On other fronts, there was also an abundance of events which could have affected confidence in the currency over the sensitive period of political transition leading to the resumption in the exercise of sovereignty over Hong Kong by China on 1 July 1997. But the Hong Kong dollar’s link with the US dollar has remained rock solid, with the exchange rate staying very close to the fixed level of $ to $ 6. There are good reasons why our exchange rate has remained so stable against such eventful background. Hong Kong’s economic fundamentals are strong2. We pursue sound macroeconomic policies. We have an impressive track record of fiscal discipline3. In the last 14 years of the fixed exchange rate link, while most countries were grappling with fiscal deficits, Hong Kong has consistently run budget surpluses averaging 2% of the GDP per year. Our fiscal surplus in the financial year 1997-98 was 5.8% of GDP. As a result, we have over the years built up strong fiscal reserves. These are deposited with the Exchange Fund which holds the foreign reserves of Hong Kong, including those backing the issue of our currency. As at the end of 1997, Hong Kong’s foreign reserves stood at $ billion, which was the third largest in the world after Japan and the Mainland of China, providing not just 100% backing, but nearly 800% backing for the currency4. 7.
This stands in stark contrast with the mystique and opaqueness which characterized earlier central bank communication. For a long time central banks have focused predominantly on their interest rate policy. Considerably less attention has been devoted to their liquidity policy which used to be carried out somewhere in the basement of the monetary policy temple, far away from the spotlight of the announcement of interest rate decisions. This year, liquidity policy has moved into the spotlight and has taken over the lead role at the forefront of the monetary policy scene. The current situation also highlights the close interaction between price stability and financial stability and that the focus of policy makers today is on crisis management. The challenge in the coming months and year is to pursue a dual approach consisting of short-term action and long-term solutions. We must constantly be on the alert to put out fires when and where they emerge, while studying the causes of the current crisis and finding the right long-term remedies in the form of new rules and systems so that we do not repeat the same mistakes. As the French saying goes, there is no point in putting a band-aid on a wooden leg. 2  Ecklund, Gunhild (2008), Creating a new role for an old central bank: The Bank of Norway 1945-1954, Series of Dissertations No. 2-2008, BI Norwegian School of Management. 3  Sejersted, Francis (1994), On the so-called “autonomy” or “independence” of central banks.