What I have suggested so far is that the exchange rate between the two currencies is probably not something which we need worry greatly about in terms of economic impact via competitiveness and trade. Thus Hong Kong ought not to need to take any particular defensive or offsetting action if the renminbi were to move more widely against the US dollar. There is, however, an important qualification to that conclusion. If financial markets believe differently, and react to those beliefs, we may see disturbances in markets as a result of actual or rumoured developments in the Mainland's exchange rate policy. We have indeed already witnessed some such behaviour from time to time when reports have circulated about imminent adjustments to the renminbi. Yet, as on those occasions, so on future ones I would expect our markets to cope satisfactorily with such disturbances – essentially through the currency board's adjustment mechanism whether to upward or downward pressures on the HK dollar exchange rate – and economic fundamentals ultimately to prevail. 2  See "Why blame the peg? ", available on the HKMA website (www.info.gov.hk/hkma/eng/speeches) and forthcoming in HKMA Quarterly Bulletin, May 2002. 3  "Price convergence between Hong Kong and the Mainland", by Jiming Ha; to be available shortly in the HKMA research memorandum series. BIS Review 31/2002  3  Fixing to the renminbi? However, the conclusion that we should not be too agitated about the HK dollar-renminbi exchange rate begs a further question.
Although the Hong Kong arrangement, and in particular the status of our Monetary Authority, is unusual internationally and may possibly be unique when compared to the more typical set-up of a central bank established as a distinct corporate entity, the process of monetary policy may not in practice be greatly different from that in other jurisdictions – with the broad framework being set by the government and with the central bank executing the policy in a transparent and accountable fashion. However, we do not have such a precisely defined framework of autonomy for the central bank as exists in some other jurisdictions, which is sometimes regarded as a necessary formal safeguard to monetary stability. The distinction may be less important under our firmly rule-based currency board system than it might be in other circumstances. Legal parameters Let's turn now to the "what" question. Although, as noted already, the Basic Law clearly states that the Hong Kong government shall determine its own monetary policy, it also sets some very important parameters within which that freedom can be exercised. Thus:"The Hong Kong dollar, as the legal tender in the Hong Kong Special Administrative Region, shall continue to circulate." (Article 111) "No foreign exchange control policies shall be applied in the Hong Kong Special Administrative Region. The Hong Kong dollar shall be freely convertible. …….The Government of the Hong Kong Special Administrative Region shall safeguard the free flow of capital within, into and out of the Region."