been the equivalent value in us dollars calculated at the fixed rate of 7. 80. within this framework the volume of note issuance itself is neutral in terms of monetary policy. there was a time back in history when it could have been claimed with some justification that hsbc, as it is now known, which then served as clearing bank to the banking system, wielded considerable influence over monetary conditions, but that capability was dismantled progressively, by the requirement introduced in 1988 for hsbc to hold a countervailing balance with the exchange fund, by the creation of the hong kong monetary authority in 1993, and by hkma's subsequent assumption, in 1996, via the exchange fund, of the role of settlement institution for the local payments system. government and monetary authority so, having dismissed the possible involvement of a number of other players, we are left with the clear conclusion that it is in essence the hong kong government which determines monetary policy. more specifically, the authority rests in the first instance with the financial secretary, since the exchange fund ordinance places him in control of the exchange fund, which in effect provides the resources for for a discussion, in lighter vein, of the relationship between hkma and other central banks, including pboc, see the viewpoint article " central bank cooperation ", 8 november 2001, at www. info. gov. hk / hkma / eng / viewpt. the conduct of monetary policy. he is, however, obliged to consult the exchange fund advisory committee in the exercise of his control of the exchange fund. the exchange fund ordinance also provides for the financial secretary to appoint a person as the monetary authority, to assist him in the performance of these and certain other functions. moreover, the financial secretary delegates various of his duties under the exchange fund ordinance to the monetary authority. in fact, the monetary authority is a public officer and therefore formally just a single person, but the ordinance provides for other persons to be engaged to assist him in the discharge of his duties. this gives rise to the institution which is known as the hong kong monetary authority. the upshot of all this is that it is the financial secretary who ultimately determines monetary policy, albeit having taken advice from the advisory committee. and it is the monetary authority who carries out monetary policy on a day - to - day basis and in accordance with any delegations to him. this does not mean, however, that the monetary authority is divorced from the formulation of policy – rather the opposite in practice, since the

, domestic prices would adjust to offset that disequilibrating tendency. in other words, it seems unlikely that shifts in relative price competitiveness would be greatly different under conditions of exchange rate variability than without it – there would simply be a different mix between shifts in relative domestic prices and the exchange rate effect. it is evident anyway that the hong kong economy complements the mainland's more than it competes with it. hong kong benefits from a buoyant mainland economy. if this buoyancy is judged to be best sustained by some increased flexibility in the renminbi exchange rate – and i make no judgement here as to whether that would or would not be the case – then hong kong would be likely to benefit. what i have suggested so far is that the exchange rate between the two currencies is probably not something which we need worry greatly about in terms of economic impact via competitiveness and trade. thus hong kong ought not to need to take any particular defensive or offsetting action if the renminbi were to move more widely against the us dollar. there is, however, an important qualification to that conclusion. if financial markets believe differently, and react to those beliefs, we may see disturbances in markets as a result of actual or rumoured developments in the mainland's exchange rate policy. we have indeed already witnessed some such behaviour from time to time when reports have circulated about imminent adjustments to the renminbi. yet, as on those occasions, so on future ones i would expect our markets to cope satisfactorily with such disturbances – essentially through the currency board's adjustment mechanism whether to upward or downward pressures on the hk dollar exchange rate – and economic fundamentals ultimately to prevail. see " why blame the peg? ", available on the hkma website ( www. info. gov. hk / hkma / eng / speeches ) and forthcoming in hkma quarterly bulletin, may 2002. " price convergence between hong kong and the mainland ", by jiming ha ; to be available shortly in the hkma research memorandum series. fixing to the renminbi? however, the conclusion that we should not be too agitated about the hk dollar - renminbi exchange rate begs a further question. if, indeed, the bilateral exchange rate arrangement does not of itself matter much in the long - term determination of price competitiveness, why not anyway tie your currency in some way to that of your closest neighbour or major trading partner, as a matter of convenience