financial services what path for this particular sector in the years ahead would be best for hong kong and he would probably answer that continued expansion would of course be best. ask the same question to a neutral economist and he would probably decline to commit himself, saying only that the optimal strategy would be to allow the forces of comparative advantage to play out. whether that favours further development of the financial sector, or of something completely different, who can tell? i am often asked what we on the official side, or more particularly in the hong kong monetary authority, plan to do in order to ensure that our financial sector remains competitive and growthorientated. i find myself torn between replying " nothing at all " and " everything possible ". in fact both would be correct in their own way. " nothing at all " seems appropriate if one is content to allow market forces and the inexorable working of comparative advantage to fashion economic development. it is also consistent with hong kong's style of non - intervention. picking winners is not easy. the offer of sweeteners, first to one sector then another, now to one class of customer then another, may, unless it can be very convincingly justified by thorough cost - benefit analysis, be at best a zero - sum game and at worst a recipe for eventual higher taxation, the burden of which ultimately falls on those least able to shift it away from themselves - typically employees and consumers. " everything possible " seems appropriate in the context of our role in encouraging and catalysing innovation, spearheading collective initiatives in cases where there is insufficient incentive for any single entity to launch them, building infrastructure, and so on. in this latter regard i think that hong kong can take a certain amount of pride in some of the achievements in the financial sphere in recent years. in the interests of time let me mention only some of the developments in systems infrastructure with which we in the hkma have been involved : • first, the establishment of the central moneymarkets unit as an electronic clearing and custodial system for debt instruments ; although this dates back to 1990, the service has been progressively enhanced and extended since then, including, most recently, the building of linkages with similar systems in other centres in order to facilitate cross - border trading in bonds and other debt securities ; • second, the introduction of real - time gross settlement into the hong kong dollar inter - bank payments system in 1996 – we were one of the first economies in the world

##ifies their high pay. the fact that hong kong appears to be, overall, a rather expensive place, relative to the majority of neighbouring economies, is a consequence and symptom of its success. as anyone can see by just looking around, this doesn't mean that we can no longer win any business. but we can only afford to pay ourselves what we are worth. if costs go too high and hong kong suffers an absolute loss of competitiveness ( as opposed to there merely being shifts in relativities between sectors ), then an adjustment process kicks in to restore competitiveness. since we have a fixed exchange rate, this adjustment occurs through downward pressure on domestic costs and prices. we have seen this process very clearly and effectively at work over the past three years or so ; for instance, the loss of competitiveness inflicted on hong kong by the currency depreciations elsewhere in the region in 1997 was made good largely through internal deflation within the space of about 18 months. at risk of my labouring the point, look at cities such as london, paris, zurich, tokyo and new york. in absolute terms they are expensive places, but they all generally thrive. the citizens don't hang their heads in shame at being in a high cost and high earning environment. indeed, many relish it. but none of the businesses there can afford not to search continuously for greater control of costs, for higher productivity, for new products and markets, and so on. competitive pressure may be intensified by globalisation and by the emergence of significant competition even from third world cities, where basic costs are hugely lower, but the very survival of the wealthy cities has not been seen to be seriously threatened on that score. over a period of time there may be marked shifts in relative income levels between different locations – hopefully as the living conditions of the poor advance more rapidly than those of the rich, although sadly there has been less evidence of that than one might have wished for – but there is no reason to expect the great cities of the world to sink out of sight. and if you add hong kong to that list, you will see the point i am trying to make. i'm not sure whether anyone a quarter of a century ago accurately predicted how important a contribution the financial and business services sectors would now be making to the hong kong economy. looking ahead, i am definitely reluctant myself to make any prediction about the mix of activity twenty - five years from now. ask anyone involved in