Implicit in these observations are strong forces pulling in different directions in the monetary and financial system on the Mainland, all with implications for monetary and financial stability, not just on the Mainland, but also for Hong Kong, being so close to and so integrated with the Mainland. There is great emphasis on controllability, gradualism and the ability to take initiatives in the reform and liberalisation of the Mainland, all in the context of the building of a socialist, market economy. I have no doubt that the Mainland authorities will be able to steer the right course through this potent scenario on the monetary and financial fronts, and avoid mishaps. One can therefore be optimistic about Hong Kong, as the international financial centre of the country, continuing to benefit from monetary and financial developments on the Mainland, although we should not forget that in the capitalist, free market environment that we are in, there is a possibility of market volatility or adjustment being magnified. The task is for all concerned to ensure that they are in a position to cope  4  BIS Review 139/2007  with magnified volatility, in other words, manage market risks that may be greater than what they have seen in the past. The linked exchange rate system Let me turn to the THIRD and last issue that I wish to cover this evening. This concerns our own exchange rate system.
It would probably not relieve pressures for currency appreciation, rising inflation and buoyant asset prices. Seventh, on the so-called reverse double play: the scope is limited. The reverse double play aims at profiting from a long position in Hong Kong stocks by engineering a capital inflow large enough to trigger passive exchange market intervention on our part, which would push interest rates to very low levels and asset prices higher. But interest rate adjustments when the exchange rate hits the strong side of the band are bounded by the floor of 0%, while they might be a lot more dramatic at the weak side, and the sensitivity of stock prices to these different adjustments differs. Herd reaction, which is what most speculative plays aim at, is a lot easier to instigate through the fear factor, when interest rates rocket up, risking a stampede to exit from the market, but a lot more difficult through the greed factor, when interest rates fall, and the rush to buy does not necessarily materialise. Conclusion I hope these answers are clear and the high degree of confidence in and credibility of the linked exchange rate system built up over the past quarter of a century is sustained. This would obviate the need for the type of interest rate adjustments seen earlier in the month and dampen volatility in Hong Kong dollar interest rates around those of the US dollar. Indeed, monetary and financial stability is dependent to a large extent on confidence in and credibility of monetary and financial policies.