In my view, the role is quite straightforward: it is to sustain a monetary and banking environment that is conducive to resolving the economic and fiscal problems that face our community - not just in the public sector, but also in businesses and households. This is not the passive, static role that it may seem, as the maintenance of a rule-based monetary system in the form of the Link misleadingly suggests. Indeed, there is the scope - and often the need - for an active and imaginative use of financial, supervisory, communication and other skills. The degree of openness and the relatively small size of Hong Kong's financial system, against the background of globalisation, mean that the maintenance of monetary and banking stability is a particularly difficult task. There is also the requirement, implicit in the Basic Law, to look ahead, and in particular, to develop the financial infrastructure that will secure Hong Kong's position as an international financial centre and provide it with the means to build on that position. And there are other important tasks, such as seeking to help the Government in its efforts to contain the fiscal deficit by achieving a favourable return on the fiscal reserves deposited with the Exchange Fund - subject always to meeting the other investment objectives of the Fund. All of these tasks present challenges to keep me and my colleagues busy enough. But there have also been suggestions that the HKMA should take further steps to help stimulate growth.
The general wisdom was that the inevitable direction of the Hong Kong dollar under a freer exchange rate would be to depreciate. The result would be an end to deflation, a boost to economic growth, a reduction in unemployment, and the elimination of the budget deficit. In fact, all of our problems would be cured - and rapidly - by this single panacea. BIS Review 44/2003  1  If only things could be so simple! But, of course, they are not. I have spoken and written at length on other occasions about the huge risks to financial and social stability that we would expose ourselves to in following such a course. Financial markets have a habit of overshooting and precipitating financial crises that are very costly to the community. And it seems, from recent events, that the very premise on which this panacea of exchange rate depreciation is based may be seriously flawed. For the market exchange rate of the Hong Kong dollar has strengthened over the past two or three weeks to the extent that it has been necessary for the HKMA to inject liquidity into the system in order to dampen excessive volatility. The market has, all of a sudden, chosen to ignore the continuing problems of deflation, unemployment and budget deficit, and the possible implications of these for the exchange rate. The clear message from the market now is that, were the Hong Kong dollar to be allowed to float, its exchange rate would rise rather than fall.