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https://www.bis.org/review/r971001f.pdf
1987-08-29T00:00:00
Mr. Bäckström elucidates the problems Sweden went through in the early 1990s, and considers whether other countries might draw lessons from the Swedish experience (Central Bank Articles and Speeches, 29 Aug 87)
Talk given by the Governor of the Swedish Riskbank, Mr. Urban Bäckström, at the Jackson Hole symposium organised by the Federal Reserve Bank of Kansas City on 29/8/87.
Mr. Bäckström elucidates the problems Sweden went through in the early 1990s, and considers whether other countries might draw lessons from the Swedish experience Talk given by the Governor of the Swedish Riskbank, Mr. Urban Bäckström, at the Jackson Hole symposium organised by the Federal Reserve Bank of Kansas City on 29/8/87. First a word of thanks to the Federal Reserve Bank of Kansas City for the invitation to discuss the financial problems Sweden went through in the early 1990s. I shall also try to draw some conclusions from our experiences that may be relevant for other countries. Before I came to Sveriges Riksbank I was State Secretary at the Ministry of Finance and involved among other things in the management of Sweden's financial crisis. While there had, of course, been a good many indications of mounting problems, I was personally made formally aware of the acute and severe financial crisis by a phone call. At the beginning of October 1991, I had been in the job just a few days when I got a call from the head of the Financial Supervisory Authority (banking supervision in Sweden is performed by this authority, not by the central bank). He wanted to inform the Government that a large Swedish bank had more than exhausted its equity capital and would have to go bankrupt if a reconstruction could not be arranged. While working at the Ministry of Finance on the initial problems in the banking sector we started to study historical and international records of financial crises. Irving Fisher's well-known paper in Econometrica, "The Debt-Deflation Theory of Great Depressions," from 1933 provided inspiration. We also came across a new volume, "The Risk of Economic Crisis", edited by Martin Feldstein and containing interesting contributions by, among others, Benjamin Friedman, Paul Krugman, Lawrence Summers and our chairman today, E. Gerald Corrigan. The conclusion from these sources was that a fall in asset prices, such as we had in Sweden, may create problems for private sector balance sheets, affect the supply of credit and result in payment system disturbances. Step by step this may affect spending decisions by households and firms, thereby impinging on general economic activity. A destabilised financial system can bring the economy into what Fisher termed "debt deflation", that is, a situation where the financial crisis may become very serious and protracted. Thus it was important both to avoid a widespread failure of Swedish banks and to bring about a macroeconomic stabilisation. The two are interdependent. The collapse of much of the banking system would aggravate the macroeconomic weaknesses, just as failure to stabilise the economy would accentuate the banking crisis. But here first is a brief account of the Swedish crisis. The Swedish crisis - what happened? The economic problems in Sweden in the early 1990s should be seen in their historical context. For several reasons, economic growth in Sweden has been relatively weak ever since about 1970. Following the collapse of the Bretton Woods system the creation of a stable macroeconomic environment turned out to be difficult. Wage formation functioned badly, fiscal policy was unduly weak and this was gradually compounded by structural problems. Credit market deregulation in 1985, necessary in itself, meant that the monetary conditions became more expansionary. This coincided, moreover, with rising activity, relatively high inflation expectations, a tax system that favoured borrowing, and remaining exchange controls that restrained investment in foreign assets. In the absence of a more restrictive economic policy to parry all this, the freer credit market led to a rapidly growing stock of debt (see Fig.). In the course of only five years the GDP ratio for private sector debt moved up from 85 to 135 per cent. The credit boom coincided with rising share and real estate prices. During the second half of the 1980s real aggregate asset prices increased by a total of over 125 per cent. A speculative bubble had been generated. The expansion of credit was also associated with increased real economic demand. Private financial saving dropped by as much as 7 percentage points of GDP and turned negative. The economy became overheated and inflation accelerated. Sizeable current-account deficits, accompanied by large outflows of direct-investment and other long-term capital (once exchange control had been finally abandoned in the late 1980s), led to a growing stock of private sector short-term debt in foreign currency. Step by step the Swedish economy became increasingly vulnerable to shocks. During 1990 matters came to a head. Competitiveness had been eroded by the relatively high inflation in the late 1980s, resulting in an overvalued currency. This caused exports to weaken and meant that the fixed exchange rate policy began to be questioned, leading to periods with relatively high nominal interest rates. Moreover, the tax system was reformed in order to reduce its harmful economic effects, but this also contributed to higher post-tax interest rates. Asset prices began to fall and economic activity turned downwards. Between the summers of 1990 and 1993 GDP dropped by a total of 6 per cent. Aggregate unemployment shot up from 3 to 12 per cent of the labour force and the public sector deficit worsened to as much as 12 per cent of GDP. A tidal wave of bankruptcies was a heavy blow to the banking sector, which in this period had to make provisions for loan losses totalling the equivalent of 12 per cent of annual GDP. While this course of events stemmed, as I have indicated, from a variety of factors, it was no doubt the financial vulnerability that helped make it so dramatic. The Swedish economy was steadily approaching a situation that entailed both a banking and a currency crisis. Matters were most acute in the fall of 1992 in conjunction with the European currency unrest. The crisis in banking was triggered, not by a classic bank run but by a loss of international confidence and difficulties with international financing. In many respects the crisis in Sweden resembled what has happened in a number of other countries. By the summer of 1993 the economy was becoming more stable and the problems in banking receded. Fiscal and monetary policy contributed to this and so did a deliberate policy of handling problem banks. The private sector's financial balance underwent a dramatic change, moving from a deficit of about 8 per cent of GDP in 1990 to a financial surplus of over 11 per cent in 1993. This was a swing of almost 20 percentage points of GDP in the course of only three years. A good deal of the swing no doubt came from private sector adjustments to cope with insufficient solvency. Falling