macro adjustment and control. seventh, although interest rates have been raised, the concern about attracting further capital inflows constrains the scope for their use. instead there has been continued dependence on the use of administrative measures that risks distortions and lowers the efficiency of the allocation of financial resources. eighth, there has been greater recognition of the need for an orderly outflow of capital, both to relieve upward pressure on the exchange rate and to achieve a more stable, risk - adjusted rate of return for the very large savings of the community, so that consumption may be encouraged and the growth of fixed investment in the economy contained, thus achieving more balanced and sustainable economic growth. but this recognition has yet to be translated into concrete action, although there are concrete proposals being explored, notably the through train for investment in hong kong stocks. ninth, however, there is considerable pent - up demand on the mainland for capital market instruments generally and outward investment in particular. this will need to be satisfied and it is the right time for introducing relaxations on outward investment. it will be unfortunate if the much needed outward capital mobility is forced through black channels and investors subject to the malpractices of unregulated intermediaries. tenth is the sensitivity of the capital markets to changes in policy, not just those in the area of macro adjustment and control, but also those relating to capital market development. given the nascent state of these markets on the mainland, the possibility and the advantages of making greater use of the corresponding, more sophisticated markets in hong kong, and the desire in the fullness of time to achieve a complementary, co - operative and inter - active relationship between the two financial systems, there has been ( and will continue to be ) frequent policy changes affecting capital market performance. implicit in these observations are strong forces pulling in different directions in the monetary and financial system on the mainland, all with implications for monetary and financial stability, not just on the mainland, but also for hong kong, being so close to and so integrated with the mainland. there is great emphasis on controllability, gradualism and the ability to take initiatives in the reform and liberalisation of the mainland, all in the context of the building of a socialist, market economy. i have no doubt that the mainland authorities will be able to steer the right course through this potent scenario on the monetary and financial fronts, and avoid mishaps. one can therefore be optimistic about hong kong, as the international financial centre of the

far more diversified today than in the past, so that brexit is just one factor among many in determining overall economic performance. still, we view brexit as a major downside risk for the irish economy and will be closely monitoring developments in the uk economy as the full impact of brexit takes hold. let me now turn to the primary goal of my speech, which is to discuss the potential implications of brexit for the configuration of the european financial system, with a primary focus on the euro area. if the uk - eu negotiations deliver an agreement that effectively preserves the single passport for uk - resident entities selling into the eu, the net impact of brexit on the structure of the european financial system might be quite minor. however, in scenarios in which uk - resident firms are no longer treated as equivalent to eu firms for regulatory purposes, it is likely that significant migration of financial activity from the uk to the eu will occur. in particular, it is plausible that a larger fraction of trade in euro - denominated financial instruments will take place inside the euro area, with ancillary implications for the location of financial lawyers, professional services firms, central counterparties, clearing services and settlement services. in order to more easily meet regulatory requirements, there may also be shifts in the organisation of the banking groups. in addition, we may expect to see non - eu banks looking to set up subsidiaries in the eu and eu - resident banks possibly converting uk branches into subsidiaries. 1 / 2 bis central bankers'speeches in the post - brexit environment, it is unlikely that financial activity will cluster in a single location in the euro area, since no individual location offers a close substitute to london. an open question is whether the decentralisation of the european financial system will impose significant efficiency costs. once a location is established as a dominant financial centre, there are many selfreinforcing factors that help it to maintain a hegemonic position. most obviously, a deep labour market for financial - sector workers and a localised stock of intangible financial knowledge are highly attractive both for new financial firms and new entrants to the labour market. however, if a shock fundamentally disrupts this equilibrium configuration, it does not follow that a new dominant location will inevitably emerge, since there also countervailing factors that work against the concentration of activity in a single location. this point is especially relevant in the context of the euro area, given the diverse characteristics of its