##uation in the region and sharper downward adjustment in asset prices. at the technical level, two schools of thought could be identified at this stage. one expressed concern on the scope in which the hong kong monetary authority exercised discretion in our rule - based monetary system. associated with this are also suggestions for improvement on how the system could be allowed to work more effectively and automatically. the other felt that the hkma should have been more forthcoming in relieving the tightness in the money market and therefore the pain of those affected. 18. interestingly, the two schools of thought are quite polarized. and, as always, the correct course should be somewhere in between, involving a good mix of pragmatism in the light of present day circumstances in financial markets, having regard also to the need for the hkma to function as the lender of last resort to the banking system, but without any departure from the strict discipline of the currency board system requiring full us dollar backing for the hong kong dollar monetary base. this, incidentally, has very much been the attitude of the hkma. discussions continue, as part of the review initiated by the financial secretary, and i look forward to more of the technical scrutiny of ideas which can be quite enjoyable and revealing. 19. meanwhile, elsewhere in the region, the full doses of the medicine prescribed by the imf for a number of the asian economies are being dutifully and courageously taken. if they persevere, they stand a good chance of coming out of this financial turmoil quickly and the damaging contagion that has spread across the world would be effectively contained. and for the longer term, i am hopeful that the new framework for enhanced asian regional cooperation to promote financial stability, agreed upon at the manila meeting of asian finance and central bank deputies, and subsequently endorsed by apec economic leaders at the vancouver meeting, would play an effective role. 20. the framework, which recognizes the central role of the imf in the international monetary system, includes important initiatives : first, there will be established a mechanism for regional surveillance to complement global surveillance by the imf ; second, there will be enhanced economic and technical cooperation particularly in strengthening domestic financial systems and regulatory capacities ; third, there will be measures to strengthen the imf ’ s capacity to respond to financial crisis ; and fourth, there will be a cooperative financial arrangement that would supplement imf resources on a case by case, contingent basis. 21. but it is perhaps in the

kong did so the hard way in the early 1980s when the situation was compounded by uncertainties about the political future of hong kong. we had our currency crisis in 1983, after nine years of operating with a floating exchange rate, against volatile capital flows, without any effective mechanism for monetary management or currency anchor. our banks had been overly exposed to credit, maturity and currency risks, and a total of seven banks had to be rescued directly or indirectly through the use of public funds. in short, we had been complacent. 13. but, thankfully, never have we been in any doubt about the need to maintain free and open markets, and a liberal financial system. the correct response to financial turmoil is not to resort to controls or to apportion blame, but to put one ’ s own house in order, and ensure that one is in a position to cope. this we did through a series of reform measures to strengthen our monetary and financial systems implemented in the past ten years. this was, in part, also spurred by the desire to minimize the risk of possible financial disturbance ahead of and through political transition, and to provide the environment for hong kong ’ s continuing development as an international financial centre, as required under the basic law. our experience tells us that financial reform takes time and determination, and the ability to bite the bullet and bear the short - term pain. it is also very much a continuous process, with financial innovation creating new circumstances and presenting new challenges all the time. 14. i believe that we have successfully achieved this, which is the important reason why we have stood out as an oasis of calm, at least relatively speaking, in the storm of financial turmoil that is currently sweeping through the region and beyond. some say that we are sticking out like a sore thumb, referring particularly to our fixed exchange rate link with the us dollar. i can of course respond to that by pointing to how well our linked exchange rate system, a currency board system that functions on auto - pilot, has worked. i can point to the supervisory efforts which have put our banking system on a very sound footing, and to our advanced financial infrastructure which has helped tremendously to contain and manage risks of a systemic nature. but many of you are, i am sure, already sick of my talking all the time, and may even dismiss what i say as trumpeting. i do not blame you. i am well aware of the possibility that over ten years of direct involvement in monetary reform in