asset prices in conjunction with high debt levels lead to balance-sheet problems in the private sector. The automatic stabilisers in the government budget probably helped to lessen the contraction of GDP. This meant that business profits and household disposable income were sustained relatively well. But it also entailed a massive increase in the budget deficit and this in turn generated new problems. The government debt trend became unsustainable and economic policy's credibility was weakened. In the early stages of the crisis, monetary policy was directed to maintain the fixed exchange rate. This line had broad support among the general public as well as in the political system. The aim was to establish a low-inflation policy once and for all. But in spite of major efforts, both political and economic, the international currency unrest in November 1992 meant that the fixed exchange rate had to be abandoned. It was replaced by a flexible exchange rate and an explicit inflation target. This resulted in a considerable depreciation of Sweden's currency, but during 1993 the continued fall in international bond rates meant that Swedish interest rates also moved down to levels that were comparatively low. Together with the Riksbank's reduction of its instrumental rate, this gave the monetary conditions a stimulatory turn. It also helped to stabilise both the economy and the banking system. Lower market rates eased the fall in asset prices, lightened the burden of servicing private sector debt and mitigated the negative impact on the financial system. Rescuing the banking sector was necessary to avoid a collapse of the real economy. There is no evidence that a credit crunch developed, though anecdotal information did suggest that creditors became more restrictive. I shall be returning shortly and in more detail to how the banking problems were tackled. In 1994, the major budget problems and the expansionary monetary conditions rebounded. Inflation expectations began to move up in many parts of the economy and when interest rates increased worldwide in the spring of 1994, bond rates in Sweden rose much more than in other countries - from just under 7 per cent to over 12 per cent in a few months. This was accompanied by a further weakening of the exchange rate to levels that were appreciably below any reasonable assessment of the real equilibrium rate. The situation called, in other words, for an economic policy realignment -- for what we can call aftercare -- once the acute financial crisis had been checked. A major consolidation of government finance was launched, accompanied by a tightening of the monetary stance which demonstrated that the 2 per cent inflation target was to be taken seriously. In time, this course has enhanced economic policy's credibility and led to more permanent economic stabilisation. Management of the bank crisis To those of us who were working on the initial banking problems it was soon clear that the crisis in Swedish banking could become very serious. In spring 1992, preparations were therefore made to cope with a variety of conceivable situations. Later we found that our worst-case scenario was on the verge of happening. Looking back, one can see that in the course of the crisis the seven largest banks, with 90 per cent of the market, all suffered heavy losses. In these years their aggregate loan losses amounted to the equivalent of 12 per cent of Sweden's annual GDP. The stock of non-performing loans was much larger than the banking sector's total equity capital and five of the seven largest banks were obliged to obtain capital contributions from either the State or their owners. It was thus truly a matter of a systemic crisis. In connection with a serious financial crisis it is important first and foremost to maintain the banking system's liquidity. It is a matter of preventing large segments of the banking system from failing on account of acute financing problems. In September 1992, the Government and the Opposition jointly announced a general guarantee for the whole of the banking system. The Riksdag, Sweden's parliament, formally approved the guarantee that December. This broad political consensus was I believe of vital importance and made the prompt handling of the financial crisis possible. The bank guarantee provided protection from losses for all creditors except shareholders. The Government's mandate from Parliament was not restricted to a specific sum and its hands were also very free in other respects. This necessitated close cooperation with the political opposition in the actual management of the banking problems. The decision was of course troublesome and far-reaching. Besides involving difficult considerations to do, for example, with the cost to the public sector, it raised such questions as the risk of moral hazard. The political system concluded that in the event of widespread failures in the banking system, the national economy would suffer major repercussions. The direct outlays in connection with the capital injection into the banking sector added up to just over 4 per cent of GDP. However, it is now calculated that most of this can be recovered. One way of limiting moral hazard problems was to engage in tough negotiations with the banks that needed support and to enforce the principle that losses were to be covered in the first place with the capital provided by shareholders. A separate authority was set up to administer the bank guarantee and manage the banks that landed in a crisis and faced problems with solvency, though the crucial decisions about the provision of support were ultimately a matter for the Government. A clear separation of roles was achieved between the political level and the authorities, as well as between different authorities. Naturally this did not preclude very close cooperation between the Ministry of Finance, the Bank Support Authority, the Financial Supervisory Authority and the Riksbank. It was up to the Riksbank to supply liquidity on a relatively large scale at normal interest and repayment terms, but not to solve problems of bank solvency. Collateral was not required for the loans to banks, neither intraday nor overnight. The banking system was free to obtain unlimited liquidity by drawing on its accounts with the central bank. The bank guarantee meant that the solvency of the Riksbank was not at risk. In order to offset the loss of foreign credit lines to Swedish banks, during the height of the crisis the Riksbank also lent large amounts in foreign currency. Banks applying for support had their assets valued by the Bank Support Authority, using uniform criteria. The banks were then divided into categories, depending on whether they were judged to have only temporary problems as opposed to no prospect of becoming viable. Knowledge of the appropriate procedures was built up by degrees, not least with the assistance of people with experience of banking problems in other countries. The Swedish Bank Support Authority had to choose between two alternative strategies. The first method involves deferring the reporting of losses for as long as is legally possible and using the bank's current income for a gradual write-down of the loss making assets. One