mr yam focuses on international capital flows and free markets speech by the chief executive of the hong kong monetary authority, mr joseph yam, jp, at the credit suisse first boston asian investment conference on 26 march 1999. introduction 1. i am delighted to have the opportunity to speak at this year ’ s asian investment conference organised by credit suisse first boston. it is particularly gratifying to be able to speak to such a large and diverse gathering in hong kong itself. many of you, i know, are old friends of hong kong, and to those among you who might be visiting this city for the first time i extend a warm welcome. your presence here happily relieves me of the need to set the scene or to explain in detail how hong kong has been grappling with regional financial crisis and economic slowdown. you will have been able to see and hear for yourselves that, despite the difficulties of the last year or two, hong kong is still very much alive and well, and that it remains one of the most open, most welcoming, and freest markets in the world. international opinion continues to echo this conclusion, so these are not empty boasts : within the past couple of weeks, for example, two reputable regional surveys have found the banking system of hong kong to be the best and the soundest in asia. we continue to develop our services and infrastructure in a way that will help business make the most out of changing opportunities and challenges. recent initiatives include plans announced by the financial secretary earlier this month for a cyberport that will be able to offer the most advanced information technologies to a whole range of businesses and industries. within the hkma, we have, in the last few months, seen the completion of a major strategic consultancy study that will help to guide the broad development of our banking sector into the next century. 2. i single out these initiatives – and i could mention many others – for two main reasons. first, one of their aims is to help hong kong get the best advantage out of three closely linked and irresistible trends : the globalisation of markets, the liberalisation of trade and finance, and the rapid advance of information technology. secondly, while we need to grasp the opportunities produced by globalisation, liberalisation and technological advance, we also have to manage the risks that they bring with them in ways that strengthen, rather than undermine, our economic fundamentals. along with many other economies in this region, we have, over the last year or

refer to as the six ‘ v ’ s : virtue, volume, variety, velocity, volatility, and viciousness. 5. by virtue, i mean simply that international capital flows, by promoting an efficient and balanced use of financial resources, bring enormous benefits throughout the world. over the past few decades they have been of crucial importance in developing new economies and revitalising old ones. when they work smoothly, international capital flows help to relieve shortages of capital in previously segmented markets. they provide a competitive environment that encourages innovation. and, by affording better returns to investors, they help to put spare capital to the best possible use. we have seen the value of this in our own region in the 1980s and early ’ 90s, and, when discussing the problems created by capital flows, we should never forget that they have specific and beneficial functions. 6. the second characteristic is the sheer volume of capital movements around the world. in april 1995 the global value of foreign exchange transactions taking place on an average day was us $ 1. 2 trillion. in april 1998 this figure increased to us $ 1. 5 trillion, or, to put it in more meaningful terms, to around 48 times the daily value of world trade. it is also worth stressing that these are largely private capital flows. in 1997, for example, the amount of private capital flowing into developing economies was estimated by the world bank to be five times the size of official flows. 7. within these private flows there is considerable variety and fluctuation in the nature and organisation of capital. with financial liberalisation and the globalisation of financial markets, portfolio capital flows are of increasing importance compared with the more traditional foreign direct investment and commercial bank lending as a source of international capital flows. an aspect of this variety is the growing number of complex investment tools, and different orders of derivatives therefrom, involving different degrees of leverage, available for moving money around the world, or indeed enabling investments to be made in markets without having actually to move money around. 8. the variety and volume of capital flows are made even more potent by the velocity with which capital moves around the world. the advance of telecommunications and information technology now means that distance and national boundaries are no longer important restraints. two consequences follow from this. first, huge amounts of money can be moved into an economy in a very short space of time, and can be moved out just as quickly. in 1996, for example, capital was flowing into the emerging economies