joseph yam : current issues for monetary and financial stability in hong kong speech by mr joseph yam, chief executive of the hong kong monetary authority, at the hong kong management association annual fellowship dinner, hong kong, 27 november 2007. * * * introduction i feel especially honoured to have been asked to speak at this hkma fellowship dinner, one particular reason being that the hong kong management association and the hong kong monetary authority share the same initials. i have, ever since the establishment of the hong kong monetary authority in april 1993, felt some what indebted to the hong kong management association in its acquiescence to our use of that symbol of excellence, the hkma, no doubt in the hope that we too would in time mature to deserve the respect that those initials command. about fifteen years on, i hope we have not disappointed you. this evening i would like to talk about the monetary and financial issues currently confronting hong kong. i have chosen to do so because what is going on around us on the monetary and financial fronts appears, to me at least, to be unusually complex, presenting risks to monetary and financial stability that are perhaps less well understood and possibly less benign than those that we have been experiencing since the economic recovery from the second quarter of 2003. and i believe that the best way of managing risks is for those concerned, not just the authorities responsible for the maintenance of systemic monetary and financial stability but more importantly also those actually assuming risks, whether as investors or as financial intermediaries, to be alert to them, and to understand that they may have peculiar characteristics. then there are importantly those innocent parties in society, who are often hard - pressed to make ends meet or struggling to acquire a dwelling place, who could be further disadvantaged if there were monetary and financial instability, should the risks materialise to the extent of causing a shock of systemic dimension. sub - prime crisis the first such issue is the sub - prime crisis in the united states. the use of the word " crisis " is not an exaggeration on my part, notwithstanding the absence so far of anything approaching a crisis in hong kong. it is the word that is increasingly being used in the developed markets and in international finance when talking about the current difficulties in the united states and europe that originated from sub - prime mortgages. at the risk of oversimplifying something that is really quite complex, let me make a few observations that might help understand what is going on. first, sub - prime mortgage

rapid growth in crossboundary capital flows in recent years. in particular, hong kong ’ s mutual market access schemes with the mainland, namely the stock connect and the bond connect, have played a crucial role in encouraging greater portfolio investment into china and the inclusion of rmb assets into major global indices. within three years, foreign holdings of onshore equities had more than tripled and foreign holdings of onshore bonds had more than doubled at the end of last year. 9. following a strong 2021, foreign equity and bond inflows into onshore markets softened this year on the back of geopolitical uncertainty, covid lockdowns, and the china - us monetary policy divergence leading to a reversal of onshore bonds ’ yield premium. 10. notwithstanding this, the scale of the decline in foreign purchases and holdings has moderated recently and is relatively small compared to global investors ’ total holdings in onshore equities and bonds. we believe that these short - term fluctuations will not reverse the long - term trend of foreign investment in mainland capital markets. 11. in fact, several key drivers will continue to strengthen interest in diversification into rmb assets over the medium term. these include ( i ) continued inclusion of onshore equities and bonds into major global indices ; ( ii ) china ’ s long - term economic growth prospects ; ( iii ) rmb being a stable currency that is increasingly recognised as a reserve currency ; and ( iv ) lower correlation of rmb assets with other global financial market assets. 12. these factors are paving the way for a structural shift which will motivate global investors to think more strategically about their exposure to china. this, in turn, will spur demand for rmb assets and facilitate the further opening up of the onshore capital markets. 13. in the remaining time, i would like to highlight in more detail a few upcoming developments which will be of interest to international investors seeking access to mainland capital markets. 14. first is mainland authorities ’ efforts to connect the interbank and exchange bond markets, which will allow participants in each market to access securities in the other market through an infrastructure connection without having to open separate accounts. this should ultimately be beneficial to the growth of both the cibm and exchange bond markets, thus creating a bigger pie. 15. foreign investors who access the interbank market through bond connect or cibm direct will be able to trade in the exchange market, which is the platform where most non - financial corporate