Hong Kong Monetary Authority

Central bank vulnerable with no rules to govern top spot

PUBLISHED : Saturday, 03 November, 2007, 12:00am
UPDATED : Saturday, 03 November, 2007, 12:00am

When Financial Secretary John Tsang Chun-wah insists on not giving a clear term of service to the city's central banker, he is ignoring reality in both the political and financial arena.

Surprises and uncertainties are opportunities for speculators. The early leak of the forced retirement of central banker Joseph Yam Chi-kwong and the attack on the peg that followed are most telling.

While Mr Yam has undoubtedly made himself an icon of the peg, the question is more on why he has been asked to leave, given that he has no official retirement age. It breeds speculation of a policy change.

By law, the chief executive of the Hong Kong Monetary Authority has no clear terms of service. Neither is there a rule on his appointment or dismissal.

The argument is that Hong Kong operates a rule-based monetary system, with little significant discretion on the part of the Monetary Authority, and a well-developed banking supervisory system.

This may have been the case under colonial rule, when orders came from London and the government had little public accountability. But if the HKMA head was no more than a technocrat back then, that is no longer the case.

The city's monetary and banking system is now a critical element in the mainland's financial liberalisation. So is the head of the HKMA.

The political ecology has also changed. Despite a lack of universal suffrage, the election of the city's leader has brought in competition. Any chief executive will ensure tight control over the HKMA. So would anyone eyeing the top job in future.

It is therefore no coincidence that the rumour of Mr Yam resigning first appeared in the media in August 2002 - a month after the then chief executive Tung Chee-hwa made his ministries' political appointees.

The personality clash between the then financial secretary Antony Leung Kam-chung and Mr Yam, both of whom were thought to consider themselves the best in the financial world, was an open secret in Central. On top of this were Mr Leung's political ambitions and his belief that the reserve had better things to do than just support the peg.

The resignation spin ended with Mr Leung making a public statement praising Mr Yam's performance and their cordial working relationship, in order to pacify the market.

Mr Leung stepped down in 2003. His successor, Henry Tang Ying-yen - a textiles heir with little financial exposure - arranged a high profile meeting with Mr Yam in the first month of his new job. The handshakes and praises in front of the camera confirmed the politicisation of the central banker's job.

This was followed by an exchange of letters between the two. The letters state that while the financial secretary shall be responsible for determining monetary policy objectives, the HKMA head 'shall on his own be responsible for achieving the objectives'. Should the financial secretary choose to defy HKMA decisions, he would have to make public the reason.

While officially listed as an answer to concerns of the International Monetary Fund about the HKMA's independence, the letters were widely seen as an attempt by Mr Yam to protect his turf in the new political environment.

As his control on the territory's financial matters appears to be on the rise (at least by an increasing number of journalists who cast Mr Yam as the seer leading the blind), his political life is in fact going the other way.

Chief Executive Donald Tsang Yam-kuen is understood to have personally decided Mr Yam should go in 2009. Given the importance of financial development in his election pledges, Mr Tsang would not want to see the matter beyond his full control. Neither would he want to see any claim to achievement by him and his favoured successor undermined by anyone.

As planned way before the chief executive election this July, Norman Chan Tak-lam, the current head of the Chief Executive Office and Mr Tsang's key campaign aide, will replace Mr Yam. Mr Chan, who used to be Mr Yam's deputy, left the HKMA knowing he was not on Mr Yam's succession plan.

Gossiping is not my profession. I have elaborated this to illustrate how involved the HKMA's top job is in the government's senior-level power play.

Given the politicisation of this job, it is even more important that appointments and dismissals to the post be governed by a clear set of rules to minimise the chance of it falling victim to political uncertainties.

Governments worldwide, both in developed and developing countries, have been doing this for the sake of gaining public confidence in their price and currency stability. Hong Kong should be no exception.