Confidence can be hard to quantify, but it is critical to the operation of financial markets, and crucial to Hong Kong's status as an international business hub. During the past 20 years, this confidence has been built on a rules-based monetary system, rational economics and broadly sensible governance of financial markets. Running a currency peg demands iron nerves to handle economic shocks, but also clearly delineated responsibilities among officials charged with its administration. The introduction of the ministerial system last year muddied the waters with the creation of the office of secretary for financial services and the treasury, making it unclear who held the reins in forming financial-sector policy. The government's climbdown over the proposed centralisation of stock-market regulation highlighted a system suffering muddle. Financial Secretary Antony Leung Kam-chung appeared a bold reformer on the issue, while his nominal subordinate, Frederick Ma Si-hang, the Secretary for Financial Services and the Treasury, seemed to oppose change. Similar confusion crept into monetary policy, with Mr Leung hinting at his dissatisfaction with the pegged exchange rate system and Hong Kong Monetary Authority chief executive Joseph Yam Chi-kwong privately fuming about Mr Leung's indiscretion. Moreover, with Hong Kong facing mounting budget deficits, it was unclear who called the shots in fiscal reserve management. Mr Yam proposed the issuance of deficit bonds, while his ministerial colleagues argued such a move would stifle efforts to reduce the government's revenue shortfall. The suspicion was that the emergence of a competitive political system was wrapping monetary policy up with personality politics. Yesterday's correspondence between Mr Leung and Mr Yam goes a long way towards clarifying matters. Mr Leung is established as setting monetary and financial policy, while the authority is charged with executing those instructions. The new operating mandate lacks legal backing, but establishes terms of engagement that restrict the financial secretary's scope for off-the-cuff policy changes. The requirement for public disclosure of any policy change within three months of its implementation is an especially welcome addition to market transparency. Similarly, forcing Mr Ma's office to support the broad policy objectives established by the financial secretary removes confusion of the sort that blew up after Mr Leung supported stripping the stock exchange of its frontline regulatory responsibility for listed firms. In explicitly stating that the Hong Kong dollar should be pegged to the US dollar at a rate of 7.8, doubts about the government's commitment to the system should be reduced. Some observers may have hoped for the authority to be granted full independence, paving the way for it to become a fully independent central bank. However, so long as Hong Kong operates a mechanistic currency board system, such an arrangement is not vital. What the new arrangement does is establish the institutional foundations should it be necessary for Mr Yam and his colleagues to assume proper central bank functions under a different currency arrangement. As such, these developments represent sensible succession planning, without necessarily indicating that change is in the air. Above all, the changes have been introduced at a time of financial calm. The economic outlook may be poor but Hong Kong's external accounts are robust and money markets quiet. However, with property prices having slumped 65 per cent since 1998, the potential for a future financial crisis is real enough. Having upgraded Hong Kong's financial infrastructure, we are better positioned to deal with such an eventuality.
