In between running one of the most famous commercial and financial cities in Asia, if not the world, Donald Tsang still finds time to dream – a dream where he hopes to see the establishment of an integrated Asian currency regime – much like the euro.
Donald Tsang on Hong Kong and Singapore
However, Tsang, Chief Executive (CE) of the Hong Kong Special Administrative Region (SAR), as the former British colony is known following its return to China, knows that this dream – if it comes true – will take decades, and not just years. Certainly, this will not happen while the Chinese yuan is not convertible as the region will require “an anchor currency”; and it will not happen during his term as Hong Kong’s CE.
However, “I believe it will happen within this century, and I hope I can see it during my life time,” said Tsang, at the recent Ho Rih Hwa Leadership in Asia Public Lecture Series organised by the Singapore Management University (SMU). The talk was entitled “The Financial Crisis – Lessons learnt and the way ahead for Asia.”
Tsang, a career civil servant, was elevated to the top job of the CE in 2005. Prior to this, he was the Chief Secretary for Administration. One of the biggest highlights of his career was when he served as Hong Kong’s Financial Secretary from 1995 to 2001, when he fended off financial speculators during the Asian Financial Crisis of 1997-1998 and steered the city’s subsequent recovery.
Since the traumatic experience of the Crisis, where governments were overthrown and numerous companies bankrupted, Asia, in the current crisis, has become more resilient – thanks to lessons learnt and remembered more than a decade ago.
“We had to dig deep within ourselves to examine what went wrong to ensure we did not make the same mistakes again. Some decisions were unpopular and could have meant a loss in the next elections; but we had to address the problems facing us then,” said Tsang.
This explains why a liquidity-flush Asia has not been shackled by the toxic investments nor asset bubbles that had brought the United States to its knees and sent the global economy into a tailspin; and why no Hong Kong bank has gone bust or required government bailout.
However, new and different sets of demands have surfaced. Today, Asia is facing various challenges as global systems and structures realign in response to the economic crisis. This includes the “flattening” (integration) of financial and economic regimes; interconnectedness and interdependence of systems; “societies, clamouring for inclusiveness”, with social disparities attracting more attention and action; and the emergence of a stronger Asia, led by China and India.
Tsang believes that the region will emerge stronger from this global crisis to achieve a higher standard of living, as well as the freedom to enjoy its prosperity. Indeed, Asia can be the foundation of stability for the rest of the world.
From Tsang’s point of view, there are four key elements essential to Asia’s rise: vision, values, integration and partnership.
In trade, Asia should strive to stand on equal footing with the US and the rest of the world. “The region must be vigilant against rising protectionism; examine consumption, examine leverage,” said Tsang. “There is a need to move from foreign-led to domestic consumption” so as to reduce the region’s reliance on the West.
To do this, he advocated investing in skills and leadership training, education in government, and public and private sector cooperation to realise the vision of a strong and successful Asia.
Values are the foundation of society, and “Asian” values like loyalty, filial duty, trust, hard work and social interest above self-interest will stand the region in good stead. For Tsang, Asia has no place for the “unfettered greed of Wall Street”, characterised by self-serving, instant gratification and ‘greed is good’ behaviours.
Instead, people in public service “must aspire to the very highest ideals”. They must possess the ability to recognise when the financial system is under speculative attack or open to manipulative exchanges; they must have the integrity and moral courage to take tough action when required.
Insider trading must not be tolerated, and financial institutions, like banks, while minding their own bottom lines, should not place their own interests above their customers’.
The economic crisis serves as a clarion call for how closely linked and vulnerable the Asian economy is, even to events far and beyond Asia’s control. Before the crisis struck, there had been talk of “de-coupling” the stock markets of Asia, America and Europe.
But the reality remains that Asian economies are driven largely by exports to these very markets; and when financial markets tank in Wall Street, Asian stock exchanges see red.
Tsang offered another take on this intertwined situation: Asian exports to developed economies still exceed intra-Asia trade by a wide, albeit narrowing, margin. He proposed that by “putting the savings back to work in our own backyards”, we would reduce an over-reliance on the US and European markets.
Given the region’s foreign exchange resources and better economic fundamentals, Tsang believes this financial crisis has thrown out an opportunity, if not catalyst, for monetary integration in Asia. Such intra-regional financial cooperation could be built on an Asian financial infrastructure (including credit ratings systems and so on), based on international best practices and standards.
Fixed income trading and other basic components of a global-standard financial system should be upgraded and deepened; and if the integrated Asian currency regime comes into existence, it would be a “key building block to a global currency system”.
While trade protectionism rears its ugly head every now and then, free trade is nevertheless widely embraced – or at least not rejected – by economies all over the world.
Hong Kong and Singapore are two Asian paragons of free trade. With established business practices aligned to global standards, Tsang said these two economic hubs can do much more regionally and internationally to help developing countries make necessary policy and financial reforms.
With cross-border trade standing at US$3.3 trillion – 62% attributable to the US and Europe, only 9% to East Asia – Tsang suggested that Hong Kong and Singapore work in partnership to tilt the balance back to the region. Coupled with the opening of capital accounts in China, Hong Kong and Singapore can “proactively look for ways for an innovative Asian agenda”.
Standing by the dollar
Tsang reiterated that Hong Kong does not intend to uncouple its peg to the US dollar – despite its recent beating. The Hong Kong dollar is pegged at HK$7.75 to each US dollar. From June to December last year, the greenback declined by nearly 6% against the euro, and nearly 8% against the yen.
While the in-tandem decline of the Hong Kong dollar has driven up costs of imports, Tsang maintains that such financial policy is sound, as it has served the SAR well for more than two decades, providing both reassurance and stability to the Hong Kong dollar. This, in turn, provides a sense of certainty so essential for entrepreneurs to ply their trade.
“All I can tell you is, as long as I am CE, I will not shift the position that pegs our currency to the largest economy in the world. We will sink or swim with the US dollar.”
In the same vein, while there have been talks by commentators that the greenback is losing its status fast as the default global currency, Tsang stands firmly by the view that the dollar will be a strong reserve currency “for a long time to come” and remain “an important cog in the global financial system”.
The three S’s
While the SAR and Singapore have long been competitors for the role of regional financial hub, China’s increasing economic influence has added another ‘S’ – Shanghai – into the equation.
Tsang reminded the audience that Hong Kong and Shanghai function on the basis of “one country, two systems” – they complement each other financially and socially. Hong Kong and Shanghai are at different stages of financial and economic developments. They are not "on a collision course at all,” he said.
While Hong Kong sees its role as helping Shanghai grow as a “substantial financial centre, the SAR will itself continue to develop in financial sophistication” and enhance its value propositions in areas like education services, testing and certification, environment services, innovation and technology, medicine, and culture and creative services.
Hong Kong and Singapore possess similarities that allow both to succeed on the global stage, such as “a transparent and open system, clean government, fair and reliable judiciary to settle disputes”, but each also boasts its own competitive advantages, sufficient to put up a “decent fight”.
Tsang revealed that he makes it a point to visit Singapore every two years to see the changes in the cityscape, observe people, and experience the different “wavelength” as the city-state changes so rapidly.
But for now, any regional rivalries – if any – should be put aside. There is a more pressing task ahead: “We should work hand in hand to lead Asia out of the financial downturn,” said Tsang.
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