eddie yue : financial markets in asia - turning challenges into opportunities speech by mr eddie yue, deputy chief executive of the hong kong monetary authority, at the international swaps and derivatives association ( isda ) 34th annual general meeting, hong kong, 10 april 2019. * * * thank you for inviting me to speak at the isda annual general meeting. for those of you coming from overseas, let me welcome you to hong kong and the very dynamic asian region. by now, i hope you have experienced and enjoyed the vibrancy of the city. indeed, this same vibrancy runs through asia, which has got strong economic momentum with a promising outlook. but as central bankers, our job is to be on the lookout for future challenges and how to overcome them. so today i ’ d like to start by outlining two near - term risks on my radar screen, and then discuss two longer - term challenges for asia. i would then offer some thoughts on how financial sector developments, including a lot of the efforts that isda has been involved in, can help overcome these challenges. challenges for the asian economies asia has seen remarkable economic growth over the past several decades – its gdp, on a purchasing power - adjusted basis, now accounts for more than 44 percent of global output, up from just 30 percent in year 2000. living standards have improved dramatically, and per capital income has more than tripled over this period. behind this incredible economic momentum are globalisation, investments, and supportive government policies, factors expected to continue to drive the region for the foreseeable future. indeed, the asian region is expected to grow at 5 percent per year through 2023, easily topping all other regions of the world. robust regional economic development has benefitted hong kong, just as the services we provide as an international financial centre has benefitted the region. hong kong offers an excellent platform for global businesses and investors, governed by a well - established legal system, backed by a resilient banking sector, and supported by its geographic and cultural proximity to china. our city has become a global leader in ipo fundraising, bond issuance, asset management, and renminbi products. in addition, innovation – both financial and technological – is a key policy priority and is at the heart of the city ’ s future plans. but underlying this promising trend for asia is a number of challenges. the most important downside risk to our region at this juncture is the china - us trade war. some negative

the concern comes when price deflation, as part of the adjustment process under the link, turns into the kind of spiralling deflation that inhibits investment and fuels recession. at present, and despite nearly three years of steady price deflation, this does not appear to be happening. indeed, the experience last year of robust growth and moderate price decline underlines the point that price deflation and economic expansion are quite compatible under a linked exchange rate system. i have tried to place these complaints about the link in a larger perspective. that is not to deny that the complaints have some validity. the link does have shortcomings. it does impose restrictions. we should all have the courage to speak of and accept them, while not overlooking the advantages of the system. and there are two clear and simple advantages of overriding importance for hong kong. a stable exchange rate provides a predictable and conducive business environment for an economy that imports practically everything that it consumes, processes or re - exports. and, for a financial centre with strong international capital flows but no capital controls, linking our currency to a strong international currency provides stability and strength. although not perfect, the link has served hong kong well, and there is no better and less risky alternative. there is no intention or plan to change or abandon it. given the renewed interest in the subject, and for the sceptics who remain, let me go the extra mile here for their benefit. let me tackle the question of what would happen if hong kong were to depeg. within the hkma we think of this a great deal. this is not because we expect or intend it to happen. it is because any responsible central banking institution must have an idea of what conditions might be like under an alternative system - if only to clarify its understanding of, and justify its adherence to, the present system. and any organisation must have contingency plans to deal with the unexpected and the unintended. we do not, of course, make public our contingency plans, though we do, as i have mentioned earlier, make public a great deal of research carried out within the hkma or under our auspices on issues surrounding the link. what, then, might happen if hong kong were to depeg? the answers would, of course, depend on what monetary policy was adopted in its place. it would also depend on domestic, and particularly external, conditions at the time. the outcome could, i think, even