A SNEAK preview of China's proposed central banking and commercial banking laws was provided by our quasi-central bank governor Joseph Yam Chi-kwong at the weekend. Although he denies having any expertise in China affairs, he related some inside information at the Hongkong Economic Journal Symposium. Having had the ''opportunity to read and comment on a discussion draft on a personal basis'', Mr Yam humbly admitted that he only heard of the drafting of banking laws ''from my contacts''. What basically amounts to a ''follow me'' blueprint comprises mainly suggestions ensuring that the People's Bank of China will assume central bank duties without carrying too far the communist interpretation of the word ''central'', which means planning by the state. To wipe out the red connotations, central bank credit will not be used for financing fiscal deficits. The People's Bank will be given scores of ''exclusive'' duties, such as exclusive responsibility and clear authority on how to achieve monetary policy objectives; exclusive powers to control the supply of money, however defined; and exclusive powers to influence the price of money, that is interest rates. To give some teeth to this infant central bank, the blueprint goes on to suggest putting commercial banks under its supervision and subjecting these banks to commercial disciplines and internationally accepted prudential standards. Last but not least, it is necessary to establish effective sanctions against non-compliance by commercial banks. If China implements the above measures, we will see a much stronger central bank than its counterpart in Hongkong, at least in one respect: the power to influence interest rates. This is something Mr Yam cannot do at the moment. He appears to feel no loss and is keen to assure the territory that all things fiscal in Hongkong are fine, even though inflation is running almost in double digits while interest rates are effectively negative. Despite the effect of airport-related projects and other public expenditure on inflation, everything will still be fine. How? Imagine Hongkong in perfect market conditions, straight out of an elementary economics textbook. ''Other things being equal, higher prices would in time eliminate excess demand and lead to a slowdown in the rate of increase in prices to the extent that our competitiveness would be restored.'' Mr Yam assured us that ''if this market mechanism is efficient enough, perhaps this automatic process of adjustment would not be too intolerable''. ''Perhaps'' is right. The main comfort from this argument is that it is theoretically sound, ''as anyone with some basic knowledge of economics would agree'', he said. The main discomfort from hearing this is that year-one economics textbooks also tell us that perfect market conditions rarely exist and economists have a hard time explaining real-world situations in terms of economic theory. And economic theories are mainly useful in that they help us to understand how far the real world situation deviates from theory. Mr Yam wants to refresh our year-one lessons, making sure we still cherish the naivete to strive for the ideal, for the perfection we never have the chance to see. Given the constant reiteration from the Government that the dollar peg will be one of the post-1997 monetary features, Mr Yam again said using higher interest rates to tackle inflation ''would be more painful to all concerned than that under existing arrangements''. No surprise. What is surprising is the argument. While it is true that higher interest rates mean higher funding costs, a stronger exchange rate and an inevitable erosion of our competitiveness, Mr Yam thinks the main problem is ''very soon, under ratherdepressed economic conditions, the strength of our currency would be brought into question''. Just as happened in the European currency turmoil last year. He is basically saying that theoretically an economy which is running at a gross domestic product growth rate of 5.5 per cent a year will turn to stagnation ''very soon'' if interest rates are adjusted upwards to tackle inflation. Therefore, Mr Yam is going for the less painful and more theoretical option of removing market imperfections. Had he stated at the very beginning of his argument that maintaining exchange rate stability was of utmost importance agreed by all governments involved, all of us would be spared the intellectual toil of following his exercise on economics. He could have summarised his arguments in five words: ''Long live the peg rate''.