the overall policy framework and the exchange rate regime. experience shows us that governments can choose exchange rate systems that do not appear optimal according to standard economic criteria yet still make them work if other policies are up to the task. at the same time, a regime that is appropriate on theoretical grounds will yield unsatisfactory results if it is not supported by other policies. consider, for instance, an economy with relatively inflexible wages and prices that adopts a fixed exchange rate regime. such an economy would need to ensure maximum scope for fiscal policy to buffer shocks that would otherwise lead to unacceptable swings in unemployment. this would require a rather conservative underlying fiscal policy in normal times to avoid a loss of confidence at times when fiscal stimulus is needed. similarly, a very open economy that chooses a flexible exchange rate regime must ensure that its policies are set in a long - term framework that establishes a clear anchor for inflation. otherwise, external shocks that cause large movements in the exchange rate can lead to policy uncertainties and broader instability. these lessons have been learnt well, and the view that overall macroeconomic policies must complement the functioning of the exchange rate regime is now generally accepted. unfortunately, the challenges do not end there. ensuring that macroeconomic policies are mutually consistent is merely a necessary — not sufficient — condition for ensuring stability in a world experiencing an explosion in capital flows. the volume, velocity and volatility of global capital movements introduce a whole new dimension to policy making — a dimension that is relatively recent, and one that we are only gradually learning to deal with. how do capital flows affect the sustainability of exchange rate and monetary policies? there is a school of thought that maintains that mobile international capital can play a useful global role as a sort of ‘ policeman ’ of sound policies. the theory is that, in a liberalised global financial system, international capital flows reward countries with sound economic policies and punish those which pursue unbalanced and inconsistent policies. international capital flows also prevent distortions from getting as far out of line as they would if the economy in question was closed to outside investors. thus, according to this view, capital flows act as an early warning system that forces quick corrections of policy errors. undoubtedly, there have been circumstances in the past that have lent substance to this view. in the latin debt crisis of the late 1970s and early 1980s, for example, many borrowers were clearly pursuing unsustainable and destabilising macroeconomic policies. the resulting outflow of funds and

mr. carse reports on the initiatives taken concerning financial industries in fujian, hong kong and taiwan speech by the deputy chief executive of the hong kong monetary authority, mr. david carse, at the symposium on the financial exchange and cooperation of fujian, hong kong and taiwan, held on 8 / 8 / 98. i am pleased to be here this morning to welcome you to this symposium. the chinese banks ’ association is to be congratulated for organizing this important initiative with the co - sponsorship of the fujian provincial government and chinatrust commercial bank. the idea of the symposium, as i understand it, is to facilitate the exchange of ideas concerning the financial industries in the three regions and the exploration of cooperative opportunities between them. 2. such an initiative could not have come at a better time. the current financial crisis is creating havoc among the asia economies. initially, the damage was felt in the financial sector. but the full impact is now being seen in the real economy as output and trade are crippled by higher interest rates, the burden of foreign currency borrowing and the credit crunch. the mainland of china, hong kong and taiwan have survived the crisis in better shape than most other economies in the region. but they have not been unaffected as events of this week have demonstrated in hong kong where we have witnessed further speculative pressure on the hong kong dollar. 3. in this kind of uncertain economic environment, it is all the more important that we should be trying to maximize the opportunities to develop trade and investment links between neighbouring economies. that is why this symposium is timely and important. the existing economic links between fujian, hong kong and taiwan provide a solid platform on which to build for the future. taiwan and hong kong are already major trading partners with taiwan ’ s exports to hong kong accounting for 23. 5 % of its total exports in 1997. visitors from taiwan also account for a significant proportion of the total number of visitors to the territory and thus make a major contribution to the tourist industry in hong kong which, as you will know, currently needs all the help it can get. 4. trade between hong kong and fujian is also growing rapidly in both directions and both hong kong and taiwan are a major source of overseas investment into the province. there are over 10, 000 hong kong enterprises in fujian. 5. the hong kong presence in fujian includes a number of banks from hong kong, including bank of east asia. the same bank also maintains a branch in taiwan which puts it in a good position to take advantage