and sophistication. this august, as you know, the hong kong financial markets became the target of a well planned attack by international hedge funds. we took unconventional actions to fend off that attack and to fortify our financial system against future attacks. not unexpectedly, these actions have been the cause of extensive controversy, and of a great deal of misunderstanding. let me attempt to present the issue from hong kong ’ s perspective by outlining what happened in august and explaining why we took action. oddly enough, hong kong became a target because of the transparency of its financial system : we were singled out for our efficiency and predictability rather than for any fundamental flaws. under our rule - based currency board system, any change in the hong kong dollar monetary base must be strictly matched, at the linked exchange rate, by a corresponding change in the amount of foreign reserves held by the currency board. this is an autopilot mechanism, in which we in the hkma have minimal discretion : the currency board simply acts passively in response to capital flows. under the autopilot mechanism, an expansion of the monetary base causes interest rates to fall ; a contraction causes them to rise. the crucial element in the monetary base influencing the rise and fall of interest rates is the aggregate balance that banks maintain in their clearing accounts held with the currency board. notwithstanding the enormous volume of transactions that goes through our banks, the aggregate balance is minimal, because our financial infrastructure is so efficient. we have a real - time interbank payment system and no reserve requirements, so that banks in hong kong do not need to maintain large balances in their clearing accounts with the currency board : in august the aggregate balance was as low as hk $ 2 billion. this meant that the aggregate balance, and hence interbank interest rates, was highly sensitive to speculative attack. we saw a series of such attacks over the past year, when various currency speculators took large short positions against the hong kong dollar with the aim of destabilizing the linked exchange rate. on all these occasions the attacks drove up the interbank interest rates to very high levels. to the extent that the speculators had to borrow in the interbank market to fund their short hong kong dollar positions, the interbank interest rates were high enough to force the currency speculators to abandon the attacks, unwind their short positions, and incur substantial losses. the finely tuned currency board system worked well, but the interest rate volatility was

’ s long - term financial value. responsible investment is part of that task. as a long - term financial investor, the fund stands to benefit from sound and sustainable growth in the companies and markets included in its investment universe. we use a variety of instruments to exercise our ownership rights. we engage in close dialogue with companies, investors and regulatory authorities. we vote at shareholder bis central bankers ’ speeches meetings in line with pre - defined principles and publish our voting results on a regular basis. we also submit shareholder proposals and participate in consultations based on the fundamental principles that we apply in the exercise of ownership rights. norges bank integrates the considerations relating to corporate governance, the environment and social conditions into the investment process. because the fund is a longterm financial investor, we place considerable emphasis on our role as responsible investor. the overriding goal, which is the highest possible return at an acceptable level of risk, remains firmly established. if norges bank is assessed using criteria other than return and risk, its mission will become unclear. this might also impact return performance. there must be no doubt as to the objective of investment management. norway ’ s enormous economic progress since 1814 has not been linear. rapid population growth and food crises in the latter half of the 1800s led to the massive emigration of close to 1 million norwegians to america. norway gradually became an industrialised country, and trade and shipping provided our new nation with much needed income. moreover, an abundance of natural resources has been essential for our country ’ s prosperity. norway never did become a true manufacturing nation. we cannot expect the strong growth in national income we have seen in recent years to continue. norway is not immune to shifting circumstances and external shocks. but we have a good starting point. the beneficial tailwinds have been put to good use and norway is in a solid position to tackle challenges when the winds shift. the constitution is the foundation of modern norway. this year ’ s bicentenary of the norwegian constitution is an occasion to remember the importance of good institutions that have clearly defined roles. this is essential for stability and progress. thank you for your attention. bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches