Hong Kong Journalists Association
Regional Conference on the Financial Crisis
26 September 1998

1. The hard life of an economist

Being an economist, there is little for one to be proud of these days. The title of "professor of economics" sounds more like an onus of proof than a status symbol. We economists, academic and commercial alike, have been so incapable of forecasting crises, so ingenious in explaining those crises, after the events of course, and so incompetent in proposing effective solutions that we almost live up to the reputation of economics as a "dismal science". I said "almost" because things now look worse than "dismal".

Even an eminent economist like MIT professor Paul Krugman, famous for dismissing the "East Asian miracle" as a non-miracle, did not do so out of his own original research. He admitted that he was surprised by the ferocity of the East Asian crisis, and his recent endorsement of foreign exchange control as a last resort has landed him on a sea of controversy.

So much for the self-degradation of the profession. Given the trend of globalization, which manifests most profoundly in the sphere of the international flow of financial funds, it is indeed difficult to forecast. Trillions of dollars are floating around the world. Japan's government holds the largest foreign exchange reserves, but only at about US$210 billion. China has US$140 billion, and Hong Kong now has less than US$90 billion after the stock market intervention. Most Asian economies have only tens of billions, or even a few billions: all fractions of the portfolios of the largest private funds in the world.

Mr. George Soros is certainly a more powerful man than many central bankers in the region are, if one is talking about money power. But a government is always a monopolist in legalized violence, which can take many forms: army, police, foreign exchange control, overnight legislation, or market intervention. No governments with any dignity are going to kneel down before Mr. Soros. Even the Bank of England yielded to him without admitting it in 1992.

Given this kind of situation, who can predict with any certainty the turn of events in the global economic arena? Economists can perhaps claim that they are confronted with a much more difficult task than sociologists or political scientists. Revolutions, cultural or physical in nature, are apparently more predictable than economic chaos. And the East Asian crisis is a financial crisis, the most volatile of economic disasters.

2. What I want to say

I feel very honoured to be invited to give the opening speech in such a distinguished gathering of journalists and concerned parties in the region. I am not sure that I qualify for the job. In any case, what I intend to do in these 40 minutes or so is to present first a summary of the more reliable "theories" that explain the crisis, including its unpredictability. Then I will look at the Hong Kong situation. As a "core" economy with the third largest foreign reserves in the world, we are not supposed to suffer the astonishing recession that is unfolding in front of our eyes. I will try to draw some "lessons" for the region in general and Hong Kong in particular before the end of my speech.

3. The "East Asian miracle" eulogized and the herd rushed in

The Asian story started out as a happy one. The idea of a "Pacific century" first emerged in the 1970s. It gained further currency in the 1980s when East Asia became a powerhouse of economic growth. Japan began to "say no", even to the US, before behaving like the "number one" economy in the world. However, the watershed year must be 1993, when the World Bank launched its report The East Asian Miracle: Economic Growth and Public Policy.

The report was not very accurate in explaining the success story of East Asia: we were then less "market-oriented" and "liberalized" than the report made us look. On the other hand, we were not as successful as the Bank thought, although we undoubtedly constituted the fastest growing area of the world.

In any case, the endorsement of the East Asian "economic miracle" by the world's top financial institution generated a tidal effect, which was felt even by a humble being like myself. In the year that followed, I was invited to many lunches by international brokers and fund managers. Carrying with them huge portfolios of billions of dollars, they were so eager to invest in Hong Kong, China, and the East Asian region. I remembered being asked a question by a fund manager from North America while I was having my soup, and I nearly choked. "How large is the population of Shanghai? Three million?", he inquired. He was thinking of investing in the B-share stock market in China's largest metropolis, which then had a population of over 13 million.

That is international money, looking for quick returns, but not really having the appropriate knowledge and information. No wonder many fund managers behave like herd. Add on top of that international institutions like the World Bank and the IMF which are entrenched in western economic orthodoxy, and are therefore not particularly sympathetic to "non-west" problems, constraints, and difficulties, periodic crises seem almost unavoidable.

4. What caused the crisis?

What caused the crisis in East Asia? There are basically three major schools of explanations in mainstream economics.

(1) Paul Krugman of the MIT emphasizes the internal causes of the problem: crony capitalism and corruption, excessive investment in areas which yielded little foreign exchange earnings (such as real estate and the stock market), shaky banking practices and poor supervision etc. (Krugman, 1998).

(2) Jeffrey Sachs of Harvard University, on the other hand, has much more sympathy for the authorities in the region. He attacks international funds for ruthless behaviour and showing herd instinct. "Panics", in his view, were responsible for the unprecedented and unpredictable phenomenon (Radelet and Sachs, 1998).

(3) Ronald McKinnon of Stanford University, finally, argues that it was the misalignment of the relative exchange rate between the US dollar and the Japanese Yen that de-railed the whole international monetary system (McKinnon, 1998). Most East Asian economies pegged their exchange rates to the US dollar, implicitly or explicitly. Remember that the US dollar fell to below 80 yens in 1995, only to surge to above 130 by the end 1997. Such a huge gyration in international monetary anchorage touched off the crisis.

MIT, Harvard, and Stanford. All prime universities in the US, home of international hedge funds which are allegedly causing so much trouble around the world. That speaks volume for the economic status quo that we are in. In any case, each school contains some elements of truth.

5. Excessive private investments and current account deficits

Professor Paul Krugman is certainly right about the internal causes, but only to a limit. In the 1990s, a number of East Asian economies showed persistent internal troubles. There were obvious signs of over-investment. Crony capitalism, corruption, and inept banking apparently had a role to play in the process.

However, we have to be careful about what over-investment means. Over-investment would not invite external speculative attack if it does not show up as overt an external imbalance. Usually, a current account deficit (CAD) is the most direct expression of external imbalance. A CAD in excess of 5% of GDP is internationally regarded as worrying. Thailand had an average annual CAD of 7.8% in 1990-1996, while the actual deficit stood at 9.2% in 1996. The figures for Malaysia were 8.1% and 6.0% respectively, and 4.8% and 5.9% respectively for Philippines. In 1996, Indonesia's CAD was 3.4% of GDP.

Despite these statistics, East Asia was not reckless, at least on the basis of broader statistics. Simple national income accounting shows that a CAD is also equal to the amount by which national investment exceeds national savings. In that case, a country needs to borrow or attract money from the rest of the world for its shortage in savings. Therefore, a current account deficit can emerge as a result of excessive investment, or insufficient savings, and both can occur in the public sector or the private sector. In East Asia, the saving rate is among the highest in the world, thanks perhaps to "Asian values". Most countries and territories in the region showed a saving rate of over 30% of GDP.

Moreover, the public sector in East Asia can hardly be blamed for lacking fiscal discipline. All of the countries and territories which have suffered currency attacks were either having huge fiscal surpluses (like Hong Kong and Singapore) or roughly balanced budgets. Even in Indonesia, a country that is still suffering from financial turbulence, the fiscal surplus in 1996 represented 1.2% of GDP.

Hence the problem seems to lie with excessive private investments. Of course, East Asia has had the highest investment rates in the world for many years, but what is interesting is that investments in the 1990s seem to have concentrated on the "wrong" sectors, i.e. sectors that did not yield sufficient value-added or foreign exchange returns.

There has been evidence that investments in several countries have centred on the non-traded sectors, in particular in real estate and other forms of infrastructural construction. Moreover, a significant portion of the financing obtained (from both the local and the international markets) did not go into new investment projects that would have produced new capital goods. Instead, the loans and bonds were used to finance the speculative demand for existing assets in the secondary market. Hence speculative asset price bubbles were formed in Thailand, Malaysia, and Indonesia. Here the roles of both domestic and international money are important. As for domestic money, i.e., the financial system within a country, Krugman is right in referring to the problem of "moral hazard" and crony capitalism (Krugman 1988). That is, given the close relationship between the domestic banking system (at least the top banks) and the government, so that a bail-out by the government in the case of bad debts or even insolvency seemed assured, some East Asian banks engaged in lending that fuelled the asset bubble.