advantage of this method is that it helps to avoid the bank being forced to massive sales of assets at prices below long-run market values. A serious disadvantage is that the method presupposes that the bank problems can be resolved relatively quickly; otherwise the difficulties compound, leading to much greater problems when they ultimately materialise. The handling of problems among savings and loan institution in the United States in the 1980s is a case in point. With the other method, an open account of all expected losses and writedowns is presented at an early stage. This clarifies the extent of the problems and the support that is required. Provided the authorities and the banks make it credible that no additional problems have been concealed, this procedure also promotes confidence. It entails a risk of creating an exaggerated perception of the magnitude of the problems, for instance if real estate that has been taken over at unduly cautiously estimated values in a market that is temporarily depressed. This can lead, for instance, to borrowers in temporary difficulties being forced to accept harsher terms, which in turn can result in payments being suspended. The Swedish authorities opted for the second method: disclose expected loan losses and assign realistic values to real estate and other assets. This method was consistent with other basic principles for the bank support, such as the need to restore confidence. Looking back, it can be said that in general the level of valuation was realistic. Since the acute crisis had been triggered by difficulties in obtaining international finance, great pains were taken to give a transparent picture of how the crisis was being managed, so as to gain the confidence of Sweden's creditors. This applied both to the account of the magnitude of the banking problems and to the content of the bank guarantee. Various informative projects were arranged for this purpose throughout the world. In Sweden, too, considerable efforts were made to legitimise the measures and their costs. The banking problems did arouse a lively debate in Swedish society, but the work could still be done in broad political consensus, which was a great advantage. The bank guarantee was terminated in 1996 and replaced with a deposit guarantee that is financed entirely by the banks. Conclusions The problems in the Swedish banking system at the beginning of this decade seem to have been more extensive than those which arose in Sweden in the early 1920s. The two periods also differ substantially in the management of the crisis. This may have had a bearing on the very different course of events in these two crises. In the early 1920s, the fall in GDP totalled 18 per cent and the price level dropped 30 per cent in the course of two years. In the 1990s the loss of GDP stopped at around 6 per cent and the price trend did not become really deflationary. Allow me now to summarise what I consider to be the most important lessons from Sweden's financial crisis: 1. Prevent the conditions for a financial crisis The primary conclusion from our experience of Sweden's financial crisis is that various steps should be taken to ensure that the conditions for a financial crisis do not arise. - Fundamentally it is a matter of conducting a credible economic policy focused on price stability. This provides the prerequisites for a monetary policy reaction to excessive increases in asset prices and credit stocks that would be liable to boost inflation and create the type of speculative climate that paves the way to a financial crisis. - Looking back, it can be said that if various indicators that commonly form the background to a financial crisis had been followed systematically, then incipient problems could have been detected early on. That in turn could have influenced the conduct of fiscal and monetary policy so that Sweden's financial crisis was contained or even prevented. In spite of the evident signs, few -- if any -- in the public discussion warned of what might happen. Martin Feldstein offers an interesting explanation in his introduction to "The Risk of Economic Crisis" from 1991. At that time, the industrialised world had not experienced an outright financial crisis since the 1930s. As a result, economists had devoted relatively little work to the analysis of this subject, being more concerned to understand the more normal economic world. This symposium is a positive sign that matters have changed in that respect. The conclusion drawn by the Riksbank is that various indicators must be followed systematically with the aim of detecting any signs of potential financial problems and systemic risks. - In Sweden's case the supervisory authority was not prepared for the new environment that emerged after credit market deregulation. This meant that during the 1980s the banks were able to grant loans on doubtful and sometimes even directly unsound grounds without any supervisory intervention. In addition, in many cases the loans were poorly documented. The lesson from this is that much must be required of a supervisor operating in an environment characterised by deregulated markets. 2. If a financial crisis does occur In a sense all major financial crises are unique and therefore difficult to prepare for and avoid. Once a crisis is about to develop there are some important lessons concerning its handling that can be learnt. - If an economy is hit by a financial crisis, the first important step is to maintain liquidity in the banking system and prevent the banking system from collapsing. For the management of Sweden's banking crisis the political consensus was of major importance for the payment system's credibility among the Swedish public as well as among the banking system's creditors throughout the world. The transparent approach to the banking problems and the various projects for spreading information no doubt had a positive effect, too. - The prompt and transparent handling of the banking sector problems is also important. The terms for recapitalisation should be such as to avoid moral hazard problems. - Automatic stabilisers in the government budget and stimulatory monetary conditions can help to mitigate the economy's depressive tendencies, but they also entail risks. Economic policy has to strike a fine balance so that inflation expectations do not rise, the exchange rate weakens and interest rates move up, which could do more harm than good. In this respect a small, open economy has less freedom of action than a larger economy. - It is important both to avoid a widespread failure of banks and to bring about a macroeconomic stabilisation. The two are interdependent. The collapse of much of the banking system would aggravate the macroeconomic weaknesses, just as failure to stabilise the economy would accentuate the banking crisis. References Feldstein, M., (ed.), (1991), The Risk of Economic Crisis, NBER Conference Report, University of Chicago Press, Chicago and London. Fisher, I., (1933), The Debt-Deflation Theory of Great Depressions, Econometrica, vol. 1 (October), pp. 337-357. Ingves, S. and Lind, G., (1996), The management of the bank crisis - in retrospect, Quarterly Review, No. I, pp. 5-18, Sveriges Riksbank.
