Thirdly, we are under no illusions about the limitations imposed by the Link. We agree that it rules out the possibility of using the exchange rate to help us adjust more quickly to sudden shocks. We agree that it ties Hong Kong to US monetary policy at times when the economic cycles of the Hong Kong and the US may not necessarily be moving in sync. We agree that it is a cause of asset price inflation in the nineties and deflation more recently. We agree, in short, that it is not a perfect system. But then, no exchange rate system is perfect. And the question to be asked, I would suggest, is not "Where is the exchange rate system that will remove these limitations?" It is "Are these limitations so severe, so constricting, so damaging as to outweigh the advantages that the Link brings to Hong Kong, or to outweigh the risks and uncertainties that would inevitably arise if we were to change or abandon the Link?" I think that the answer has to be no. Let us take the question of competitiveness first. The claim is made that, without exchange rate flexibility, our products, and Hong Kong generally, have become uncompetitive when compared with economies in the region that have devalued their currencies. Even ignoring the fallacy of competitive devaluation, this claim assumes that the nominal exchange rate on its own is a reliable measure of an economy's competitiveness.
Some shops were reluctant to accept Hong Kong dollars. No one, I think, who lived through those times would wish to live through similar events again. Conclusion The creation of the Link eighteen years ago helped restore stability at an unstable time. History does not repeat itself. Times change. But let us at least remember the experience of those years when we talk about the usefulness or otherwise of the Link to Hong Kong during what are, arguably, even more unstable times. At this time of great global uncertainty and local distress, our efforts should be directed towards building stability, not destroying or undermining it. I have given some account in this talk of how, in its banking system and financial infrastructure, and in its currency, Hong Kong enjoys a position of great strength. It is from this position of strength, and not through any sudden and destabilising gimmickry, that we will best be able to weather the difficulties that now face us, and to embrace the opportunities to come. 6  BIS Review 88/2001