6. Moral hazard cuts both ways

However, there is another version of the story, and that is where Jeffrey Sachs of Harvard University comes in. It involves international money. Encouraged by the World Bank and the International Monetary Fund (IMF), many East Asian countries embarked on a process of financial deregulation and privatization, but without careful monitoring. Given newly found freedom, many banks and non-bank financial institutions (NBFIs) became intermediaries that channelled foreign capital into the local system. Many of them, in particular the financial trusts in Thailand, were under-capitalized. In other words, their owners had everything to gain by borrowing locally and aboard and re-lending the money to domestic investors and speculators, but had little to lose themselves if things went wrong.

That was a result of carelessly following the laissez faire ideology and the lack of proper prudential supervision by the government. Moreover, for every borrower there is a lender. It now becomes clear that in countries like Indonesia and Thailand many international lending institutions and investors conspired with local counterparts to evade government regulation on foreign exchange exposure. Moral hazard cuts both ways. It is wrong to condemn just the borrowers. It is also wrong to concentrate effort in any "rescue package" to bail out the lenders.

All the above factors would have caused serious problems, but probably not crises or disasters of the kinds that we have witnessed in the past year. Since they took the form of a financial storm in general, and attacks on national currencies in particular. We have to look at the exchange rate more closely.

In the region, only Hong Kong formally pegs its currency to the US dollar at the rate of HK$7.80/US$, under the so-called linked exchange rate system, or the "link". The system is actually a variation of a genre called "currency boards" (Tsang 1996a, 1996b). Most other East Asian economies were practicing implicit nominal peg (i.e. pegging without announcing it) or implicit real peg (continuous nominal depreciation of the home currency that just compensates for the inflation differential) to the US dollar.

This is where the view of Ronald McKinnon of Stanford University is of reference value. When the US dollar started its relentless strengthening against all major currencies in 1996, because of the unexpectedly sound US economy, international speculators smelt blood in East Asia. With the implicit peg to the US dollar (or explicit peg in the case of Hong Kong), East Asia faced the loss of competitiveness against the rest of the world, exactly at a time it could ill-afford to. Given the CADs and the emerging financial problems, the region's ability to export goods and services, and therefore to earn sufficient foreign exchange to service the financial liabilities that had been built up, was dealt a serious blow.

Hence international speculators flocked in and sold the East Asian markets short. I do not think that there was a grand conspiracy coordinated among a few George Soros's, but several large international funds did have some market power or the ability to ignite a trend, given also the right (or wrong) "fundamentals". As Radelet and Sachs (1998) explain, those funds which had already been locked in then panicked, and along with domestic units and agents, ran for cover. The Bank of Thailand put up a fight for the Thai baht by pushing up interest rates and selling the US dollar in the forward market, but then had to yield because of a shortage of foreign exchange reserves, which unfortunately was not fully revealed to the public. When reality transpired, confidence in the Thai baht was suddenly and severely shaken. The meltdown began.

In a speech in Hong Kong in early 1998, the Nobel laureate in economics, Merton Miller from the Chicago University, accused Japan as the "culprit" of starting the crisis in East Asia, because it allowed the yen to depreciate sharply against the US dollar, in a bid to export herself out of her six-year old recession. The other side of the coin was of course the rapid strengthening of the US dollar, to which most East Asian currency pegged, as I said. Professor Ronald McKinnon of Stanford (McKinnon, 1998) however argues that US-Japan coordination is necessary to stabilize the exchange rate of dollar-yen, and he regards 130 as the long-run equilibrium level. Only with a stable international money anchor, the other East Asian economies would not have to ride another roller coaster, which could produce economic disasters.

7. The contagion effect

However, why did the crisis spread to Taiwan, Singapore and Hong Kong? In 1996, Hong Kong had a roughly balanced current account, while Singapore managed to have a surplus of 16.26% of GDP! Taiwan's surplus was less impressive, but the ratio still stood at about 5% of GDP. Moreover, all three economies had one of the largest foreign exchange reserves in the world just before the crisis.

