Asian Cover -- Policymakers
HONG KONG'S JOSEPH YAM (int'l edition)
White Knight: That's the name of central banker Joseph Yam's race horse. It's an apt description of Yam, too: As head of the Hong Kong Monetary Authority, he has already ridden off several times to rescue the Hong Kong dollar's peg to the U.S. greenback. That link is seen as an essential element in Hong Kong's stability, and if it goes, panic selling could rock Asia once more.
Yam, 50, is staying the course. Hot-tempered in private, poker-faced in public, Yam let overnight interest rates hit 280% when the Hong Kong currency first faced serious pressure in October. At that point, one alarmed British resident entered Yam's office thinking that collapse was at hand. An hour later, he walked out "feeling like I'd had a Zen experience." Such was the strength of Yam's unruffled, brilliant analysis of Hong Kong monetary policy. To date, the peg has held, and Yam is closely monitoring the health of Hong Kong's banks to make sure they can stand the pressure. A vigilant knight, as always.Return to top
A TALK WITH HONG KONG'S JOSEPH YAM (int'l edition)
Joseph Yam is chief executive of the Hong Kong Monetary Authority, the Special Administrative Region's quasi-central bank. The HKMA oversees the city's currency board, which pegs the Hong Kong dollar to the U.S. dollar at a fixed rate of HK$7.8 to US$1. He spoke to Business Week's Mark Clifford on June 12, five days before the U.S. and Japan's massive currency stabilization effort to prop up the sliding yen. Here are excerpts of their conversation. Q: What's the mood now?
A: I don't know how to describe it, Hong Kong and the region. The whole atmosphere is so....people are so down. I feel so helpless. I wish I could do something about it. It is not easy. Everybody in Hong Kong is feeling a little pain. I wish I were in a position to relieve their pain, and yet this there is nothing much we can do without actually undermining the credibility of our system.
So all I can do is to advise people to sit tight -- don't panic, sweat it out, stick it out. It is all very well for someone with a secure job and an interesting job to be saying that to the people of Hong Kong, some of whom are actually facing the prospects of losing their jobs, and of paying higher mortgages, higher interest rates. What do you do? You don't feel good as a result.
We just have to stick it out, don't lose our nerve, don't panic into doing anything that would not be in the long-term interest of Hong Kong. That is very important. Of course, I could also ask you to compare our situation to the rest of the region, but these sorts of things nobody would like to hear, although it's realistic.
Within the discipline imposed upon us by the currency board system, we are scratching our heads and looking hard about this repo thing and greater disclosure to help smooth out the market, push the mortgage corporation to do more. I don't know what other things we can come up with. It's very difficult.Q: How long do you think people will have to stick it out before they feel some relief?
A: That's the most difficult part. If it were just an internal problem, then after a downward adjustment, the consolidation of the economy, then you see the end of the tunnel, you start all over again and you climb out of it. But the situation is not under our control at all. That is why we feel a little helpless. The situation in Japan is the crucial factor. I don't think anybody has come up with any solution for Japan at this point in time. The fiscal packages are big, and I am sure that in time they will work through and produce positive results. In the meantime, there are these structural problems that they have to resolve, and there does not seem to be any clear agreement among the G-7 or the G-3 countries about getting a little more stability for the yen. That's worrying to see.Q: Have you ever had a time like this in your career? In 1983, you faced a run on the currency...
A: That's different. At that time it was more domestic, so one did not have a feeling of helplessness. You'll do something about it, sort it out. At least those are under your control. But this one.... It's as if we are something welded onto an ocean liner, a very sturdy ship. The USS United States of America. We're linked to it, we are welded to it, we cannot actually break loose at all, but the waves are huge -- not affecting that big ship, but it goes up and down. And sometimes we are under water, sometimes we are above water. But we will not sink. There are other people out there, they may be very sturdy boats, they are being tossed around, and possibly they could sink. It is just that sort of situation. You can ask the ocean liner to be steady, but the waves are there. What can you do? Stay welded to that ship. Q: Can you conceive of a Hong Kong without the peg?
A: It would be very bad. It is quite clear. It is not just my view. If you ask anybody out on the street, I think the majority of them would be scared of breaking the link -- depreciation of the currency, inflation higher. The adjustment of asset prices possibly leading to a systemic crisis in the banking system. It would be very bad.Q: Are you having to confront the possibility of a Chinese devaluation?
A: I don't think we will se a devaluation of the renminbi. The views from Beijing are very clear. I don't just listen to the views. I look at the economics. Q: What do you make of [central bank governor] Dai Xianlong's comments [which many people interpreted as a threat to devalue]?
A: I've just spoken with him. He said he's been misinterpreted. He said three things. One, we need greater stability in the yen. Two, weakness of the yen would, of course, affect the competitiveness of China. Third point -- [China has] a balance-of-payments surplus, [China has] huge reserves, [China] is not going to devalue the renminbi. It is very clear.
We are maintaining stability in the Hong Kong dollar, of course for our own good. But at the same time we thought this would provide a degree of stability in the region and therefore financial markets across the world. While we are doing it, the G-3 countries are not coming to any agreement on the yen, on these other currencies. They are still making these waves and tossing people around.
I've talked to central bankers in the G-3.... I've tried to tell them what the implications of continued volatility of the yen would be on the region and urged some sort of action, some sort of agreement.Q: What do you want them to do?
A: Stabilize the yen.Q: How?
A: There are two issues. Higher clarity of policy in Japan for taking the economy out of the recession. That is a prerequisite together with a determination to deal with the structural problems of the financial sector. Together with that, a commitment from the G-3 central banks and financial ministers for stable exchange rates.Q: What have you learned in the turmoil of the past year?
A: It's more on the technical side. Volatility of capital flows, the huge volume of capital flows, the velocity with which it is moving around, the huge variety of financial instruments that facilitate such movement of capital. It surprised everybody, including myself. It surprised the IMF, it surprised the rating agencies. Nobody thought capital flows could be so difficult to manage.
Therefore, the turmoil surprised everybody, and the contagion of that turmoil was also very surprising. So we are fortunate in that we have prepared ourselves, for a different reason, for possible volatility as a result of political transition. We are fortunate in that. Financial markets never fail to surprise. You have to just sit there and continue to worry about the situation even if nothing is happening and get yourself prepared.Q: Are these a vindication of your policies?
A: To the extent that there is this turmoil and we are coping, I suppose better than other people, it is of course an indication that our policies are appropriate. I refer to our policy in strengthening banking supervision, building a robust financial infrastructure, in adhering to a very clear and rule-based monetary system. Yes, the financial turmoil in the region has proved that these were correct measures...Q: Is there anything you would have differently?
A: Yes. I could have explained better to people how the system works. If I had done that, I suppose October last year [when the stock market crashed] would have been less dramatic because people would have prepared themselves. Also a higher degree of transparency, a higher degree of disclosure in these key numbers, these forecasts in the changes of the aggregate balance [of funds in the system] for example, would have helped people to position themselves better and avoid getting into a panic. Return to top