We have seen the value of this in our own region in the 1980s and early ’90s, and, when discussing the problems created by capital flows, we should never forget that they have specific and beneficial functions. 6. The second characteristic is the sheer Volume of capital movements around the world. In April 1995 the global value of foreign exchange transactions taking place on an average day was $ trillion. In April 1998 this figure increased to $ trillion, or, to put it in more meaningful terms, to around 48 times the daily value of world trade. It is also worth stressing that these are largely private capital flows. In 1997, for example, the amount of private capital flowing into developing economies was estimated by the World Bank to be five times the size of official flows. 7. Within these private flows there is considerable Variety and fluctuation in the nature and organisation of capital. With financial liberalisation and the globalisation of financial markets, portfolio capital flows are of increasing importance compared with the more traditional foreign direct investment and commercial bank lending as a source of international capital flows. An aspect of this Variety is the growing number of complex investment tools, and different orders of derivatives therefrom, involving different degrees of leverage, available for moving money around the world, or indeed enabling investments to be made in markets without having actually to move money around. 8.
But if we were to find a single factor that has brought the crisis to a head and magnified its damaging effects, we should be looking, not to ‘crony capitalism’ or ‘Asian values’, but to a more specific and more universal phenomenon: the swift flow of large amounts of heavily leveraged capital into and out of the region through an international financial system that is globalised, liberalised, technologically advanced, but, from an international point of view, largely unmanaged and unregulated. 3. The freedom of capital flows is, of course, essential to effective financial intermediation in the international dimension, which has played a vital role in promoting economic development in this region. But, as the current crisis has shown, it also has the potential to distort, disrupt or even destabilise domestic financial markets: this applies not just to ailing economies, but also to sound ones. Being small and open, with predictable policy responses, their markets are susceptible to manipulation. As you know, last summer Hong Kong was exposed to this problem in an extreme form, and we took radical and controversial measures to address it. We remain convinced not only that what we did preserved our financial system 1  BIS Review 35/1999  from a serious threat to its stability at a time of stress and uncertainty, but also that our actions were entirely consistent with our responsibilities as a government mandated by law to safeguard the free operation of financial business and the free flow of capital within, into and out of Hong Kong.