Fred Bergsten (1997), a former undersecretary of the US treasury and now Director of Institute of International Economics, criticized the Taiwanese authorities which "chose to let its currency join the decline after a minimal defensive effort" and therefore spread the crisis to the "strong center" economies of Hong Kong and Singapore. "On every measure, its (Taiwan's) competitive position remained very strong even after the depreciations in southeast Asia and Korea. Hence its action was totally unnecessary and violated every norm of international cooperative behaviour."

The Hong Kong Monetary Authority (HKMA) follows the same line, albeit more diplomatically. In the Report on Financial Market Review released in April 1998 (FSB, 1998), the Hong Kong government said, "On 20 October (1997), the New Taiwan dollar depreciated by 5.8%, as a result of the authorities' announcement of allowing the currency to float. This sparked off speculation on the resolve of Hong Kong authorities in maintaining the linked exchange rate with the US dollar." (P.7) I do not want to judge here who the real culprit is. The "contagion" effect is a phenomenon that is difficult to understand. Market psychology sometimes does feed onto itself, and creates herd-like or panic behaviour that spreads afar.

8. Hong Kong in the Midst of the Financial Crisis

In any case, the impact of the financial crisis on Hong Kong turns out to be even deeper than most analysts anticipated. I remember in a gathering of economists and financial experts in May, I was the most pessimistic as I forecast a negative growth of -0.5% for the whole year. Everyone else opted for zero growth or positive growth of 1% or 2%. Now it seems likely that Hong Kong might witness a negative growth of about -5.0% in 1998---the worst recession since reliable statistics became available in the early 1960s!

That would put Hong Kong much nearer to the category of Thailand, Malaysia, South Korea, and Indonesia, than to Singapore and Taiwan, our real competitors. Taiwan should be able to register decent positive growth for the year of 1998, and Singapore might yet perform better than us. Why is Hong Kong so "unlucky"? Why do we have to suffer so much?

I shall argue that three different factors have contributed to our present predicament. First, the structural imbalance that had built up in the Hong Kong economy before the crisis was more serious than that in Singapore and Taiwan. Second, since Hong Kong stuck to the linked exchange rate in face of persistent speculative attacks instead of letting the currency depreciate, the impact tends to be harder, particularly regarding high and volatile interest rates. Third, the government has not been decisive enough in handling the rapidly unfolding crisis. Let me elaborate on each factor.

9. Structural imbalance and bubble in Hong Kong

The first factor is Hong Kong's internal imbalance. Two major forces have been driving the local economy since the early 1980s and contributed to the present post-1997 troubles. The first is the "China factor": Hong Kong's economic "integration" with Mainland China. The second is the escalating dominance of the property sector.

Both factors have pushed Hong Kong down the path of what I described as "Manhattanization" (Tsang, 1994; 1998d). Between 1980 and 1996, the share of the manufacturing sector in GDP dropped from 23.7% to 7.2%, while the number of manufacturing workers fell from over 900,000 in 1980 to less than 290,000 by the end of 1997. At the same time, major service sectors had their employment more than doubled. Hong Kong has rapidly become like New York's financial hub.

Such a process is in my view inconsistent with the framework of "one country, two systems", under which Hong Kong is not supposed to "dissolve" itself into the Mainland economy and to become "just another Chinese city". As stipulated by the Basic Law, Hong Kong is to take care of her own fiscal, monetary and manpower problems. Hong Kong will not be able to expediently "export" its difficulties (including unemployment or the lack of demand for its goods and services) to mainland China, like what New York in the US or London in the UK can do to the rest of the country. So the Hong Kong economy needs to maintain some "coherence" in its own structure.

Unfortunately, these economic constraints of "one country, two systems" were not fully understood before 1997. Even worse, the Chinese and the British sides were also engaging in hostile politics that had the side effect of paralyzing any significant initiatives in economic re-structuring. The failure by the Patten Administration to build up a land bank and to provide an adequate supply of land to the market was particularly disappointing (Tsang, 1998d).

