On the other hand, a flexible exchange rate regime can also work, provided that the policy package is correct and there is a well functioning foreign exchange and financial market. But it would be a mistake to think devaluation can substitute for fundamental policy adjustments to correct a structural external imbalance. Competitive devaluations are “beggar-thy-neighbour” policies that are self defeating. 31. Indeed, the adoption of more flexible exchange rate systems by some Asian economies has not meant they can avoid the adjustments that are currently being undertaken. With a fixed exchange rate under a very strong and disciplined regime in the form of a currency board system, Hong Kong focused precisely on our underlying productivity, maintaining strict financial and fiscal discipline, and also prudent banking supervision, in order to enhance the resilience of the linked exchange rate system, and minimize and manage the downside risks of overheating in the economy. 32. Let me also put the currency adjustments in their proper perspective. In the last few years, the currencies with the greatest adjustments and volatility have been the G-3 currencies, rather than the Asian currencies. The yen has depreciated by 50% against the US dollar from its peak in 1995. The deutschemark has likewise fallen by over 30%. In comparison, the Asian currencies have until recently remained relatively stable. The Hong Kong dollar has been the most stable of BIS Review 91/1997  -7-  Asian currencies, moving less than 1% against the US dollar.

Moreover, we expect the financial sector advancement to also contribute to the overall economic and social development of the country. Thus, the plan will also aim to promote a more complete financial access, ensuring that all needed financial services are available at appropriate prices to bankable users in all market segments. I envisage that these objectives would be achieved through policy measures under three main pillars. The first pillar will aim to improve financial institutions’ operational efficiency by reducing unnecessary costs that stem from outdated or overly restrictive regulations and approval process. In this regard, private sector’s input will be a key ingredient in improving the regulatory environment to one that is more conducive to business efficiency and innovation, while ensuring that prudential considerations both at individual and systemic levels are not compromised. The second pillar will look at improving efficient intermediary functions of the financial sector by increasing the level of competition through further deregulation and liberalisation. Deregulation would involve expanding business scope and enhancing the role of existing players, including banks, non-banks and other niche banks. One of the deciding factors for the optimal number and type of new players would be the value added that these new institutions, be they universal banks or niche banks, could bring to the financial system, such as technical expertise and product innovations. Set against these benefits, however, are potential risks to financial stability stemming from disorderly competition and exits. Thus, liberalisation considerations will be grounded on a robust supervisory framework and be appropriately sequenced and phased.