- Historical and international records, such as Irving Fisher's debt-deflation theory, highlight how falling asset prices can destabilize economies, leading to severe financial crises. - Sweden's financial crisis in the early 1990s stemmed from several factors, including weak economic growth since the 1970s, poor wage formation, weak fiscal policy, structural problems, and financial deregulation in 1985. - Deregulation led to increased credit and debt, speculative bubbles in asset prices, and economic overheating, culminating in a vulnerable economy by 1990. - The crisis intensified in 1992 due to international currency unrest, leading to a loss of confidence and difficulties with international financing. - A comprehensive bank guarantee was implemented to maintain liquidity in the banking system and prevent widespread failures. - The crisis management involved close cooperation between the Ministry of Finance, the Bank Support Authority, the Financial Supervisory Authority, and the Riksbank. - The Swedish authorities opted to disclose expected loan losses early to restore confidence and avoid greater future problems. - Transparency in handling the crisis was crucial to gaining the confidence of international creditors. - The banking crisis was resolved by 1993, with the economy stabilizing due to fiscal and monetary policies, including the adoption of a flexible exchange rate and an inflation target. - Key lessons from Sweden's crisis include the importance of credible economic policies focused on price stability, systematic monitoring of financial indicators, and preparedness of supervisory authorities in deregulated environments. - In case of a financial crisis, maintaining banking system liquidity, transparent crisis management, and avoiding moral hazard in recapitalization are vital. - Automatic stabilizers and stimulatory monetary conditions can mitigate economic contractions but risk raising inflation expectations and interest rates. - Macroeconomic stabilization and avoiding widespread bank failures are interdependent and critical to resolving financial crises effectively.
Urban Bäckström
Sveriges Riksbank
SE
Governor
Governor
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https://www.bis.org/review/r970211c.pdf
1996-09-10T00:00:00
Mr. Chen discusses monetary relations between China and Hong Kong (Central Bank Articles and Speeches, 10 Sep 96)
Speech by the Deputy Governor of the People's Bank of China, Mr. Chen Yuan, at the Bank of England Seminar held in London on 10/9/96.
Mr. Chen discusses monetary relations between China and Hong Kong Speech by the Deputy Governor of the People's Bank of China, Mr. Chen Yuan, at the Bank of England Seminar held in London on 10/9/96. INTRODUCTION In less than three hundred days, China will resume the exercise of sovereignty over Hong Kong. Given Hong Kong's role as an international financial centre, it is natural for the international investment community to be interested in the future of Hong Kong. I am grateful to Governor George for giving me this opportunity to share with this distinguished audience the Chinese Government's policy on the monetary relationship between the mainland of China and Hong Kong after 1997. By way of introduction, let me first explain the origin of the basic principle of "one country, two systems", which forms the backbone of China's policy towards the Hong Kong Special Administrative Region as from 1 July 1997. This will help people to understand why China is so committed to implementing this very important principle in Hong Kong. THE "ONE COUNTRY, TWO SYSTEMS" PRINCIPLE What does "one country, two systems" mean? It means that after 1997, the socialist system and policies shall not be practised in the Hong Kong Special Administrative Region, and the previous capitalist system and way of life shall remain unchanged for 50 years. This principle was not a compromise solution reached in the Sino-British negotiations for political expedience. It was not even an idea floated by the British side. It was in fact a paramount guiding principle adopted by the Chinese Government for advancing the unification of China. The principle was also the outcome of intense research by the Chinese Government on what factors contributed to the economic success and stability of Hong Kong and how they could be preserved beyond 1997. We are convinced that this principle would serve not only China's long-term national interest but also that of Hong Kong. It was against this background that the Chinese Government put forward in the negotiations the concept of "One Country, Two Systems" and the guiding principles. These were subsequently incorporated in the Sino-British Joint Declaration in 1984 and then in the Basic Law promulgated by our National People's Congress in 1990. I should add that the principle of "one country, two systems" as a fundamental policy for the unification and development of China has been written into our country's constitution and become a long-term irreversible national policy. The Sino-British Joint Declaration is a treaty registered with the United Nations. The Chinese Government is committed to implementing fully and faithfully the provisions of the Joint Declaration and the Basic Law. My second point is that notwithstanding our commitment, there is no lack of sceptics who doubt that the Chinese Government would abide by the Basic Law and fulfil its commitments after 1997. This brings to mind those sceptics who doubted China's commitment to the open door policy and the economic reform which China initiated in late 1979. Such critics thought that the problems faced by China in the reform process were so huge that we were doomed to fail. They also doubted how our economic reform could square with China's socialist economy. Today, you and I can both see that