The dramatic "economic restructuring" of Hong Kong has led to voids that have been largely filled by real estate developments and their related businesses, as reflected in the huge increases in property prices and rentals. Take the example of residential property prices, their average level rose by eight folds between 1985 and 1997, yielding an annual nominal growth rate of 19.0%, far above those of nominal GDP (13.5%) and nominal per capita GDP (11.8%). In many categories of property, Hong Kong had become the most expensive in the world by 1997. Moreover, more than 40% of bank loans were extended to property related activities, including property mortgages, building and construction, and property developments.

A direct consequence of the surge in property prices and rentals was that it pushed up the profitability of the real estate sector and its affiliates, e.g. legal services and finance, while squeezing that of other services (e.g. retail outlets, restaurants etc.), not to mention the manufacturing industries.

A tired economy is vulnerable to speculation. The narrowing of the range of profitable activities would force money into the already shrinking "funnel". In a way, it is like a scenario of "too much money chasing too few profitable opportunities". Ironically, by design or by default, the China factor also directly contributed to the latest financial bubble in Hong Kong. Since October 1996, huge amounts of Chinese capital reportedly poured into the property and stock markets in the territory.

Fed by rumours and observable transactions, property prices put on a dramatic upswing. The average price index of residential property units rose by 40% in the run up to the political transition. In the stock market, prices of China-related stock shares listed in Hong Kong also soared. From the beginning of June 1997 to late August 1997, the H-shares index (the China Enterprises Index) rocketed 60%, while the red-chips index (the China-Affiliated Corporations Index) surged 40%, compared with the 7% rise in the Hang Seng Index composed of an elite basket of stocks. Their fall from the peak, which actually began before the October 1997 speculative attack on the Hong Kong dollar, was equally breath-taking: the H-shares index plunged by 50% between late August and mid-October 1997, as the red-chips index took a 38% battering. The Hang Seng Index meanwhile fell by about 18%.

In other words, just before the East Asian financial crisis, a huge economic bubble was building up in Hong Kong. The bubble was larger than anything that could be observed in either Singapore (where the private residential property sector was much smaller than that in Hong Kong) or Taiwan (where there was no pre-1997 rally). No wonder the adjustment in Hong Kong has been much more pronounced.

10. The Hong Kong linked exchange rate system: anchor or curse?

The second factor aggravating Hong Kong's economic agony is the dilemma created by the linked exchange rate system, under which the Hong Kong dollar has been pegged to the US dollar at the rate of 7.80 since October 1983. It was a product of politics; in fact a rescue measure to save the dollar in the heat of Sino-British conflicts over the future of Hong Kong.

Hence, unlike the implicit nominal and real pegs practiced by many East Asian economies, or the "crawling peg" in the case of the Singapore dollar (pegged to a basket of currencies including the US dollar), the Hong Kong dollar link is explicit, officially announced and defended with the utmost vigour. Moreover, it carries with it a political meaning, which sometimes becomes almost sacred.

Before the 1997 transition, nobody dared to propose any changes to it. It was seen as the most important anchor in a turbulent time, keeping "ill-intended speculators" away. But I wish to put it on record that my "private" view since 1993 was that after the transition, something should be done. This view was actually conveyed to various policy decision-makers, including one in the Bank of England, in my visit there in summer 1993. After the dust has settled, the HKMA should in my opinion choose a hot and boring Friday afternoon in mid-summer, when most fund managers have gone swimming in Bali and top government officials have gone missing in Canada, Australia or southern France, and announce the floating of the Hong Kong dollar. Few would notice the move. Two weeks later, the SAR government could disclaim any responsibility, whichever way the exchange rate moves.

Unfortunately, just as we thought we could feel relieved after the political transition, the speculative attack occurred. I am afraid that the hot mid-summer Friday afternoon is not going to be with us any time soon. Under attack, there are actually only two time points when a fixed exchange rate system can optimally change. The first is immediately when the attack takes place. The second is after the storm is over and when everything returns to calm. The first option is "wise" in the sense that the speculators lose a "target" (notwithstanding what was said previously about Taiwan's action on 20 October 1997). Nevertheless Hong Kong missed that opportunity. On 23 October, the HKMA defended the link vigorously, and overnight interbank interest rates shot up to 280% briefly. Since then, interest rates have stayed at very high levels and shown huge volatility. That phenomenon proved to be the most depressing factor on the Hong Kong economy, leading to a "credit crunch" in the banking system that has strangled even normal economic activity and added to our economic blues (Tsang, 1998d).

