Subject:
Yam's Empire
Date:
Fri, 18 May 2001 07:20:06 -0400
From:
"R. A. Hettinga" <[EMAIL PROTECTED]>
To:
Digital Bearer Settlement List <[EMAIL PROTECTED]>
http://interactive.wsj.com/articles/SB990128659479662118.htm
May 18, 2001
International Commentary
Joseph Yam's Empire
Is the Hong Kong Monetary Authority a central bank? The ready answer
should
be no, since it is charged with running a currency board arrangement. A
currency board means that Hong Kong dollars can only be created when
U.S.
dollars are deposited in the Exchange Fund. The HKMA isn't supposed to
serve as a provider of liquidity in times of market stress, as central
banks do. Rather its mandate is to deter speculative attacks on the Hong
Kong dollar with an iron-clad promise to redeem the local currency at
the
fixed rate.
With an Exchange Fund of $115.1 billion it certainly has the resources
to
do so, down to the last coin in circulation. But the HKMA's resolve to
carry through on the promise is the critical factor in the success of
this
arrangement. So it's worrying that the HKMA is looking more and more
like a
full-service central bank. That raises doubts in many people's minds
whether, faced with a crisis, it would indeed behave like a currency
board,
or if the government would choose to abandon the fixed rate and give a
stressed banking sector relief from high interest rates.
The chief executive of the HKMA, Joseph Yam, enjoys a great deal of
autonomy and good relations with his political masters. His organization
is
a statutory body, technically not part of the civil service, and it has
its
own source of funding, the returns from managing the territory's
monetary
reserves. Mr. Yam reports to the financial secretary, and an advisory
group
oversees his stewardship of the reserves. But this group is made up
largely
of bankers, who in turn are regulated by Mr. Yam. It's interesting to
note
that the chief executive is allowed to pay himself a salary of over $1.2
million. This is about four times the remuneration of the financial
secretary, and more than many large countries pay their central bank
governors.
The authority has grown tremendously in its eight years of operation. It
employed 607 people last year, up from from 324 when it was created
through
the merger of the Exchange Fund and the Office of the Commissioner of
Banking in 1993. And expect more expansion in years to come. Mr. Yam is
planning to move from his current cramped quarters, three floors in
downtown Victoria's Citibank Tower, to 14 floors in the International
Finance Centre, totalling 340,000 square feet. Last month the
Legislative
Council tried without success to restrain Mr. Yam from spending $474.4
million, more than Hong Kong's annual education budget, on the new digs.
It's true that the bulk of the HKMA's expansion has little to do with
the
currency board. Mr. Yam found growth opportunities in his other areas of
responsibility, regulating banks and developing Hong Kong's financial
system. For instance, he set up a company to create mortgage-backed
bonds
in order to promote the local bond market. Now he wants to oversee
consumer
protection for banking products. As part of introducing deposit
insurancehe
will get vetting power over all appointments of banks' senior managers.
And
of course Mr. Yam has a busy schedule of attending conferences and
giving
speeches to his central bank colleagues around the world.
The danger of lumping such a large and fancy operation with a currency
board is that it inevitably encourages the public to believe the HKMA
can
steer Hong Kong through financial crises with relatively little pain.
After
all, the more resources you put in, the more you expect to get out.
Nothing
has been done to discourage this misconception. In 1998 the HKMA created
a
discount window so that it could lend overnight money to banks using
bonds
as collateral. Employed in moderation to smooth out some sudden drops in
liquidity, this measure doesn't necessarily weaken the currency board.
But
taken in connection with other signs of central-bank envy it undermines
the
notion that Hong Kong is prepared to suffer the pain of high interest
rates
in order to defend the fixed rate of exchange.
In a column posted on his Web site last month, Mr. Yam explained that
Hong
Kong needs large amounts of reserves far in excess of those needed to
back
the local currency in circulation. That's so that the government can
ward
off speculators without interest rates spiking upward, as would happen
with
a simple currency board operation. Mr. Yam cites as example the
government's intervention in the stock market to defeat currency
speculators in the "wicked month of August 1998," when Hong Kong was
"hit
by the tidal waves of international finance." About $10 billion was used
defending the currency, $15 billion was used buying stocks and $13
billion
was used enlarging the monetary base in order to minimize the increase
in
interest rates.
In other words, in a crisis the Hong Kong Monetary Authority behaved
like a
central bank, buying the local currency to maintain its value in the
forex
market but putting that money back into the banking system to prevent
interest rates from rising. Trying to maintain a fixed exchange rate
with
this kind of system invites trouble, as the 1997 Asian crisis
demonstrated.
Yet Mr. Yam hasn't shown much sign that he understands this difference.
In
fact he joined the regional chorus of outrage against the dastardly
hedge
funds which supposedly were to blame and has called for controls over
the
free movement of capital.
Mr. Yam and his political masters might be willing, once the reserves
started running low, to revert to the currency board discipline of
reducing
the money supply as holders of the local currency cash out in U.S.
dollars.
But that "might" is all the uncertainty needed to inspire speculators to
test their resolve when the next opportunity arises. His efforts to
build
the HKMA empire, with its shiny new offices and myriad employees,
suggest
that he aspires to the title of central banker rather than currency
board
manager. After all, to run a currency board you really only need one man
and a computer. In fact, the deterrent effect on speculators would be
greater with such an arrangement. This should be a powerful incentive
for
Hong Kong to rethink the direction of the HKMA.
-- From The Asian Wall Street Journal
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