these critics have been proven wrong. Between 1979 and 1995, China's GDP has increased by an average of 9.9% every year and the standard of living has improved significantly. The economic and monetary conditions and the legal and institutional reform of our financial sector have made progress beyond the expectations of many. China's foreign reserves reached a record high of US$ 90.7 billion in early August 1996. The critics are right in pointing out that China is a vast country, with a large population of over 1.2 billion people. It is natural that in the implementation of our reform we could run into difficulties of one sort or another. At times we need to adjust our pace a bit to resolve those problems but there is no question that China is firmly resolved to continuing with economic reform. Equally, China remains firmly and totally committed to maintaining the prosperity and stability of Hong Kong, in accordance with the provisions of the Joint Declaration and the Basic Law. I am sure that the facts and events will demonstrate that the sceptics will once again be proven to be wrong. Ladies and gentlemen, let me now proceed to outline first the legal and policy framework and then the seven basic principles governing the monetary relationship between the mainland of China and Hong Kong. Finally, I will describe China's policy on Hong Kong's participation in international and regional financial institutions and forums. THE LEGAL AND POLICY FRAMEWORK According to the Joint Declaration and the Basic Law, Hong Kong will enjoy autonomy in all areas other than foreign affairs and defence matters. The key provisions on the monetary and financial sides provide that: The Government of the Hong Kong Special Administrative Region shall provide an appropriate economic and legal environment for the maintenance of its status as an international financial centre. Hong Kong shall, on its own, formulate monetary and financial policies, safeguard the free operation of financial business and financial markets, and regulate and supervise financial activities in accordance with the law. The Hong Kong dollar, as the only legal tender in Hong Kong, shall continue to circulate, and the existing currency issue mechanism shall continue. The Hong Kong dollar shall remain freely convertible, with free flow of capital and no exchange controls. The Exchange Fund, which holds Hong Kong's foreign reserves, shall be managed and controlled by the Government of the Hong Kong Special Administrative Region, primarily for regulating the exchange value of the Hong Kong dollar. The above provisions form the foundation for defining and establishing the monetary relationship between the mainland and Hong Kong under the principle of "one country, two systems". Under these provisions, this relationship can be best summarised as one country, two currencies, two monetary systems and two monetary authorities, under two different social and economic systems within a sovereign state. SEVEN PRINCIPLES GOVERNING THE MONETARY RELATIONSHIP BETWEEN THE MAINLAND AND HONG KONG I will now set out the seven principles governing the monetary relationship between the mainland of China and Hong Kong. The first principle concerns the relationship between the two currencies and between the two monetary systems. According to the Basic Law, Hong Kong will continue to maintain its own system of currency issuance and management after 1997. The Hong Kong dollar and the renminbi will circulate as legal tender in Hong Kong and the mainland respectively. The Hong Kong dollar will be treated as a foreign currency in the mainland. Likewise, the renminbi will be treated as a foreign currency in Hong Kong. The three note-issuing banks in Hong Kong will continue to issue Hong Kong dollar bank notes, with 100% backing by US dollars under the linked exchange rate system. The currency in circulation in Hong Kong is in fact backed over five times by foreign reserves. Here I would like to stress that China supports Hong Kong's commitment to the maintenance of the linked exchange rate system, which has served Hong Kong well by providing monetary stability since its introduction in 1983. Corresponding to the two currencies will be two monetary systems. They possess their own characteristics, reflecting the differences between the two economies. The two monetary systems are of equal importance to China in its reform and liberalisation. One does not precede or be subsidiary to the other. They will operate in a mutually independent manner. The second principle relates to the relationship between the two monetary authorities. It follows from the two mutually independent monetary systems of the mainland and Hong Kong that the two monetary authorities will also be mutually independent. The Hong Kong Monetary Authority will be accountable solely to the Hong Kong government. The People's Bank of China will not take the place of the Hong Kong Monetary Authority and will not set up any office there. As Hong Kong and the mainland develop increasingly close economic ties in both trade and investment, close co-operation between the two monetary authorities becomes even more important. The two monetary authorities must, therefore, strengthen further the present sound co-operation of central banking functions, including monetary management, banking supervision and the development of the financial infrastructure. The third principle concerns co-operation in prudential supervision. According to the Basic Law, the Hong Kong government will continue to supervise financial institutions in Hong Kong, including financial institutions from the mainland. Supervision will continue to be undertaken in accordance with international rules and practices. Notwithstanding different business practices in the mainland and Hong Kong, we have reached