Now, after several more rounds of speculative attacks on the "target", abandoning the link would produce disasters that could well get out of control. Speculators would take no prisoners alive. More seriously, it could result in a massive loss of confidence in the government and a scale of capital flight that would be difficult to imagine. Hence the second choice of soldiering on seems to be the only viable option left.

11. The Hong Kong SAR government's handling of the crisis

The third factor that has probably aggravated the recession is the way that the SAR government has handled the unfolding crisis. As a "currency board system", the Hong Kong linked exchange rate system was flawed in that there was no effective arbitrage mechanism that really fixed the spot exchange rate (Tsang, 1996a; 1996b; 1998a). The Hong Kong Monetary Authority (HKMA) had to resort to the manipulation of interbank liquidity and interest rates, as well as outright intervention in the foreign exchange market (Tsang, 1998a). These were inconsistent with market-driven fixed rate systems such as the gold standard and the currency board arrangements (CBAs).

In 1996, I was commissioned by the Hong Kong Policy Research Institute (HKPRI) to come up with a report on ways to strengthen the link. A report was completed in October 1996. It was sent to the Financial Secretary, the Chief Executive of the HKMA, as well as various important personalities in the banking sector. In the report, I proposed to improve the link by adopting the AEL model of Argentina, Estonia and Lithuania, under which the central bank guarantees the convertibility at the fixed exchange rate of the whole monetary base (instead of just the cash base in the classical currency board). An effective electronic arbitrage mechanism would be then in place, and the spot exchange rate would be firmly "locked" (Tsang, 1996a; 1996b; 1997).

Nothing was heard after October 1996. Then after the speculative attack in October 1997, Financial Secretary Donald Tsang openly conducted a consultation exercise with academics. I was one of those consulted and I re-proposed the AEL model. I then had technical sessions with the HKMA. In its Report on Financial Market Review released in April 1998 (FSB, 1998), however, the government rejected my proposal, for reasons that I did not find convincing (Tsang, 1998a).

Then the government made a historical move in August 1998, by intervening in the stock and futures market, citing the danger of "double market play" (Yam, 1998). On 5 September 1998, the HKMA finally implemented "seven technical measures" which could be categorized into two major moves. The first, and the most important one by the recognition of many informed commentators, was a partial adoption of the AEL model that I have been proposing (Tsang, 1998e).

It is my humble opinion that if the government had adopted the AEL model late last year, or in April 1998, Hong Kong's economic crisis would have been less severe because interest rates would not have been so high and volatile. The government might not even have had to intervene in the stock and futures markets. The "seven technical measures" announced on 5 September 1998 could and should have been implemented earlier (Tsang, 1998e).

One question in the mind of nearly all commentators is: why so late? I am afraid that it belongs to the realm of political economy, rather than monetary economics, and I have no answers to offer. As far as the AEL model is concerned, I should emphasize that I am just a "discoverer", an "interpreter", and certainly not an inventor (Tsang, 1998e).

12. Three lessons to learn about money and one additional lesson for Hong Kong

Some say that the worst is over for the East Asian currency crisis. Others predict that the worst is yet to come. There may even be a worldwide meltdown, given the instability in the US and Japan. My honest answer is that I am not quite sure what the future holds. In any case, I think that there are three general lessons about money that we should learn.

The first lesson is that both governments and enterprises should use money carefully and wisely. They should avoid investing borrowed money in projects or speculative ventures that do not generate sufficient real returns which would enable them to service their debts. No matter how optimistic the future may look, no countries or territories are exempted from the law of financial gravity: what goes up must come down (or what shoots up must then plunge).

