joseph yam, jp : open and connected – scaling new heights luncheon address by mr joseph yam, jp, chief executive of the hong kong monetary authority, at the 7th annual hong kong general chamber of commerce business summit “ hong kong : the hub of asia ”, held in hong kong on 13 december 2000. * * * 1. i am grateful, and much honoured, to have the opportunity to speak to this 7th annual business summit of the hong kong general chamber of commerce. this conference is billed as a ‘ business summit ’. the word ‘ summit ’ always makes me think of one of my favourite hobbies – hiking. those of you who have enjoyed – or endured – some of the more spectacular mountain trails in hong kong will know what i mean. i am thinking especially of the steep ranges in the remoter parts of sai kung, but you don ’ t have to go far in hong kong before you find yourself in the middle of one of our wild and mountainous country parks. they are among the attractions that make hong kong such a special place. in my view, they should be included in any list of the qualities that make hong kong a desirable city to do business in – along with the rule of law, a low and simple tax regime, an educated workforce, and so on. if you haven ’ t enjoyed these mountains, i recommend you take advantage of this long - awaited fine autumn weather to try them out. but if you are used to eating lavish lunches like this one every day, check with your doctor before you tackle the mountains in sai kung. and avoid sharp peak, the steepest, slipperiest and sharpest summit of the lot. 2. hong kong ’ s economic development bears some resemblance to its mountain ranges : indeed, the dramatic ups and downs of the past decade alone form as stark a profile as anything that can be seen on the maclehose trail – the most daunting and relentless of all of hong kong ’ s hiking trails. go back further into hong kong ’ s history, and it is possible to see, decade after decade, this same jagged landscape. the remarkably rapid reconstruction of an entrepot economy after the devastation of world war ii. then the blow to hong kong ’ s entrepot position from the un embargoes on china during the korean war, which, far from destroying hong kong, helped stimulate its dramatic transformation into a major manufacturing economy. and again, in the late ’ 70s and

taken into account in the riksbank ’ s forecast of future inflation through their effects on household wealth and thereby on demand in the economy. it is difficult of course to predict how households will act, but we usually assume that they are rational and able to make sound judgements of how the economy will develop and how this will affect their borrowing costs. this is not necessarily a correct assumption. for example, it ’ s conceivable that households in certain situations would react stronger to a rate hike than to an equivalent rate cut. should households not expect interest rates to rise in an economic upturn and a rate hike by the riksbank came as something of a surprise, it could have effects on consumption beyond those predicted in our models. we discuss these effects and try to take account of them outside our models to the extent that we believe it is justified. were households to react stronger than expected, it could mean that we don ’ t need to raise interest rates as quickly in an economic upswing as we otherwise would have done. the question of the real economic effects beyond the forecast horizon is trickier. when a speculative bubble bursts, it can result in rapid price falls, but also in poorer economic growth and higher unemployment in the longer - term. naturally, this is something we want to avoid if possible. how the risk of rapid price falls in general and of speculative bubbles in particular should be dealt with in the context of monetary policy is not an altogether simple question, however. but, as i mentioned, there doesn ’ t seem to be any significant elements of speculation in housing prices. consequently the bubble problem is somewhat hypothetical for us. i see no reason from a real economic perspective to depart from our normal rule of monetary policy on account of households ’ debt levels. furthermore it seems that the price situation has stabilised and in some locations prices are even easing. concluding remarks the high debt levels of swedish households and rising housing prices give cause for the riksbank to be vigilant. there is no doubt about that. but there are no signs that the stability of the payment system is threatened or that price stability in any way is jeopardised by the rise that we have seen so far in households ’ mortgage debt. individual households should also be vigilant. for some time now nominal and real interest rates have been low owing to weaker economic activity and low inflation. however, as economic activity picks up, inflation should accelerate and interest rates rise. interest costs will increase.