system is sound. the banking system is strong and solvent, and well able to cope with the interest rate movements necessary under the currency board system. capital adequacy ratios among locally incorporated banks average around 18 %, and their problem debt ratio is about 3. 7 %. our standards of prudential supervision are among the highest in the world. fourthly, hong kong ’ s economy is flexible and responsive. because they are governed by free market principles, the markets respond quickly to interest rate changes and other variables, making the economy resilient in absorbing external shocks and capable of adjusting efficiently to validate the linked exchange rate. these are hong kong ’ s economic strengths. not all economies have them, or would necessarily wish to have them, but they have enabled us to maintain a monetary system appropriate to hong kong ’ s unique needs and capable of withstanding the storms that any open and externally oriented economy must necessarily expose itself to. one of our greatest underlying economic strengths is our relationship with the mainland of china, a relationship which helped fuel rapid growth in both economies over the last two decades. our two economies maintain extensive and highly productive economic links yet at the same time operate entirely separate economic systems under the one country, two systems formula. not much more than a year ago, just before the asian financial crisis erupted and on the eve of the transfer of sovereignty over hong kong, pessimists were depicting this relationship as a weakness rather than a strength : they were predicting extensive meddling by the central government, and consequently a loss of autonomy and dynamism in hong kong. they have been very wrong on this. the track record so far has been impressive, and all the more so given the succession of crises over the last year. as far as hong kong ’ s monetary system is concerned, the transfer of sovereignty has meant more, not less, autonomy for hong kong. whereas before the handover monetary policy often required close consultations with the secretary of state in london, the central government in beijing has left such matters entirely in the hands of the hksar government. furthermore, it has strongly and clearly reiterated its support for what we are doing, its confidence in our ability to manage things on our own and its preparedness to help in the unlikely event that help is needed. our fundamental policies are enshrined in the basic law : among these are fiscal independence ; maintenance of hong kong as an international financial centre ; and a financial system governed and protected by locally enacted laws

of measures that threw them off their guard, drove them out of the market, and raised the defences against future attacks. first, drawing on the official reserves, we went into the stock and futures markets. in the second half of august we accumulated us $ 15 billion worth of shares : i am happy to say they are now worth us $ 19 billion, but our aim was not to make money ; it was simply to deter manipulation by making sure that it did not pay off. that objective was achieved. the manipulators were forced to close out their short positions, in many cases with heavy losses. and we followed through with a package of technical measures to strengthen our currency board arrangement to make our money market less susceptible to manipulation. these measures are working well. further reforms are being introduced in the securities and futures markets to reduce the possibility of market dislocation. our actions served their purpose of deterring market manipulation. we could not passively sit through the speculative attack and see our markets overshoot to produce profits for the manipulators, and our entire financial system brought to the brink of collapse. we do not pretend that our intervention in the markets was not a controversial act. this was not a decision that we enjoyed taking. it involved many risks, not least among them the risk of being misunderstood. our critics, both at home and abroad, have accused us of intervening with the aim simply of propping up the stock market ; of being too afraid to face the pain from the necessary interest rate volatility under a strict currency board system operating in difficult conditions ; even of trying to introduce a novel form of state ownership by acquiring a substantial interest in hong kong ’ s major corporations. the essence of these charges is that what we did in august marked the end of our long - standing and hugely successful philosophy of non - intervention in the markets. i think it is now increasingly recognized throughout the world that what we did was both necessary and effective. but let me emphasize this : our actions in august were not the end of non - interventionism, not an abandonment of our free market principles, but a measure taken to ensure that those principles prevailed. free markets cannot mean markets that can be freely manipulated, particularly by large players operating in small markets. we did the minimum that was necessary to preserve the integrity of our linked exchange rate system and allow our financial markets properly to perform the role of financial intermediation. our responsibility was to keep the markets free and fair for all investors