consensus on licensing procedures and supervision of each other's financial institutions. It has been agreed that : Financial institutions based in the mainland and Hong Kong setting up offices in each other's territory shall be approved on the same basis as foreign financial institutions. The mainland offices of Hong Kong-based financial institutions shall continue to enjoy the same preferential treatment in the mainland as other foreign financial institutions. mainland financial institutions in Hong Kong shall not enjoy any privileges. They shall abide by the law of Hong Kong and be regulated by the relevant supervisory authorities in Hong Kong. This arm's length treatment will certainly help to underscore the implementation of the "one country, two systems" principle. The fourth principle is that the People's Bank of China will support the currency stability of Hong Kong. On behalf of the PBOC, I have early this year signed a bilateral agreement with the HKMA on the repurchase of US treasury paper. We are prepared to offer liquidity support to the HKMA for the purpose of stabilising the exchange rate of the Hong Kong dollar. We also stand ready to use our foreign reserves to support the Hong Kong dollar, if necessary. However, I must point out that under no circumstances will China draw on or resort to Hong Kong's Exchange Fund or other assets in any way and for any reason. I mentioned earlier that the Basic Law states that the Exchange Fund shall be managed and controlled by the Hong Kong government. It is also stated that the financial revenues of the Hong Kong Special Administrative Region shall be used exclusively for its own purposes. In addition, the Basic Law stipulates that the Chinese Government shall not levy taxes in Hong Kong. These triple safeguards are evidence that China does not have its eyes on siphoning off the resources of Hong Kong. The fifth principle relates to the treatment of financial business between China and Hong Kong. After 1997, all financial business between the two places will be conducted in accordance with the rules and practices of international financial activities. Claims and liabilities between banks and companies from the mainland and those in Hong Kong will continue to be regarded as external claims and liabilities. When raising funds in Hong Kong, Chinese entities will have equal treatment as other international and local market participants, without any special privileges. Disputes relating to contracts between banks and companies of the mainland and those of Hong Kong shall be handled in accordance with international practice. Where China's Arbitration Law and other relevant laws and regulations are applied, the provisions relating to arbitration involving foreign parties will apply. The sixth principle is about the standing of mainland financial institutions in Hong Kong. As discussed earlier, mainland financial institutions in Hong Kong must abide by the law of Hong Kong and be regulated by relevant regulatory authorities there. I would like to stress that the Bank of China group, though being one of the three note-issuing banks and a leading commercial bank in Hong Kong, shall not be treated more favourably than other banks. It shall not carry out any activities beyond the role of a commercial bank. The seventh principle is on the complementarity between Shanghai and Hong Kong. As you know, Shanghai used to be China's financial centre. With China's deepening reforms and open-door policy, Shanghai is becoming a vibrant city with tremendous potential for further development. To a certain extent, Shanghai has met the conditions for reviving herself as a financial centre. While there are concerns as to whether Shanghai will replace Hong Kong, I would like to emphasise that these are groundless speculations because the Basic Law has already stipulated that Hong Kong shall maintain its status as an international financial centre. We are of the view that Hong Kong and Shanghai will have a complementary and mutually reinforcing relationship. In the short run, and at least before the renminbi becomes fully convertible, it will not be possible for Shanghai to become an international financial centre. Given the size of China's economy, there is plenty of room for more than one financial centre. Hong Kong and Shanghai will likely become two complementary and mutually reinforcing financial centres that will each develop with its own characteristics. HONG KONG IN INTERNATIONAL MONETARY RELATIONS Apart from these seven principles, it is also important for Hong Kong as an international financial centre to continue to develop its international monetary relations and participate in the activities of international and regional financial institutions, central bank forums etc. There are therefore provisions in the Joint Declaration and the Basic Law that Hong Kong may, on its own, maintain and develop financial relations and conclude and implement agreements with other countries, regions and relevant international organisations, using the name of "Hong Kong, China". Some international financial organisations restrict their membership to sovereign states. In those cases, where negotiations are held on matters involving Hong Kong, the Chinese Government would normally consult Hong Kong and include its representatives in the Chinese delegation. When entering into international financial agreements which may involve Hong Kong, the Chinese government will first seek the views of Hong Kong before deciding whether such agreements will apply to it. Taken together, these provisions will enable Hong Kong to continue and also develop its current international monetary relationship. PROSPECTS FOR HONG KONG AFTER 1997 I believe Hong Kong will remain prosperous and stable after 1997. Why? This is because: First, the strong