Thus, markets adjust irrespective of the exchange rate regime and the unit of account. 28. Is there any easy way of avoiding the pain of adjustment in Asia due to rising global competition? The answer is clearly no. As a general rule, the faster we adjust, the less the pain. BIS Review 109/1997  -6-  There have been different approaches to this issue. There are some who think that a floating exchange rate regime would cushion the pain, but many forget that Hong Kong has tried the floating exchange rate regime before, in 1974-83. During that period, growth was more volatile and inflation much higher than what we are experiencing now. As an open economy with trade accounting for 285% of GDP, any inflation would be immediately imported under exchange rate volatility. The recent experience in Asia actually shows that contrary to the theory, floating exchange rates requires even higher interest rates, because of the higher risks associated with exchange rate volatility. 29. Here I would like to correct the common image that the Hong Kong’s exchange rate regime is a peg. The Hong Kong dollar is a fixed exchange rate, not a peg which can be adjusted from time to time. The linked exchange rate system in Hong Kong operates as a currency board system whereby the issue of Hong Kong dollar notes is fully backed by the US dollar at the fixed rate of $ to $ Such a note-issuing mechanism ensures that currency issued is fully backed by foreign exchange.
As Chairman Greenspan said recently, "in retrospect, it is clear that more investment monies flowed into these economies than could be profitably employed at modest risk". 8. The strong Asian growth would have continued but for the fact that global competition in external trade has emerged with newly industrialized and export-oriented economies with cheap labour, such as China, India, Latin American and Eastern Europe. The failure of central planning has brought at least three billion new workers and consumers into the global market. These new markets began to benefit from the growing trade liberalization and inflows of foreign investments, thus putting greater pressure on the markets of the earlier “tigers” of East Asia, leading to a widening of their current account deficits as they continued their investments in infrastructure and real estate. Issues in Asia 9. If we look more closely at the situation in Asia, the economic fundamentals remain intact. Asia has been the fastest-growing region in the world, recording growth rates of around 5%-9%. Asian economies have low inflation rates and exchange rates were stable until recently. Current account for the region as a whole is broadly in balance, while the fiscal account, excluding Japan, is in surplus. Asia has exceptionally high savings rates of above 30% of GDP. Official savings, in terms of foreign currency reserves, were even higher. In Asia, 70% of the inflows contributed to reserve accumulation. As a result, Asian central banks are now holding about 40% of the world’s foreign exchange reserves.