recession of the last 18 months has been the deepest since records began in 1961. real gdp fell by 5. 1 % in 1998 after rising by about the same percentage in the previous year. unemployment has risen to 6. 2 %, a level unprecedented for hong kong. this was accompanied by plummeting asset prices that at their lowest had fallen by 50 % in the case of residential properties and 60 % in the case of the hang seng index. in an economy as used to prolonged economic growth and full employment as hong kong and so heavily dependent on asset values, it is not surprising that this translated into a sharp rise in bad debts for the banks. the bad debt charge for our locally incorporated banks in respect of their hong kong business more than tripled in 1998, albeit from a low base. non - performing loans ( measured by those that have been classified as substandard, doubtful and loss ) rose from around 2 % at end - 1997 to 7. 3 % at the end of last year. this is a sharp increase but it is important to put it into regional perspective. the equivalent figure for non - performing loans in thailand at present is around 46 %. the picture in indonesia is even worse. hong kong has therefore fared better in respect of credit risk than its neighbours. it has no doubt been helped in this by the solid regulatory framework in hong kong and the infrastructure of business laws that makes it relatively easy to take and realize collateral and to put defaulting borrowers into liquidation. banks are also free to carry on their business without political interference. i believe that hong kong has also benefited from its openness as a financial centre, though this can also have its drawbacks. major international banks are allowed to play a full role in our banking system, including in many cases participating as full retail banks. this has allowed cross - fertilization of talent, systems and products between the local and foreign banks. finally, another point in hong kong ’ s favour is that it had already gone through a banking crisis in the early 1980s, in which abuses such as connected lending had played a part. this provided a stimulus to major reform of the banking law and to improvement of supervisory standards, a process that has continued to this day. we should not however allow the relatively better credit performance of hong kong during the crisis to lull us into a sense of complacency. much of the blame for the rise in bad debts in hong kong can indeed be laid at the door

monetary authority has a major influence on the determination of policy through close liaison with the financial secretary and membership of the advisory committee. although the hong kong arrangement, and in particular the status of our monetary authority, is unusual internationally and may possibly be unique when compared to the more typical set - up of a central bank established as a distinct corporate entity, the process of monetary policy may not in practice be greatly different from that in other jurisdictions – with the broad framework being set by the government and with the central bank executing the policy in a transparent and accountable fashion. however, we do not have such a precisely defined framework of autonomy for the central bank as exists in some other jurisdictions, which is sometimes regarded as a necessary formal safeguard to monetary stability. the distinction may be less important under our firmly rule - based currency board system than it might be in other circumstances. legal parameters let's turn now to the " what " question. although, as noted already, the basic law clearly states that the hong kong government shall determine its own monetary policy, it also sets some very important parameters within which that freedom can be exercised. thus : " the hong kong dollar, as the legal tender in the hong kong special administrative region, shall continue to circulate. " ( article 111 ) " no foreign exchange control policies shall be applied in the hong kong special administrative region. the hong kong dollar shall be freely convertible. … …. the government of the hong kong special administrative region shall safeguard the free flow of capital within, into and out of the region. " ( article 112 ) " the exchange fund of the hong kong special administrative region shall be managed and controlled by the government of the region, primarily for regulating the value of the hong kong dollar. " ( article 113 ) " the hong kong special administrative region shall follow the principle of keeping the expenditure within the limits of revenues in drawing up its budget, and strive to achieve a fiscal balance, avoid deficits and keep the budget commensurate with the growth rate of its gross domestic product. " ( article 107 ) these stipulations confirm the continuance of the hong kong dollar as an independent currency ; they confirm that the exchange fund is available to regulate the exchange rate ; they rule out the use of exchange controls ; and they provide some comfort that deficit fiscal financing should not attain a scale that would pose a serious threat to monetary stability. choice of regime but within these parameters the exact monetary arrangements are not prescribed. we have chosen to operate