had kept on falling. when they first set up the noodle shop, they were very serious about every minor detail – they scouted the new territories to source the best quality flour to ensure that noodles were chewy. the husband went to the fish market at dawn to buy the fresh shrimps for the wonton and the wife woke up at four in the morning to make sure the soup base ( [UNK] [UNK] ) was properly prepared. but they both had ceased doing that when the noodle shop business was doing well and such daily routines were no longer practised. so the noodles were no longer as chewy as before and the wontons were no longer tasty. as for the cafe and hot pot meals, they had very little idea on how to do them well and eventually their customers, one by one, turned away from the shop. 9. the takeaway of this story is that very often that market conditions or customer needs have changed and so we have to adapt. if a company does not or cannot adapt, then bad outcomes would ensue. however, it is more often the case that the formula and values leading to success in the past have been inadvertently eroded, if not forgotten totally. the couple in wanchai should not have forgotten what drew customers to their noodles in the first place. they had failed not because their customers had decided to eat sandwiches rather than noodles but because they forgot that it was quality that made the noodle shop bis central bankers ’ speeches successful in the first place. very often we become complacent and take things for granted after we have been successful, just like the wanchai couple did. shifting to a new product line in which we have no real expertise or niche was a recipe for disaster. the same holds true if we look at what made hong kong tick twenty or thirty years ago. many good qualities such as can - do spirit, never - say - die, openness and versatility that were cherished by hong kong people in the past seem to have faded away. keeping these good qualities, hong kong can hope to maintain its competitive edge even when the goings get rough. 10. ladies and gentlemen, the message i have for you is : while an entrepreneur should always strive to expand and grow his business, it is equally important that he should resist complacency and continue to excel in what he is doing or what he is good at. to venture into an unfamiliar universe in which one has no expertise or advantage is risky

it was at the end of october 1997 and again in january of this year, the hkma buys hong kong dollars from the banks in exchange for us dollars and the monetary base shrinks. this tightening of liquidity will in turn cause interest rates to rise, perhaps sharply so. this will choke off the inflows and restore stability to the exchange rate. 19. it is important to realize that this is an automatic process and that the hkma has no room to maneuver to prevent the rise in interest rates from taking place. to do so would run counter to the basic principle of the currency board and would risk prolonging any attack on the hong kong dollar. 20. i think that there is now a better understanding of how the currency board system works. in addition, our determination to adhere to the system and to defend the linked exchange rate has been clearly demonstrated. this should help to deter future speculative attacks on the hong kong dollar. however, we have to acknowledge that the possibility of short term interest rates shocks does exist under the currency board mechanism and the banks therefore need to take this into account in the way in which they run their business and manage their balance sheets. 21. bearing this in mind, i draw three main supervisory lessons from the regional crisis and its impact on hong kong : • first, it is important for banks to maintain a strong balance sheet that can withstand the interest rate fluctuations to which i have referred and maintain the confidence of the public. banks in hong kong score well in this respect but it is not something that can be taken for granted. i think that it is true to say that some banks did expand their loan books too rapidly during the mortgage boom in 1997. as a result, loan to deposit ratios came under some strain. the banks were also exposed to growing interest rate risk because a substantial proportion of their assets are linked to best lending rate while their liabilities are linked to hibor. this has been a reminder of the need to maintain sound fundamentals : high capital adequacy and liquidity ratios ; prudent loan classification and provisioning ; and sound risk management. • a second and related lesson from the region is that banks need to beware of excessive lending to finance overheated asset markets. this increases the leverage of their customers, exposing the banks to increased credit risk if prices fall. this of course is what has happened in the property market in hong kong, although the banks have so far been protected by their prudent lending