Asia has no shortage of funds, only that its high level of savings are invested in less liquid long-term investments. Thus, one of the more pressing issues in Asia is to build a more competitive, stable financial system and a robust infrastructure to facilitate efficient financial intermediation. The better risk management of the financial system would also assist both corporations and investors to manage also their risks better. Ultimately, a balanced and flexible economy with sound risk management will then be in a better position to withstand global shocks and avoid crisis. The need for national risk management 20. We are all aware of the complexities of risks in financial markets. Aside from credit risks, market risks such as interest rate, exchange rate, legal risks, operational risks and systemic risks all have to be managed, both at the micro level and at the macro level. All markets suffer from the “fallacy of composition”. Mistakes at the corporate or bank level will add up to national mistakes, which now may add up to regional or international crisis through contagion. Traditional risk management at corporate or sectoral level simply shift risks from one sector to another. Risks still remain in the economy as a whole. Thus, increasingly in the 1980s, there emerged the awareness that financial sector regulation was all about national risk management. 21. National risk management covers six major aspects:  •  Credible policies, with monetary and fiscal policies consistent with each other, and applied consistently. •  Capital account liberalization should be phased appropriately.
With the sustained budget surplus and accumulated surplus on the Exchange Fund and Land Fund assets, the actual amount of foreign reserves in Hong Kong amounted to $ billion at the end of September, the third largest in the world. This is more than seven times Hong Kong dollar cash in circulation or over three times $ M1. 30. The currency board system has an automatic adjustment mechanism to maintain exchange rate stability. When there are outflows of funds from the Hong Kong dollar, the Hong Kong Monetary Authority (HKMA) will sell US dollars to banks for Hong Kong dollar. On settlement day, the HKMA will debit the clearing accounts of the banks for the necessary amounts of Hong Kong dollars in return for the US dollar that will be credited to the New York accounts of the same banks. Since banks may have sold more Hong Kong dollars than they have in their clearing accounts with the HKMA, they can only obtain Hong Kong dollars by borrowing from other banks, by bidding up the interbank rates, or selling back the US dollars to the HKMA, that is, by reversing their short position. In fact, the banks do not hold excess Hong Kong dollars because they are generally long in foreign currency. The latest data at the end of July shows that the Hong Kong banking system is short roughly $ billion or $ billion. 31.