economic fundamentals of Hong Kong and the entrepreneurial and management skills of the people of Hong Kong are the basis for its continued prosperity and stability. Secondly, the Basic Law has provided a legal safeguard for the maintenance of the prosperity and stability of Hong Kong. Thirdly, the economic development of the mainland has created excellent conditions for Hong Kong's continued prosperity and stability. As pointed out by China's VicePremier Zhu Rongji at his meeting on 29 May this year with senior officials of four main financial regulators and institutions from Hong Kong including the Hong Kong Monetary Authority - China is confident in Hong Kong's maintaining prosperity and stability and its status as an international financial centre after 1997 because we have full confidence in the economic development of China. As Hong Kong will continue its role as an international financial centre, it will become the most important funding centre for China and very likely for the Asian region as a whole. With the ongoing reform and open-door policy, the mainland of China has achieved sustained and strong economic growth. Our target for economic growth in 1996 is 8% but it could exceed 9%. Inflation should be within the range of 7 to 8% for 1996. The mainland of China's growth will obviously benefit Hong Kong's economy tremendously as we are its largest trading partner. The mainland of China is also one of the leading investors in Hong Kong, with total investment reaching US$ 25 billion last year. At the same time, Hong Kong has also contributed greatly to the mainland of China's reform and modernisation, both in terms of investment and know-how. Hong Kong is the largest investor in the mainland. Total cumulative direct investment from Hong Kong has now reached US$ 78.6 billion, accounting for 58% of total foreign direct investment. In 1995 alone, about half of the foreign direct investment in the mainland came from Hong Kong, which amounted to some US$ 20 billion. Also, for the 23 Chinese companies listed on overseas stock markets, the trading of such overseas stocks is most active in Hong Kong. Out of the 23 companies, 21 had their primary listing in Hong Kong. As China continues with its financial and economic reforms, Hong Kong's role as a financial centre for China will become even more important. It is therefore vital that Hong Kong remain the vibrant financial centre with its own economic system that we know now. We certainly would not do anything which would jeopardise Hong Kong's prospects. To conclude, I have no doubt that Hong Kong will continue to do well after 1997 as it has done in the past three decades during which Hong Kong survived numerous shocks and market turbulence. History has shown that Hong Kong has been extremely resilient to external shocks and was able to regain its vitality and competitiveness through swift internal adjustments. Investors who had the foresight and wisdom of capitalising on the opportunities in Hong Kong have done well and will be able to continue to share in the prosperity of Hong Kong. Ladies and gentlemen, 1997 is not a time when Hong Kong will need a miracle in order to survive the transition. I hope you will also come to the conclusion that China, particularly Hong Kong, offers tremendous business potential for investors, both local and overseas.
- China is committed to the "one country, two systems" principle for Hong Kong, ensuring the continuation of Hong Kong's capitalist system and way of life for 50 years post-1997. - The Chinese Government will implement the Sino-British Joint Declaration and the Basic Law fully and faithfully. - Hong Kong will maintain autonomy in all areas except foreign affairs and defense, with its own monetary and financial policies, free operation of financial markets, and regulation of financial activities. - The Hong Kong dollar will remain the only legal tender in Hong Kong, freely convertible, with free capital flow and no exchange controls. - Hong Kong and China will have separate currencies and monetary systems, with mutual independence of their monetary authorities. - The People's Bank of China (PBOC) and the Hong Kong Monetary Authority (HKMA) will strengthen cooperation in central banking functions, including monetary management and banking supervision. - Mainland financial institutions in Hong Kong will be regulated by Hong Kong's laws and will not receive any special privileges. - The PBOC will support the stability of the Hong Kong dollar and will not draw on Hong Kong's Exchange Fund or assets. - Financial transactions between China and Hong Kong will adhere to international rules and practices. - Hong Kong will maintain its status as an international financial center, with complementary relations with Shanghai. - Hong Kong will continue to develop international monetary relations and participate in international and regional financial institutions using the name "Hong Kong, China." - The economic development of mainland China will benefit Hong Kong's economy, reinforcing its prosperity and stability. - Hong Kong will remain a significant financial center for China and the Asian region, fostering robust economic growth and investment opportunities. - The resilience and adaptability of Hong Kong's economy ensure its continued success post-1997, offering substantial business potential for investors.
Chen Yuan
People's Bank of China
CN
Deputy Governor
Deputy Governor
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https://www.bis.org/review/r970211a.pdf
1996-09-30T00:00:00
"Mr. Dai assesses the outlook for Hong Kong as Asia's financial centre (Central Bank Articles and S(...TRUNCATED)
"Speech by the Governor of the People's Bank of China, Mr. Dai Xianglong, at the luncheon hosted by (...TRUNCATED)
