Hong Kong's Currency Cop

Joseph Yam's duty: Defend the dollar against all comers

He's certainly self-confident. Some bankers even find him arrogant. But there's no question that Joseph Yam is a key member of the new generation of Hong Kong Chinese who are taking the reins of power as the British make their final retreat from the thriving territory.

Much of the success of the transition will depend on Yam. He holds the key to one of the richest treasuries in the world--$60 billion in currency reserves--and it will be up to Yam to ensure that it's safe from Chinese cadres and international currency speculators. But the 48-year-old Yam has plenty of clout to defend Hong Kong's monetary system as the 1997 takeover by Beijing approaches.

An activist in a laissez-faire town, the chairman and CEO of the Hong Kong Monetary Authority has set up a government debt market to help lower borrowing costs. He has also proposed starting up a mortgage corporation to spur the market for home loans. Before that, he gained fame as the official who stripped Hongkong & Shanghai Banking Corp. of its role as the territory's lender of last resort.

POWERFUL WEAPON. Now, an even bigger challenge looms. Paid more than $840,000 a year--he won't say exactly how much--Yam is the main bulwark against traders eager to test the Hong Kong dollar's strength at a time of political flux. Keeping a hard link between the Hong Kong and American currencies "is of paramount importance to Hong Kong's stability during the takeover" says Gordian Gaeta, vice-president of Booz, Allen & Hamilton Inc. But so far, Yam, a Hong Kong University graduate who started his government career as a statistician 25 years ago, shows no sign of wavering in his commitment to keep the Hong Kong dollar firmly pegged to the U.S. greenback at a fixed rate of 7.8 to 1. Warns Yam: "We will be in a position to inflict pain on speculators."

Yam has already held off one major assault. In 1995, when traders tried to topple the Hong Kong dollar in the wake of the Mexican peso devaluation, Yam doubled overnight interest rates, to 12%, by draining $775 million from the local interbank market. The move squeezed speculators, who were borrowing Hong Kong dollars in the hope of being able to buy them back at a lower rate after the currency fell. It also hurt local banks, which had to scramble to raise funds as their own borrowing costs soared. But Yam added one final touch: He warned banks bluntly not to do business with the currency sharks. The lenders had ample reason to listen. Looking back on the episode, Financial Secretary Donald Tsang continues to caution that those--or their bankers--attacking the Hong Kong dollar will be punished "without mercy."

Since the peso meltdown, Yam has also forged deals with most other Asian central banks allowing them to provide the territory with cash to fight off attacks. And in August, the Monetary Authority pounced on reports that George Soros' Quantum Fund was ready to move against the Hong Kong dollar. The rumor proved groundless, but the episode demonstrated Yam's high degree of readiness.

But even with Yam's efforts against the shorts--rumored and real--it may be politicians in Beijing, and not speculators in New York or London, who will prove to be the ultimate threat to the Hong Kong currency. If China botches the takeover of the territory, concerns about Hong Kong will quickly turn into a wave of capital flight.

Because many of Hong Kong's banks offer their customers multicurrency accounts, which allow depositors to switch among currencies with just a telephone call, a run on the territory's currency could easily take on huge proportions. Although Hong Kong maintains its fixed rate by guaranteeing to have enough foreign currency on hand to cover every dollar bill outstanding, the guarantee does not extend to the broader money supply.

Even with $60 billion on hand, the territory's Exchange Fund only has enough to cover a fifth of Hong Kong's total of cash and bank deposits. If enough savers switch out of Hong Kong dollars, "there's absolutely nothing effective anyone can do to protect the currency," Yam concedes. "That is why we need the people of Hong Kong behind us."

BEIJING PROMISE. For now, Yam insists, he also has Beijing behind him. The Basic Law, which governs China's actions in Hong Kong until 2047, gives Hong Kong the right to run independent monetary and financial policies and gives the local government control over the Exchange Fund. Yam and other officials say China will honor these promises, even though Beijing has not kept its pledge to allow Hong Kong political autonomy.

But Beijing has repeatedly voiced support for monetary independence and the Hong Kong dollar, most recently when Yam appeared in London on Sept. 10 with People's Bank of China Deputy Governor Chen Yuan. This was only the latest sign that Yam has won the trust of Chinese leaders, at whose pleasure he will serve. And so far, Yam is also winning plaudits at home. "There is a case for a firm hand on the tiller," says HSBC General Manager Christopher P. Langley. As far as the Hong Kong dollar goes, Yam is determined to stay the course.

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