5 See, for example, Summers (2018). 3 [24]  from 0.75 to –0.5 per cent, the cut would be 1.25 percentage points, that is much less than the estimated 2.5–3 percentage points. 6  Raising the repo rate to have ammunition ready? Here I should like to briefly touch on a particular question before I go on. If one is concerned that the repo rate will not be sufficiently high when the next economic downturn comes, can one not just raise it to a suitable level now, as a preventive measure – so that there is ammunition available when needed? This is an argument sometimes put forward in the general debate. But unfortunately there are a number of problems with this argument. Firstly, the economy will of course be affected by interest rate increases. Growth would slow down and inflation would fall. If one raises the rate quickly and substantially, one might even cause the economic downturn one was ultimately aiming to prevent. But even if this was not the case then, secondly, a very probable scenario would be that inflation nevertheless fell substantially, perhaps down to 1 per cent or lower, that is, to the level it was at some years ago. This could in turn mean that the credibility of the inflation target was questioned once again and economic agents would begin to expect that inflation on average would be 1 per cent rather than 2 per cent.
As the fundamental role of the financial system is financial intermediation, or the channelling of funds from those who have a surplus of it to those in need of it, the comparison should usefully be made in respect of the three channels of financial intermediation, namely, that of banking, equity and debt. The total assets of the banking system of Hong Kong are equivalent to 21% of those of the Mainland. You may think that this is not high; but if you put this along with similar comparisons for population, which is only 0.5%, or gross domestic product, which is 8%, you can appreciate the significance of the banking system of Hong Kong in the context of the country as a whole. What is more, the quality of assets in the banking system of Hong Kong is superior and the efficiency in financial intermediation, in mobilising savings in the form of deposits into the hands of borrowers who are credit-worthy, is also a lot higher. Capitalisation of the equity market of Hong Kong is 2.6 times that of the Mainland. The amount of funds raised in the past ten years in Hong Kong, through Initial Public Offerings (IPO) and other fundraising activities, is nine times that on the Mainland. The turnover value in 2005 was about 1.5 times that on the Mainland, and Hong Kong also has an active derivatives market, which traded 25 million contracts in stock futures and options last year.