Hong Kong's International Financial Centre: Retrospect and Prospect

in October 1983 and the signing of the Sino-British Joint Declaration in December 1984.
Financial crises preceded its creation, and financial crises pushed it to new heights in 1998 and
again ten years later when it stepped into the limelight with the Financial Secretary and once
again restored confidence in Hong Kong’s banking system. (It used the Exchange Fund to
guarantee customer deposits not only in core authorized institutions, but also in banks with
restricted licenses and other deposit-taking companies. It initiated a Contingent Bank Capital
Facility to inject new capital, if necessary, directly into financial intermediaries. It introduced
temporary measures to allow liquidity to be provided to licensed banks. As noted above, in 1998
it also used HK$118 billion to buy a range of non-financial stocks in a successful bid to stabilize
markets and discourage activity deemed excessively speculative.)
From the beginning, then, the HKMA was assigned many responsibilities: for maintaining
the linked exchange rate system and managing associated reserves, safeguarding monetary and
banking stability, for developing the financial infrastructure necessary to support a resilient
international financial centre, for investing surplus cash generated by government, and for
resolving financial emergencies. Over time, without complete or clear statutory foundations
beyond those required for the linked exchange rate system, it became a quasi-central bank. From
the point of view of a Chief Executive or a Financial Secretary, one can see the attractions of this
one-stop, and not independent, shop. In fact, it has proven to be a generally successful
instrument of executive power. It has also been well led.
As in the similar case of the Monetary Authority of Singapore, at its inception the
government agreed to executive compensation levels in the HKMA in excess of those prevailing
in the civil service. In later years, second thoughts about some aspects of that agreement may
have occurred to senior officials, but they have typically been assuaged by calculations of
political utility. To the extent it is perceived to be more than the manager of a currency board,
indeed, to be a central bank and primary financial supervisor, the HKMA provides the
government with a useful political buffer and an effective instrument for steering a modern
market economy and, in a pinch, for managing financial crises.
The question now naturally arises. Why change anything? The linked exchange rate
seems secure. Hong Kong’s financial system has proven itself to be resilient.
The current circumstances do not, in fact, suggest the need for root-and-branch reform of
the HKMA. But both recent events and the prudent anticipation of changing circumstances do
suggest the need for open minds capable of thinking strategically. At the very least, the Lehman
mini-bonds incident reflected some weaknesses in the supervision of financial institutions at the
point-of-sale. Having shed harsh light on the gap between prudential oversight and the
regulation of products not necessarily suitable for most non-professional investors, some were
likely tempted to extend the HKMA’s remit into the area of consumer protection. But all
bureaucracies have limits. To assign such responsibilities to the HKMA would have been to risk
continuing success in its core missions. Moreover, the products that would conceivably have to
be regulated under such a rubric will likely continue to be difficult to differentiate from similar
products sold by non-banks. After all, the global processes of securitization and de-
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