I (c I 82 THE NEWSLETTER ABOUT REFORMING ECONOMIES TRANSITION Volume 8, Number2 April 1997 Hong Kong Will Remain a Free What's Inside Market after 1997 Selected Reforms on China'sAgenda 4 by Andrew Sheng Why Is Ukraine's Economy-and Russia's- In 1997theworldwillwitnessamajorhis- US$100 billion.) Hong Kong will use its NotGrowing?byDanielKauftnann5 toric event in Asia. On July 1, 1997, Hong financial resources for its own benefit. The Russia's New DreamTeam Confronts Kong, with 6 million people the world's central govemment will not tax Hong Kong. Nightmares 9 eighth largest trading economy and fourth largest international financial center, will For the very reasons that people are skep- Russia's New Robber BaronsAct Up 11 return to China, the world's most popu- tical about monetary integration in Europe, Kremlin Capitalism 12 lous nation and one of its most dynamic there will be monetary segregation be- economies. tween mainland China and Hong Kong.The Forum: Russia's Economic Policy- Heritage Foundation in the United States Suggestionsforan Alternative 13 But under the agreed principle of "one found Hong Kong the freest economy in The Bank Should Proritize Recovery- country, two systems," or "one country, two the world. Hong Kong will record a budget by David Gisselquist 15 currencies, two monetary policies, and surplus of HK$15 billion (US$1.95 billion) two credit ratings," Hong Kong will enjoy a for the fiscal year ending March 31, and Retraining Economics Lecturers in Russia high degree of autonomy, except in such HK$31.7billioninthenextfiscalyear.China by Lan Wu 17 areas as foreign affairs and defense. Hong still has a budget deficit to cut. Interest rates The World Bank Should Facilitate, Not Kong will formulate and implement its own in Hong Kong are totally market-driven; Provide 18 monetary and exchange rate policy, and China is going through a transitional phase will safeguard and regulate financial trans- in which some interest rates are still set ad- Letters to the Editor-Millard Long, John actions undertaken on the Hong Kong ministratively. [See Transition, November- Nellis,andJozeMencinger19 market. Underthe Basic Law (see box), December 1996, p. 22] (China has NorthKorea'sEconomyUnderStresses Hong Kong's capitalist system will exist for brought inflation down into the single dig- by Nicholas Eberstadt 21 fifty more years, and the extremely suc- its, but it is still higher than in Hong Kong.) cessful monetary system-a currency The Hong Kong dollar is fully convertible North Korea Is Starving for Reform 23 board where the currency is pegged to with no exchange controls whatsoever; Milestones of Transition 24 the U.S. dollar-will continue. Backing the China's currency is convertible on the currency, Hong Kong will manage the current account but not yet on the capi- World Bank/IMF Agenda 29 world's seventh-largest foreign exchange tal account. So China is going through a Conference Diary 32 reserves, totaling US$66 billion. These re- major transition. Monetary segregation New Books and Working Papers 33 serves are five times larger than Hong makes sense. Kong's monetary base. And Hong Kong Bibliography of Selected Articles 39 has no external debt. (To compare: Seven principles have been agreed be- Subscription Form 40 Taiwan's [China] reserves are about the tween Hong Kong and China on monetary same and China's reserves are about relations: Macroeconomics and Growth Division Policy Research Department The World Bank 1. The Hong Kong dollar will be the only international business. Trade and liabili- international standing. Hong Kong is al- legal tender in Hong Kong, and the ties between the two will be regarded as ready an equal member with the People's renminbi remains the only legal tender in external trade and liabilities. Bank of China in the Basel-based Bank China. for International Settlements. And the 6. Some raise the question: After unifica- Hong Kong Monetary Authority, as re- 2. The two monetary authorities are mutu- tion will Shanghai replace Hong Kong as cently agreed, will participate in the New ally independent and are not subsidiary to a major international banking center? The Arrangements to Borrow within the IMF. one another. They may consult one another Hong Kong's suc- and closely cooperate. 1Hong Kong in; 1997-The Basic Law cess as a prominent The People's Bank of international and re- China will not set up ginlfinancial ser- China's policies of maintaining Hong vested in the Government of the HK gional Kong after 1997 and Kong's status as an international finan- S.A.R. The issue of Hong Kong cur- vices center is no will not replace the cial center and preserving its au- rency must be backed by a 100 per- ishgly cong m ong wil nt rplce hetonomy in monetary and financial cent reserve fund.... The Government i ihycmeiie Hong Kong Monetary affairs after 1997 are clearly enshrined of the HK S.A.R. may authorize des- This is confirmed by Authority. The two in- the World Economic in the Joint Declaration of 1984 and ignated banks to issue or continue to dependent monetary Forum's 1996 Glo- s the Basic Law of 1990.The BasicLaw issue Hong Kong currency under systems will have their thefollowing provisions: statutory authority, after satisfying it- bal Competitive Re- own credit ratings. y ot hc ak self that any issue of currency will be por, whic as 3 Te a d "109. The Government of the Hong soundly based and the arrangements Hong Kong as the 3 The mainland ~~~~~~~~~~~~~second most com- China offices of the Kong Special Administrative Region for such issue are consistent with the s econ om y in Hong Kong-based fi- [HK S.A.R. shall provide an appropri- object of maintaining the stability of the word, eust after nancial institutions ate economic and legal environmTent the currency. Singapore. Hong will continue to be for the maintenance of the status of Kn a ogbe Hong Kong as an international finan- "1 12. No foreign exchange control poli-Kn a ogbe treated as any other cial center. cies shall be applied in the HK S.A.R. a leading financial (U.S., Japanese, and ;; H K dbies shall be free services center in so on) financial insti- 110. 0.., The Govern ent tf the HK Tconvertibg Kon dollar shall be freely Asia and globally. It tutions. Similarly, the ..TeGvrmen f theHKcoveribe.Maretmfr fregnex mainland's financial S.A.R. shall, on its own, formulate mon- change, gold, securities, futures and ditions forpsuccess institutions in Hong 0etary and financial policies, safeguard the like shall continue. The Govern- Kongswillton inHotneciv the free operation of financial business ment of the HK S.A.R. shall safegUard ,