WHEN a European drops in to have a chat with Tung Chee-hwa these days, the Chief Executive prefers to start the conversation with questions before outlining his own policies and visions. Europe and European fiscal and monetary policies are very much on Mr Tung's mind these days. Mr Tung, like Singapore's Senior Minister Lee Kuan Yew, will go to Europe in January to attend the Davos World Economic Forum. Both politicians want to know the answer to the $64 million question: how strong will the euro be? Mr Tung is not the only one in Hong Kong asking this question. On the fifth floor of a nearby government building, Financial Secretary Donald Tsang Yam-kuen, talked openly on the subject. While Mr Tung prefers to give only a background briefing, Mr Tsang goes on the record: 'Who can tell me how Europe will perform in February next year, two months after the change over to the euro? 'These things impact on Hong Kong's performance because we are the most externally orientated economy in the world.' Remarks by Mr Tung and Mr Tsang in Hong Kong are echoed in Beijing. Zhu Min, director of the Institute of International Finance of the Bank of China (BOC) surprised Europeans at a recent conference by voicing some critical questions about the euro and pointing to political risks it raises. A Beijing-based diplomat said: 'Europeans have debated the pros and cons of the euro for many years and many serious doubts have been expressed. But as the euro becomes a reality the discussion has stopped. But now the Chinese are expressing the same kind of doubts about the euro which made many Europeans hesitate in the past.' The Chinese world - including the mainland, Taiwan, Hong Kong and Singapore - has reason to ask hard questions about the euro. Together they have about US$400 billion in reserves. Central bankers in Beijing and Hong Kong have about 30 per cent of their reserves in European currencies. Mr Zhu said: 'What central bankers in Asia do will be decisive for the euro.' And their investment strategy will be a guideline for business, bankers and private investors who also have to decide which currency to keep their money in. What will Mr Tsang do with his reserves of US$88 billion? 'We are entrepreneurs in Hong Kong,' said Mr Tsang. 'Money is money provided it gives good returns. My French franc, my deutschemark holdings and my Dutch guilder will all become euros on January 1. [But] we are looking very critically at this question. We have to see if the euro really is a genuine hard currency. 'That depends not only on the new European Central Bank, but also on the political systems. How much faith can be put in the French and German governments to maintain the tight fiscal policies demanded by the Maastricht treaty? If the criteria for budgetary prudence, inflation and stability are met, the euro will become a very possible option. But how much of Hong Kong's or China's reserves will be put into the new European currency? 'I do not want to speculate how much of my reserves will be put into the euro. You have to ask [the new German chancellor] Mr Schroeder what he is going to do with the budget. And you have to put the same question to his French counterpart,' said Mr Tsang. Hong Kong Monetary Authority chief executive Joseph Yam Chi-kwong, said that in monetary and foreign exchange reserves policies, the SAR has gained 'more, not less, autonomy' since July last year. 'Whereas before the handover, monetary policy often required close consultations with the secretary of state in London, the central government in Beijing has left such matters entirely in the hands of the Hong Kong SAR Government,' says Mr Yam, who recently went on a euro fact-finding tour in Europe. Mr Tsang said: 'Yam has been telling the Europeans that we are prepared to trade in the euro. We are there to help. 'But there is another way to promote our reserves in Europe. In order to internationalise the euro we have to find ways to trade it in non-European countries. 'I am seriously asking you [Europeans] to make use of Hong Kong, Singapore or Tokyo to [make possible] trading and clearances of the euro in non-European trading hours. And you can do this most effectively in one city and that is Hong Kong. International euro settlements can be done here. 'If you do this you will create a market for the euro in Asia. And we need assurances of 24-hour euro liquidity.' Mr Tsang's thoughts are shared by Beijing. Mr Zhu also advocates strong euro bond trading in Asia so as to give central banks flexibility and an alternative to buying US treasury bills. Beijing's First Deputy Prime Minister Li Lanqing said: 'We prefer the co-existence of several currencies [in our reserves] instead of the hegemony of the US dollar.' Hong Kong and the mainland, bound together politically but with very different economies, have also found some common views on how to protect their currencies from the wave of speculation. Mr Yam said: 'Volatile exchange rates would introduce instability and unpredictability without bringing any corresponding advantages, except possibly in the foreign exchange industry. 'Over the last two months an international consensus has emerged about the dangers of unmonitored, highly leveraged cross-border capital flows.' Meanwhile, Mr Li in Beijing is cautious about financial liberalisation. 'We are [only] gradually opening up our financial services sector, because we have a very poor base to begin with. We in China have a tradition which is to invite guests in after we clean the room. 'Some foreigners have told me: 'don't worry we will bring in our high-powered vacuum cleaner to help you' . . . we are afraid that if the financial speculators come in with their high-powered vacuum they will not only clean up but they will also absorb our US dollars, renminbi [yuan] and eat up all our euros as we are going to include them in our currency reserves.' Asian leaders will be looking carefully to see whether the euro adds stability to global currency markets, and it is here that many concerns are now growing.