HKMA’s Chan says fiscal cuts are essential for Europe

Hong Kong Monetary Authority chief executive Norman Chan says Europe must make deep fiscal cuts to regain market confidence. Talks about macro-prudential regulation, the Hong Kong dollar peg and the internationalisation of the renminbi
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The chief executive of the Hong Kong Monetary Authority, Norman Chan, believes European leaders are on the right track in tackling the eurozone sovereign debt crisis and fiscal cuts are the only way to restore confidence.

"I welcome the agreement reached by the European Union to restore fiscal discipline, which I think is essential in regaining market confidence in the fiscal sustainability of the euro system," Chan said in an interview published in the February 2012 edition of the Central Banking Journal. "Unfortunately, there is no easy way to pursue fiscal consolidation that could avoid the need for very painful cuts and structural adjustments in Europe. The deleveraging process is unpleasant but inevitable, and I hope that it will take place in an orderly manner."

In a wide-ranging interview, Chan also defended the role of macro-prudential regulation. He said one of the lessons learnt from the Asian financial crisis of 1997–98 was to be more vigilant to the risk of an asset bubbles and be "more proactive and timely in rolling out well-calibrated counter-cyclical measures".

Chan pointed out that Hong Kong has introduced four rounds of such counter-cyclical measures since October 2009 to address the threat that rapidly rising property prices fuelled by low interest rates and capital inflows in Hong Kong could have on the territory's banking system. These measures include lowering the cap on loan-to-value ratio and debt servicing ratio for bank lending for property mortgages.

But Chan rejected a move to ‘twin peaks' regulation in Hong Kong and defended the role of the Hong Kong dollar's peg to the US dollar. "The Hong Kong dollar has been stable," he said. "This is in contrast to the sharp fluctuations in exchange rates of some other economies that adopted the floating exchange rate regime, which attracts more inflows for exchange rate gains."

He cited the Swiss National Bank's decision in September 2011 to cap the appreciation of the Swiss franc by setting a strong side limit against the euro as reflecting, in part, the challenges posed to an economy when currency movements, driven by shifts in market sentiment, go out of line with economic fundamentals under a floating exchange rate regime.

Chan also made light of heightened volatility in the offshore renminbi market in late September, saying it was due to typical supply and demand factors. "The softening of the offshore renminbi exchange rate in late September 2011 was in tandem with other currencies in the region, reflecting uncertainties and volatilities in the global financial markets," he said. "There are increasingly two-way movements in the pricing of renminbi in the offshore market, sometimes at a premium and sometimes at a discount to the onshore rate. This is a sign that Hong Kong's offshore renminbi market is maturing."

Click here for the full interview

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