. p. to 9. 5 % in view of the rising funding costs. although the short - term interbank interest rates have come down to low levels very quickly, the interest rates for the 1 - month maturity and beyond had stayed above 10 % for a longer while. however, since mid - november the term interest rates have also eased steadily, with one month rate falling to 7. 5 % early this week. while some may regard the present levels of interest rates as too high and the correction in the stock market and property market too painful, they have missed a vital point when they put all the blame on the linked exchange rate system. this is because they have assumed, quite wrongly, that under a floating rate system, hong kong interest rates can stay constant or low compared with what they are under the linked exchange rate system. moreover, they assume that the asset markets would have avoided the kind of sharp falls that we have experienced. this is an unrealistic assumption because the financial turmoil in our neighboring economies is a regional or even global problem from which hong kong cannot be immune. 4. it may be easier to explain my point by comparing hong kong with our neighboring economies. you are of course aware that the regional stock markets, including hong kong, have seen major corrections recently. if one also takes into account the depreciation of the domestic currency against us $ as at end - november, the stock market of thailand has fallen by 71 % from its peak this year, malaysia by 69. 7 %, indonesia by 64 %, korea by 61 % and the philippines by 61 %. even singapore ’ s stock market suffered a 35. 7 % drop in us $ terms, which is comparable to the 37. 7 % fall in the hang seng index. only taiwan recorded a lower fall of 31 %, whereas the nikkei also lost 28 %. i quoted these figures in order to illustrate the magnitude of the turmoil and its contagion effects on the asset markets in the region. singapore, which is a strong economy and given a triple - a rating by the international rating agencies, adopts a managed floating rate regime, but such regime has not insulated its asset markets from the regional turmoil. in terms of interest rates, singapore ’ s one month interbank rate rose by almost 5 times to 16 % on 27 october from around 3. 6 % on 2 july. singapore ’ s one month rate is now 6. 25 %, which is still significantly higher than the level

the rtgs interbank payment system. the detailed legal arrangements were finalised in may of this year and a formal invitation to join the system was issued to those rlbs with a clear business need to do so. • finally, at the beginning of july of this year, we embarked on the first phase of deregulation of the remaining interest rate rules. this involved removal of the interest rate cap on time deposits with a maturity of less than 7 days. following this, all time deposits are now completely deregulated. what has been the reaction to these changes? the answer is that not much has happened so far. despite the fears of some of the local banks that they would have to cope with a flood of new foreign bank branches, no foreign banks have as yet taken the opportunity to establish additional branches. of course, many foreign banks are engaged in wholesale, corporate or private banking business in hong kong and do not require an extensive branch network. moreover, a number of banks are still recovering from the asian crisis or are in the process of merging, and are not in an expansion mode at present. as mentioned previously, however, there are some foreign banks that are enthusiastic about building up their presence in hong kong. but perhaps for these, the organic route of establishing new branches, and having these limited to three, is too slow and restrictive. acquisition of an existing operation is likely to be more attractive for such banks. we have already said that we will review the impact of the three building condition in the first quarter of 2001. if it appears that it is serving little useful purpose - because there is not in any case a huge demand on the part of foreign banks for additional branches - we may simply dispense with the condition altogether. similarly, no rlb has yet applied to join the rtgs system. it is however early days for this, and we are aware that some of the more active rlbs are considering whether to apply. they will need to weigh the costs and benefits of direct membership compared with the existing practice of using a settlement bank. the important point is that the rlbs are now in a position to make that choice based on their own business needs. if the rlbs feel that there are any remaining impediments to their joining the system we would be pleased to hear from them. interest rate deregulation the first phase of interest deregulation also produced a muted response. this is not unexpected nor is it unwelcome