of production, notably labour and capital, with the asymmetry in capital mobility between the mainland and hong kong presenting the most obvious obstacle. these restrictions may well be there for good reasons, but they do not mean that the development of a working relationship that is beneficial to both financial systems and to the country as a whole can just be left to market forces. there is a clear case for the involvement of the authorities responsible for these policy areas. to be sure, there have been notable co - operative efforts between the two financial systems, both between the authorities and between the private sectors of the two financial systems, and these have been quite obvious since the resumption of the exercise of sovereignty. these efforts have arisen simply out of need, particularly where the free play of market forces has been possible, and through the initiatives of the authorities concerned, where a common understanding can be arrived at concerning the common benefits that could flow from the removal of restrictions. but i think it is fair to say that the process has not always been a smooth one. neither has the outcome been as productive as it could be, at least when assessed, narrowly some say, against the fundamental objective of making the two financial systems work together for their mutual benefits and in the best interests of the one country. it is not hard to understand the obstacles to developing a mutually beneficial relationship between the two financial systems. naturally, with financial restrictions much more prevalent on the mainland than in hong kong, relationship - building between the two financial systems, to the extent that it involves relaxation of financial restrictions, invariably requires policy decisions on the mainland. in making such decisions, the mainland authorities have to weigh carefully the benefits of financial liberalisation with the over - riding need to avoid doing anything that will destabilize such a large and complex economy. this need for balance and careful sequencing of the reforms that are introduced is, i believe, well understood by the mainland authorities. it is something that we in hong kong, in our desire for rapid change, need to approach with understanding and patience. one thing remains clear : the utility of the financial system of hong kong to the country as a whole. the mutual benefits of financial co - operation are also clear – on the one hand greater efficiency of financial intermediation and therefore greater sustainability of economic growth and development on the mainland and on the other hand the successful maintenance of hong kong as an international financial centre in accordance with the requirement laid down in article 109 of the basic law. both are

of government ’ s economic and social objectives. on the other hand, it must be acknowledged that the government ’ s determination to run fiscal surpluses throughout the cycle, and to achieve further reductions in net public sector debt, has been one of the important reasons why foreign investors have been willing to finance new zealanders ’ insatiable appetite for borrowing in recent years. should there be no government fiscal response to the present situation, and should a fiscal deficit subsequently emerge, the confidence of foreign investors could be somewhat undermined - with resultant upward pressure on interest rates and downward pressure on the exchange rate. last week, the government statistician announced that the gross overseas debt of new zealand banks and corporates had risen by $ 20. 1 billion during the year to 31 march 1998, to reach a total of $ 79. 0 billion. of this increase, it was stated that $ 6. 2 billion was on account of the increase in the new zealand dollar value of foreign currency debt. it was also noted, however, that the figures took no account of ‘ hedging or other financial derivatives used by companies to offset potential foreign currency risk. ’ the significance of this note has almost certainly been missed by many commentators, because it is quite clear that all banks, and i suspect most corporates, hedge their foreign - currency denominated liabilities in full or in substantial part. certainly at 31 march 1998, the four largest banks, which have been heavy borrowers of foreign funds in recent years, carried almost no foreign exchange risk on that borrowing. this means that the increase in the new zealand dollar equivalent of the gross overseas liabilities of the banking system as a result of the depreciation in the new zealand dollar, included in the debt figures published by the government statistician, will have been almost exactly matched by gains on the banks ’ currency hedges. the press, 23 june 1998. moreover, in recent years it has been possible to argue that new zealand ’ s balance of payments deficit has been a result of investment exceeding saving in the private sector ; the public sector was more than funding its own investment activities through its operating surplus. in 1998 / 99, the budgeted operating surplus looks likely to be broadly similar to public sector investment. if the operating surplus turns out to be less than now budgeted, perhaps because economic growth turns out to be slower than projected, it is possible that public sector investment will exceed the operating surplus. in other words, if the operating surplus turns out