is called the monetary base. if you were to ask any representative grouping of the community, say, the legislative council, what the monetary base is, i would be surprised if more than ten per cent of the group could come up with the correct answer. many would be tempted to relate this to the various definitions of the money supply, because that is the term mostly heard in commentaries on money and finance. but they are quite different things. the crucial part of the monetary base and the money supply, however defined, are in fact on the different sides of the balance sheet of the banking system. put this question to a group of academics and you would probably, on the contrary, get as many definitions as there are people in that group. 15. this confusion is understandable and, at least partly, in the context of hong kong, a reflection of the rather peculiar institutional framework for monetary management of the past that is now, one hopes, history, with the ten years of reforms to our monetary system. you may be surprised to hear this. it was not until the end of 1996 that the monetary base for hong kong was properly defined. this was when, on the occasion of the introduction of real time gross settlement for interbank transactions, all licensed banks were required to operate a clearing account with the hkma instead of with a commercial bank. yet we have been, somehow, controlling, or we claimed to have been controlling, the monetary base ever since the linked exchange rate system was established in october 1983. 16. even assuming that the definition of the monetary base is well understood, there is then the important question of how it should be controlled. herein lies one of the most interesting subjects in monetary management and that is the choice between discretionary control with people making decisions, and automatic rule - based control with no discretionary decisions involved. associated with this are considerations concerning, and possibly another choice between, flexibility in management and the credibility of the monetary system. even the most professionally competent central banker can be wrong. a system that involves discretionary decisions is therefore subject to human errors of judgement that may undermine the credibility of the system, and some would go as far as to argue that this would eventually lead to failure of the system. on the other hand, an entirely rule - based system without any discretion is inflexible and may not serve the best interest of the community, even though short - term interests may sometimes be involved - witness the many calls for lowering interest rates even when

been the largest recipient of odi flows from the mainland. at present, about 60 % of odi from the mainland has gone to hong kong or via hong kong to other places. the significant share of hong kong in mainland ’ s fdi and odi underscores the unique role of hong kong as a gateway for foreign enterprises to access the mainland market, while at the same time being a springboard for mainland institutions to gain exposure to international markets. with respect to portfolio investment flows, market attention has been focusing on portfolio flows from advanced economies towards mainland china. in my view, portfolio flows in the opposite direction – i. e. portfolio outflows from mainland china – will also present huge bis central bankers ’ speeches opportunities to the asset management industry, especially given the fact that the mainland economy is the single largest provider of savings in the world. currently, outward portfolio investment ( opi ) from the mainland is only around 5 % of its gdp, still far below 57 % for east asia, 42 % for the us and over 100 % for the uk. our inhouse research findings show that an economy ’ s portfolio investment outflows as a percentage of gdp tend to grow along with the level of economic development measured by per capita gdp. so, given the huge potential outward portfolio investments from mainland china, how will they be allocated across different financial markets? our researchers have studied this particular subject in depth and found that the home bias is still very much there, i. e. the closer the potential investment destination to mainland china, the more opis it will receive from mainland china. as such, hong kong is likely to be one of the key destinations of mainland ’ s opis and the amount of those opis hong kong will receive will increase as china ’ s gdp grows. apart from being the final destination for these investments, hong kong can also act as an ideal launch platform for these investment flows to reach other major global markets. since the introduction of the qdii scheme, about us $ 67 billion worth of investment quotas have been granted up to september 2010. it is likely that a significant portion of these moneys is managed out of hong kong. in fact, over 40 mainland companies providing fund management, securities and futures, insurance, and other services have already established a presence in hong kong to manage the funds flowing out of the mainland and engage in fund advisory businesses. we expect the process of financial liberalisation in mainland china to be a gradual and controllable one,