The second lesson is that monetary institutions are beset with the problems of "moral hazard". Financial liberalization should be pursued with care to ensure proper monitoring and supervision. This is an inescapable responsibility of a government.

The third lesson is that the international monetary order is in a mess. On the one hand, international institutions such as the World Bank and the IMF are lamentably lacking in funds and authority that enable them to serve as genuine global central banks. Even if they had, we would be wary of whether their decision making could truly reflect the diverse situations and needs in different parts of the world. On the other hand, there are all these private funds seeking quick returns on the basis of incomplete information, or worse, hearsay. The other side of the coin for over-borrowing is over-lending: moral hazard cuts both ways. International investors and hedge funds should also be more disciplined.

The East Asian currency crisis is a typical case of international market failure and the lack of effective international governance as a public good. In such a messy environment, any nation or territory must act with extra caution. Ronald McKinnon's suggestion of a monetary anchor in terms of stable exchange rate between the US dollar and the Japanese yen would be a useful start. How it is going to come about is a different story.

As to Hong Kong, we are supposed to be a "strong economy" in the "core" of the East Asian region (Bergsten, 1997). Very few people, particularly top government officials could have imagined such a deep recession and such a difficult situation that the territory has been caught in. A sincere and thorough soul searching is in my view needed. However, perhaps this is not yet the time to do it. The Hong Kong economy is still out in the stormy sea. Our top priority must be to ensure that the "ship" returns safely to the port first.

References

Bergsten, C. Fred (1997), "The Asian Monetary Crisis: Proposed Remedies", statement before the Committee on Banking and Financial Services, US House of Representatives, 13 November.

Financial Services Bureau (FSB) (1998), Report on Financial Market Review, Hong Kong Government.

Krugman, P. (1998), "What Happened to Asia?" January, paper on Krugman's web site (web.mit.edu/krugman/www).

Radelet, S. and J. Sachs (1998), "The Onset of the East Asian Financial Crisis", Harvard Institute for International Development, mimeo., March 30.

McKinnon, Ronald I. (1998), "Exchange Rate Coordination for Surmounting the East Asian Currency Crisis", Keynote Speech at the 6th Convention of the East Asian Economic Association, 4-5 September, Kitakyushu, Japan.

Tsang, Shu-ki (1994), "The Economy", in The Other Hong Kong Report 1994, Hong Kong: The Chinese University Press, pp.125-148.

Tsang, Shu-ki (1996a), A Study of the Linked Exchange Rate System and Policy Options for Hong Kong, a report commissioned by the Hong Kong Policy Research Institute, October.

Tsang, Shu-ki (1996b), "The Linked Rate System: through 1997 and into the 21st Century", in Ngaw Mee-kau and Li Si-ming (eds.), The Other Hong Kong Report 1996, Hong Kong: The Chinese University Press, chapter 11.

Tsang Shu-ki (1997), "Currency Board the Answer to Rate Stability," Hong Kong Standard, 31 October.

Tsang Shu-ki (1998a), "The Hong Kong Government's Financial Market Review Report: An Interpretation and A Response", article placed on Hong Kong Baptist University's web site: www. hkbu.edu.hk/~econ/web985.html

Tsang Shu-ki (1998b), "Is a Currency Board System Optimal for Hong Kong?" article placed on Hong Kong Baptist University's web site: www.hkbu.edu.hk/~econ/web986.html.

Tsang Shu-ki (1998c), "The Case for Adopting the Convertible Reserves System in Hong Kong," Pacific Economic Review, forthcoming.

Tsang Shu-ki (1998d), "Handling Credit Crunch under Hong Kong's Currency Board System", article placed on Hong Kong Baptist University's web site: www.hkbu.edu.hk/~econ/web987.html

Tsang Shu-ki (1998e), "Welcome on Board the AEL Model, Hong Kong, but........", article placed on web page: www.hkbu.edu.hk/~econ/web989.html

Tsang Shu-ki (1998f), "The Hong Kong Economy: Opportunities out of the Crisis?" Journal of Contemporary China, forthcoming.

Yam, Joseph (1998), "Why We Intervened", The Asian Wall Street Journal, 20 August.