A TALK WITH HONG KONG'S CENTRAL BANK CHIEF

Edited by Douglas Harbrecht

Joseph Yam is chief executive of the Hong Kong Monetary Authority. As such, he oversees the Hong Kong administrative region's quasi-central bank. Yam recently spoke with Business Week Assistant Managing Editor Robert J. Dowling and Hong Kong-based Asia Correspondent Mark L. Clifford. Here are excerpts from their discussion:

BW: Is the currency crisis over for Hong Kong?
A: Currency turmoil has settled down, [but] we have not seen the end of the tunnel yet. Term rates have a small premium over U.S. rates. That is a reflection of the Asian premium. The deposit base is growing, but quite slowly.

BW: What is the impact on Hong Kong's economy?
A: The adjustment will have to work through the rest of the economy. There was some irrational exuberance in the past in the property and stock market. The markets have taken this opportunity to adjust quite sharply. Banks are cautious in part because of the withdrawal of funds by Japanese banks.

The European [banks] are being more cautious. There we have a problem of perception. There is some sort of credit crunch. The economy is not growing very robustly at this time. The slowdown in economic activity may affect this.

BW: Wouldn't breaking the Hong Kong dollar's peg to the U.S. dollar and allowing the currency to depreciate help the economy?
A: [No.] I don't think that exchange rate changes are that important.

BW: Is there the possibility of currency union with China, which, after all, is more closely linked to Hong Kong's economy than the U.S. economy is?
A: One currency? That's impossible. Under "one country, two systems," you will have two currencies. They are, after all, quite different economies. If you apply the Maastricht criteria to Hong Kong and mainland China, you will come to the conclusion that there ought to be monetary segregation.

BW: Are you worried about the political impact of high rates and declining asset values?
A: Concerned? Yes. If there is pain all around, people will point fingers at whoever is responsible for that pain. The autopilot mechanism [of the currency board] will produce high interest rates if there is an outflow of funds. One has to carry that kind of criticism and explain how it will work. [For banks] there is a need to manage interest-rate risks properly.

BW: What will the impact of the euro be?
A: There will be a euro. It may take a little time for the euro to become a liquid, attractive [currency] from the standpoint of an investor. In the meantime, there may be a need to reduce our exposure to Europe. What we call the plumbing of the financial system could affect the liquidity and thus the risk premium in this market. We have adopted a wait-and-see attitude.

BW: What are the challenges for Asia's financial systems?
A: The risk profile is higher. Something ought to be done about that. Economies should look at building financial markets, robust financial infrastructure. There is not a mechanism for mutual surveillance. Perhaps it is needed. [For example,] monetary cooperation or coordination, upgrading supervisory and regulatory standards. Linking up those infrastructures in terms of clearing debt securities. A payment system for money -- first bilateral, then multilateral. For example, a real gross time settlement payment system [to build] a very strong financial infrastructure. That would lower the risk profile of the region. That would attract money into the region on a more stable and less volatile basis. Otherwise you will see a recurrence of the events of the past year.

BW: Should there be restrictions on currency speculators?
A: I'm not in favor of restrictions. I think financial liberalization is beneficial to the economic growth of Asia. I am definitely not in favor of imposing controls and stepping backwards.

BW: Will reform slow down?
A: There may be a danger of slowdown in financial liberalization because of the need to look at these risk-management issues.

BW: Is the new Hong Kong Mortgage Corp. a way of shielding homeowners from spikes in interest rates caused by attacks on the currency?
A: Yes. If innocent parties are immune from the volatility in interest rates, the resilience of the system would be higher. When you have everyone on the streets suffering from high interest rates, there would obviously be political pressure for relieving the pain. I would want to provide that buffer.