business and financial markets, and regulate and supervise financial activities in accordance with the law. the hong kong dollar, as the only legal tender in hong kong, shall continue to circulate, and the existing currency issue mechanism shall continue. the hong kong dollar shall remain freely convertible, with free flow of capital and no exchange controls. the exchange fund, which holds hong kong ’ s foreign reserves, shall be managed and controlled by the government of the hong kong special administrative region, primarily for regulating the exchange value of the hong kong dollar. the above provisions form the foundation for defining and establishing the monetary relationship between the mainland and hong kong under the principle of “ one country, two systems ”. under these provisions, this relationship can be best summarised as one country, two currencies, two monetary systems and two monetary authorities, under two different social and economic systems within a sovereign state. seven principles governing the monetary relationship between the mainland and hong kong i will now set out the seven principles governing the monetary relationship between the mainland of china and hong kong. the first principle concerns the relationship between the two currencies and between the two monetary systems. according to the basic law, hong kong will continue to maintain its own system of currency issuance and management after 1997. the hong kong dollar and the renminbi will circulate as legal tender in hong kong and the mainland respectively. the hong kong dollar will be treated as a foreign currency in the mainland. likewise, the renminbi will be treated as a foreign currency in hong kong. the three note - issuing banks in hong kong will continue to issue hong kong dollar bank notes, with 100 % backing by us dollars under the linked exchange rate system. the currency in circulation in hong kong is in fact backed over five times by foreign reserves. here i would like to stress that china supports hong kong ’ s commitment to the maintenance of the linked exchange rate system, which has served hong kong well by providing monetary stability since its introduction in 1983. corresponding to the two currencies will be two monetary systems. they possess their own characteristics, reflecting the differences between the two economies. the two monetary systems are of equal importance to china in its reform and liberalisation. one does not precede or be subsidiary to the other. they will operate in a mutually independent manner. the second principle relates to the relationship between the two monetary authorities. it follows from the two mutually independent monetary systems of the mainland and hong kong that the two monetary authorities

out in the four state - owned asset management companies to enable them to operate on real commercial basis with hard budget constraints. fourth, when the market has not been fully developed, it is desirable to let the institutions with rich market experiences to make price evaluation so as to avoid soft constraints and set up internal incentives. fifth, efforts should be made to establish proper incentives. without incentives or with very weak incentives, it is not possible to preserve and enhance the value of the assets and make maximum recovery. without effective incentives, people may also tend to seek personal gains from the disposal of assets. sixth, it is important to have appropriate procedures and prevent any improper practices so that the assets are disposed through market competition. however, if the market is not strong enough – for example, market participants are under soft constraints or there are adverse internal incentives, improper behaviors may arise even with sound procedures, and the procedures themselves may become a shelter disguising those improper activities. seventh, it is crucial to develop market intermediaries, since the disposal of assets relies importantly on the integrity and services of the intermediaries. eighth, the objectives of setting up asset management companies are not only to dispose the nonperforming assets in a professional way, but also to make the commercial banks stronger so that they will be able to provide better financial services. so the government needs to consider how to handle the relationship between the asset management companies and the commercial banks. the asset management companies will not operate satisfactorily and there will be much criticism from the public if the above are not handled properly. the state council attaches great importance to the issues concerning the asset management companies. premier wen jiabao has said that “ the asset management companies have had five years ’ experiences in disposing the non - performing assets, and it is time for them to carefully review the experiences and lessons and try to resolve the long - term problems ”. apart from promoting more effective internal management of the asset management companies and strengthening external regulation and supervision on them, the government has much more to do. from the longer - term point of view, china will need a well - functioning capital market to enable its economy to develop soundly.