While there are certainly grounds for limiting exchange rate fluctuations to prevent temporary misalignments, targeting exchange rates is likely to be counterproductive in the long-run. Doing so requires policymakers to choose a level of the exchange rate to stabilize around. This can be very difficult to implement in practice, not least because the target would change over time as fundamentals evolve. Importantly, there is little that monetary policy can do to influence real exchange rates in the long run. Past attempts to give the exchange rate more weight in monetary policy decisions tended to generate more interest rate volatility, with little lasting effect on the real exchange rate. Here, I should note that emerging markets are generally better placed than in past cycles to withstand capital flow volatility. Key areas where progress has been made include: more flexible exchange rates, clearer monetary policy frameworks, larger foreign reserve cushions, generally moderate external debt levels, improved fiscal discipline, and better capitalized banking systems, supported by stronger supervisory and regulatory frameworks. Moreover, the general shift away from debt-based finance towards equity and foreign direct investment, which together now account for two-thirds of emerging market financing, is significant from a stability perspective. Nevertheless, I want to stress that there is an enormous amount of heterogeneity among emerging market economies. The underlying strengths and weaknesses in terms of institutions and economic capabilities of Thailand and Brazil, for example, are very different. The destinies of emerging markets are not tightly bounded to each other like General Cao Cao’s battleships.

Joseph Yam: A new euro clearing system for Hong Kong Remarks by Mr Joseph Yam, Chief Executive of the Hong Kong Monetary Authority, at the signing ceremony for the appointment of Standard Chartered Bank as settlement institution for the euro clearing system in Hong Kong, Hong Kong, 3 July 2002. *  *  *  We live in a financial world where boundaries and barriers are progressively collapsing, whether as the result of conscious policy decisions in favour of liberalisation or because of the new vistas opened up by the onward march of information technology. Thus, restrictions on providing or using services across geographic or political borders are on the decline. Particular transactional services, such as quoting, dealing, confirming, settling, delivering, paying and safe-keeping, are increasingly footloose, in the sense that many of them can be readily accessed from remote locations. Moreover, the development of interfaces between systems in different parts of the world provides scope for continuous 24-hour real-time trading. At the same time, the regulatory framework is tending towards standardisation around the world, thereby reducing the potential for regulatory arbitrage between jurisdictions. As a result of these various developments, the marketplace in which we can operate is potentially ever larger, but at the same time the potential number of competitors is ever growing. Against this background, financial centres must be nimble, competitive, efficient and safe, and alert to the changing world, if they are to thrive. One of the essentials is that they must offer an effective and robust financial infrastructure.