in their clearing accounts with the hkma, they can only obtain hong kong dollars by borrowing from other banks, by bidding up the interbank rates, or selling back the us dollars to the hkma, that is, by reversing their short position. in fact, the banks do not hold excess hong kong dollars because they are generally long in foreign currency. the latest data at the end of july shows that the hong kong banking system is short roughly hk $ 33 billion or us $ 4 billion. 31. in addition to the robust currency board mechanism, the linked exchange rate system is underpinned by some of the strongest fundamentals in asia, if not the world : • growth is strong, at 5. 5 %. • fiscal position has been consistently strong, with an average fiscal surplus averaging 2 % of gdp for the past decade. fiscal surplus in 1997 so far is 4. 4 % of gdp and is expected to exceed 5 % of gdp. • the government has no external debt. • exchange fund and land fund together have more than us $ 100 billion in assets. • corporate debt ratios are amongst the lowest in asia. • the external account is broadly in balance. 32. the free markets and strong fundamentals mean that the nature of the shock is absorbable. hong kong does have a strong competitive edge, since we are a service economy with 83 % in the services sector. as a major investor and integrator of production in the region, with manufacturing concerns in china and southeast asia, hong kong companies could adjust production to areas which have the greatest export competitiveness. in addition, the mainland chinese economy is still growing at 8 - 9 % per annum, with low inflation, a balanced external account and strong commitment to reforms in the enterprise and financial sectors. all these auger well for hong kong as the main gateway to the chinese market. 33. the current higher interest rates reflect somewhat a slightly higher risk premium in asia due to the currency turmoil. we do admit that the higher interest rates affected the stock market and property market. but we should also remember that high interest rates are necessary to cool the overheating in the asset markets that prevailed until recently. given the excess demand situation in hong kong as the economy grew by 6. 4 % in the second quarter, a correction was expected. a moderation in property prices will help bring houses to more affordable levels to homebuyers. 34. higher interest rates will also bring down inflation, by encouraging savings

of their current account deficits as they continued their investments in infrastructure and real estate. issues in asia 9. if we look more closely at the situation in asia, the economic fundamentals remain intact. asia has been the fastest - growing region in the world, recording growth rates of around 5 % - 9 %. asian economies have low inflation rates and exchange rates were stable until recently. current account for the region as a whole is broadly in balance, while the fiscal account, excluding japan, is in surplus. asia has exceptionally high savings rates of above 30 % of gdp. official savings, in terms of foreign currency reserves, were even higher. in asia, 70 % of the inflows contributed to reserve accumulation. as a result, asian central banks are now holding about 40 % of the world ’ s foreign exchange reserves. five of the top six foreign exchange holders in the world are now asians. 10. the strong fundamentals - - a young, educated, flexible workforce, stable government, good natural resources and communications infrastructure, openness to trade and innovation, and high savings and investment rates - - these have not basically changed. asia is still outward - looking, with open markets and openness to technology and innovation. the aspirations of asia are also real : an entrepreneurial approach to innovation, competition and better standards of living for the rising urban population. where asians have perhaps kept their eyes off the ball is the need to develop the services sector in complementary step with the manufacturing or export sectors. delays in opening the financial sectors to global competition make them vulnerable to real sector excesses or imbalances, such as the overconcentration of risks in certain areas, including the asset markets. 11. the momentum of growth depends critically on continued vigorous trade reform, fiscal prudence and improvements in finance, health and education policies. increasingly, exports are changing from labour - intensive industrial production, and more toward higher value - added industries and services. this poses the challenge of sustaining productivity growth. 12. the asian turmoil being a financial turmoil on the surface, let me focus on the interesting way asia recycles its surplus savings. as my colleague joseph yam has consistently pointed out, a large portion of asian foreign exchange reserves is invested in assets of the oecd countries, which provides safe and liquid instruments. these funds return to the region in the form of foreign direct investment and foreign portfolio investment. this global recycling also exposes asian economies to volatile portfolio adjustments due to policy