Former HKMA chief Joseph Yam says China quite right to take a cautious approach on allowing the yuan to become freely traded

The next global financial crisis ‘could be even bigger than previous ones’, he adds, that’s why China must be cautious with its currency

PUBLISHED : Friday, 26 May, 2017, 4:36pm
UPDATED : Friday, 26 May, 2017, 10:53pm

Joseph Yam Chi-kwong, former head of the Hong Kong Monetary Authority (HKMA), says the next global financial crisis could be even bigger than previous ones – and that’s part of the reason why China should not let its currency to be freely traded, but only allow it to be tradable via monitoring.

“In my opinion, the renminbi should not be freely convertible without monitoring, but the currency should be allowed to be tradable under appropriate reporting and monitoring,” he said on Friday.

He added it would only be safe and appropriate to allow people to convert large amounts of other currencies into yuan, if they report and declare the exact purpose of the usage to the authority, which should also then strictly enforce the use of the money.

“As an example, if someone reports he is to convert 1 billion yuan (US$145 million) to invest in the stock market and three months later he has not invested the money, the authority should order him to take the money out of the country,” Yam said.

Yam, who ran Hong Kong’s central bank from its creation in 1994 to 2009, and who acted as an adviser to incoming Chief Executive Carrie Lam Cheng Yuet-ngor during her election campaign, has a close working relationship with both the mainland authorities and The People’s Bank of China.

He is a strong supporter of China’s socialist-led market economy, which accepts more market opening up to the outside world under monitoring and controls.

For someone like me, who has always believed in market forces, it [the government’s intervention in August 1998, to defend against currency speculators] felt like being betrayed by a friend
Joseph Yam Chi-kwong, former head of Hong Kong Monetary Authority

He says that’s how China has been able to weather the recent global financial crises, and achieve better economic performance than many western countries over the past 20 years.

“Please don’t misunderstand me. I still believe in market forces and Hong Kong will never have any capital controls under the Basic Law,” he said.

“But if you look back at the past twenty years, the Hong Kong stock and currency markets were hit hard by the Asian financial crisis of 1997, and the Hong Kong government was forced to take market intervention in August 1998, to defend against speculators.

“For someone like me, who has always believed in market forces, it felt like being betrayed by a friend.”

The 2007/2008 financial crisis was, he added, rooted in speculative activities by Wall Street investment banks which introduced sub-prime and other complicated products to investors.

“That was a very bad, greedy culture which led investment banks to carry out their businesses with the sole purpose of benefitting themselves, not the public or their investors,” he added.

“For many freely traded currencies, 95 per cent of trades are done by speculators, with only 5 per cent done by those who need the currency for business purposes. This is not healthy.”

But Yam said the damaging speculative culture in the world’s biggest financial market has not changed, and the monetary easing policies in the US since 2008 have simply led to trillions of dollars flooding the markets.

“These problems, together with globalisation of economies, means the next financial crisis could be bigger than the previous one,” he said.

“Hong Kong needs to make sure its system is prepared for that, while China also needs to adopt a safe approach to open up its market and internationalise its currency.”