In short, Hong Kong possesses almost all of the conceivable favourable economic, legal and political attributes for attracting banks and other organisations to set up their regional headquarters here. Our estimate, within the HKMA, is that, for Hong Kong’s banking sector, as for trade generally, the “creation effect” of China’s entry into the WTO will significantly outweigh the “diversion effect”. Hong Kong’s banking sector stands to benefit substantially from the increased demand for banking BIS Review 68/2000  4  services in China. This will have a boosting effect on Hong Kong’s lending business to China, provided that Hong Kong can continue to improve its infrastructural framework and its regulatory regime so that the diversion effect is minimised. Developments in these areas, including the recently opened US dollar clearing system and the substantial regulatory reforms currently in progress, suggest that we are on the right track. Monetary implications Turning to the implications for monetary policy, I am happy to observe that we have moved some way beyond the misunderstandings that have often clouded the view from outside of Hong Kong’s monetary relationship with the mainland. The old myths that 1997 would mean that the renminbi would replace the Hong Kong dollar or that Beijing would take control of Hong Kong’s extensive foreign reserves are now dead and buried after three highly successful years of experience of “one country, two monetary systems”.

Mr. Erçel discusses financial risk and its management Address by the Governor of the Central Bank of the Republic of Turkey, Mr. Gazi Erçel, at the Sixth Annual Global Finance Conference, Bilgi University, Istanbul, on 8 April, 1999 _________________________________________________________________________ $ University. Today I like to discuss financial risk and its management which are one of the hot topics in the international financial circles. The 1980s and 1990s witnessed a major transformation in the international financial markets. The advent of more complex and dynamic transactions have substantially increased uncertainties in the marketplace, and, in today’s environment, dominated by a dynamic, aggressive financial service industry, market participants are exposed to greater financial risks than before. Of course, there are several reasons for these changes. The first reason is the globalization of the international markets. Markets all over the world are becoming consolidated into a vast world market as obstacles to the free movement of capital are gradually being removed. This can be seen in the present global crisis, which arose because problems occurring in one region of the world promptly made themselves felt by markets and investors in other regions. Another reason is that the international markets have become much more volatile. Volatility, which means the fluctuation of market prices and ratios, is one of the principal sources of financial risk. When market volatility increases, market participants are exposed to greater uncertainty--and greater risk. Still another change of conditions in the international markets is the appearance of new forms of investment with very complex structures.