norman t l chan : sme financing guarantee scheme opening address by mr norman t l chan, chief executive of hong kong monetary authority and deputy chairman of the hong kong mortgage corporation limited, at the sme financing guarantee scheme signing ceremony, hong kong sar, 13 december 2010. * * * good morning, i am very pleased to welcome all of you to today ’ s letter of intent signing ceremony for the launch of the sme ( small to medium - sized enterprise ) financing guarantee scheme by the hong kong mortgage corporation ( “ hkmc ” ). smes are an important pillar of the hong kong economy and employment. in 2008, the collapse of lehman brothers caused credit crunch and market dislocation around the world. to mitigate the impact of the global financial crisis, the hong kong sar government swiftly rolled out a series of measures to “ stabilise the financial system, support enterprises and preserve employment ”. a key measure to help the smes was the launch of the $ 100 billion special loan guarantee scheme in december 2008. by october this year, the scheme has helped more than 20, 000 companies, with the approved loan amount exceeding $ 98 billion, and helping to secure more than 330, 000 jobs. with the recovery of the local economy and the improved financing and cash flows for smes, the special loan guarantee scheme will cease to receive applications from early next year. since may this year, many smes and think - tanks suggested that hong kong should develop a market - oriented platform to guarantee sme loans upon the phasing out of the special loan guarantee scheme. this suggestion has gained a good measure of support from the market and society at large. the hkmc therefore immediately launched an in - depth study and market consultation exercise. in mid - november, the hkmc announced that it will launch the sme financing guarantee scheme on 1 january next year. the scheme will offer extensive and flexible guarantee coverage to help the smes in hong kong obtain more sustainable bank financing for their daily operations or purchase of equipment etc. also, this scheme will help banks manage their lending risks more effectively – the banks can meet the financing needs of the smes without having to warehouse excessive credit risks. undoubtedly, the scheme will bring benefits for the smes, banks, economy and employment in hong kong. we do not expect an overwhelming demand for the new scheme initially. however, the global market conditions change and turn all the time. there is a high degree of volatility and uncertainty in

relative price movements are welfare enhancing and not something that we should be concerned about. in practice, the world is not so simple and markets are not perfectly competitive. relative price movements do not always occur freely, and adjustments to changes in preferences or technology can be costly. monetary policy cannot and should not influence relative prices within the euro area to offset divergences between sectors or countries. those relative prices are determined by real factors. instead, the best contribution that monetary policy can make to society ’ s welfare is to stabilise the general euro area price level. that reduces the noise in relative price changes, and therefore improves the workings of the price mechanism. nonetheless, central bankers do monitor divergences. why do we monitor divergences if there is nothing we can do about them? first, our knowledge of the monetary transmission mechanism is incomplete. information about the various parts of the economy, including divergences, adds to our knowledge of the economy as a whole. we are particularly conscious of this in the euro area where we are still in the process of developing and enhancing indicators for the euro area as a whole. the second reason for our interest is that regional or sectoral differences in economic performance can provide early signals of area - wide developments, as us experience has shown. if monetary policy cannot and should not react to divergences, what about other policy areas? as i mentioned earlier, allowing relative price changes to occur is often the best approach, so that resources are allocated to their most effective uses. accordingly, structural reforms that allow the relative price mechanism to operate are generally sensible. and, hearing central bankers call for structural reforms is nothing new! my colleagues and i on the ecb governing council have been regularly calling for further structural reform. for example, labour market reform that stimulates the movement of labour around the euro area is likely to reduce euro area unemployment overall, as well as reducing disparity in prices, wages and unemployment rates between regions. central bankers in other countries make similar points. another approach would be to use fiscal policy to try and dampen national divergences. however, given the planning and implementation lags, it is not easy to use fiscal policy in a counter - cyclical manner. in addition, the main objective of fiscal policy is not normally to reduce cross - country or cross - sector divergences. even though fiscal policy is normally formulated within a multi - year framework, elements of discretion remain. any discretion should be used to reduce,