23%. Thirdly, reforms and improvements
will continuously be made to the approach in making macro-economic adjustment. That is, we
will move from reliance on direct control of the volume of credit towards regulating money
supply by means of indirect monetary policy instruments such as reserve requirements, open
market operations and interest rate policy. Appropriately tight monetary policy is not limited to
the control of total credit but also adjustment of the credit structure, deepening of monetary
reforms, and timely adjustments to the different aspects of the monetary system. An
appropriately tight monetary policy is conducive to the healthy, stable and sustained growth of
the national economy. It also helps to create favourable conditions for the resumption of
sovereignty and the continued prosperity of Hong Kong.
Stability in China is the very basis for Hong Kong's stability while Hong Kong's
stability will certainly enhance economic reform and developments in China. Foreign investors
in Hong Kong will, at the same time, benefit from the stability of China and Hong Kong.
Those sceptics who have doubted China's commitment to the open door policy no
longer can have such doubts after witnessing the implementation of our economic reforms and
its achievements. I hope you will recognise that China is firmly committed to implementing the
principle of "one country, two systems" and maintaining the prosperity and stability of Hong
Kong, just as we have been firmly committed to the implementation of economic reform in
China. The principle of "one country, two systems" is the realisation of the spirit of our
constitution and has become a long-term irreversible national policy. As China continues to
pursue its economic reform, Hong Kong's role as the international financial centre in China will
become more and more important. We will do our best to help maintain the existing economic
system of Hong Kong and keep up its economic dynamism. We also hope that the international
financial community will join us in our efforts to maintain Hong Kong's prosperity and stability.
Ladies and gentlemen, when you come to next year's Annual Meetings in Hong Kong, you will
all see for yourselves the realisation of the principle of "one country, two systems" in Hong
Kong. In addition, I believe that the 1997 World Bank/IMF Annual Meetings will be an
impressive event as a result.