"Mr. Dai assesses the outlook for Hong Kong as Asia's financial centre\nSpeech by the Governor of th(...TRUNCATED)
"- The 1997 World Bank/IMF Annual Meetings will be held in Hong Kong, symbolizing the realization of(...TRUNCATED)
Dai Xianglong
People's Bank of China
CN
Governor
Governor
[0.011697578243911266,-0.007701425347477198,-0.003419585060328245,0.0009012122172862291,0.0220654141(...TRUNCATED)
["kong","hong kong","hong","rmb","mainland","financial","china","hkma","market","international","mai(...TRUNCATED)
https://www.bis.org/review/r970107a.pdf
1996-11-06T00:00:00
"Mr. Matsushita considers the role of monetary policy in Japan (Central Bank Articles and Speeches,(...TRUNCATED)
"Translated excerpts of a speech given by the Governor of the Bank of Japan, Mr. Yasuo Matsushita, a(...TRUNCATED)
"Mr. Matsushita considers the role of monetary policy in Japan Translated\nexcerpts of a speech give(...TRUNCATED)
"- Japan's economy faced a pause in recovery in 1995, leading to concerns about a deflationary spira(...TRUNCATED)
Yasuo Matsushita
Bank of Japan
JP
Governor
Governor
[0.002797089982777834,-0.019979214295744896,0.001057096989825368,0.021813372150063515,-0.01328453980(...TRUNCATED)
["japan","economic","bank japan","prices","growth","easing","corporate","bank","economy","monetary e(...TRUNCATED)
https://www.bis.org/review/r970211b.pdf
1996-11-13T00:00:00
"Mr. Dai looks at the possibilities of strengthening financial co-operation between China and Hong K(...TRUNCATED)
"Speech by the Governor of the People's Bank of China, Mr. Dai Xianglong, at the Hong Kong Associati(...TRUNCATED)
"Mr. Dai looks at the possibilities of strengthening financial co-operation\nbetween China and Hong (...TRUNCATED)
"- Mainland China's economy is experiencing stable development with controlled inflation, slowed mon(...TRUNCATED)
Dai Xianglong
People's Bank of China
CN
Governor
Governor
[-0.0006041334709152579,0.003876092843711376,0.0016867544036358595,0.008592120371758938,0.0266438350(...TRUNCATED)
["kong","hong kong","hong","rmb","mainland","financial","china","hkma","market","international","mai(...TRUNCATED)
https://www.bis.org/review/r970108c.pdf
1996-12-16T00:00:00
Mr. Davies gives his personal view of EMU (Central Bank Articles and Speeches, 16 Dec 96)
"Speech by the Deputy Governor of the Bank of England, Mr. Howard Davies, at the EFMA Conference on (...TRUNCATED)
"Speech by the Deputy Governor\nMr. Davies gives his personal view of EMU\nof the Bank of England, M(...TRUNCATED)
"- EMU (Economic and Monetary Union) is a significant endeavor with vast implications for European e(...TRUNCATED)
Mervyn King
Bank of England
GB
Deputy Governor
Deputy Governor
[-0.012444181367754936,0.00557411415502429,-0.008124337531626225,0.02382734790444374,-0.020235057920(...TRUNCATED)
["euro","ecb","area","euro area","european","monetary","economic","stability","policy","union","fisc(...TRUNCATED)
https://www.bis.org/review/r970115a.pdf
1996-12-17T00:00:00
"M. Trichet presents the monetary policy guidelines of the Bank of France for 1997 (Central Bank Ar(...TRUNCATED)
BANK OF FRANCE, PRESS RELEASE, 17/12/96.
"M. Trichet presents the monetary policy guidelines of the Bank of France for\n1997 BANK OF FRANCE, (...TRUNCATED)
"- The ultimate goal of monetary policy is to ensure price stability, with a target of no more than (...TRUNCATED)
Bank of France
Banque de France
FR
Governor
Governor
[-0.01862860471010208,-0.02004222385585308,-0.003033887129276991,0.006726663559675217,-0.01933541521(...TRUNCATED)
null
https://www.bis.org/review/r970108b.pdf
1996-12-19T00:00:00
"Ms. Rivlin discusses the prudential regulation of banks and how to improve it (Central Bank Articl(...TRUNCATED)
"Remarks by the Vice Chairman of the Board of Governors of the US Federal Reserve System, Ms. Alice (...TRUNCATED)
"Ms. Rivlin discusses the prudential regulation of banks and how to improve\nit Remarks by the Vice (...TRUNCATED)
"- Importance of prudential regulation for the safety, soundness, and efficiency of the banking syst(...TRUNCATED)
Alice M Rivlin
Board of Governors of the US Federal Reserve System
US
Vice Chairman of the Board of Governors
Vice Chair
[-0.012912239879369736,0.00008392602467210963,-0.018643945455551147,-0.01570388488471508,0.001140510(...TRUNCATED)
["financial","risk","capital","regulatory","banks","management","banking","regulation","supervision"(...TRUNCATED)
https://www.bis.org/review/r970107b.pdf
1996-12-20T00:00:00
"Bank of Japan's December review of monetary and economic trends in Japan (Central Bank Articles an(...TRUNCATED)
BANK OF JAPAN, MONTHLY ECONOMIC REVIEW, 20/12/96.
"Bank of Japan's December review of monetary and economic trends in Japan\nBANK OF JAPAN, MONTHLY EC(...TRUNCATED)
"- Japan is experiencing a moderate economic recovery driven by strengthening private demand.\n- Bus(...TRUNCATED)
Bank of Japan
Bank of Japan
JP
Governor
Governor
[0.016578545793890953,0.012487891130149364,0.003949700389057398,0.005818085744976997,-0.044193461537(...TRUNCATED)
["japan","economic","bank japan","prices","growth","easing","corporate","bank","economy","monetary e(...TRUNCATED)
https://www.bis.org/review/r970106.pdf
1996-12-28T00:00:00
"Prof. Tietmeyer discusses the Bundesbank's commitment to stability (Central Bank Articles and Spee(...TRUNCATED)
"Translation of an article by the President of the Deutsche Bundesbank, Prof. Hans Tietmeyer, publis(...TRUNCATED)
"Prof. Tietmeyer discusses the Bundesbank's commitment to stability\nTranslation of an article by Pr(...TRUNCATED)
"- Bundesbank's unwavering commitment to currency stability is rooted in Germany's historical experi(...TRUNCATED)
Hans Tietmeyer
Deutsche Bundesbank
DE
President
President
[0.023883197456598282,-0.022931622341275215,-0.01698092743754387,0.025826554745435715,0.028332816436(...TRUNCATED)
null
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