Hong Kong calls for Asian debt market to end liquidity crunch

HONG KONG is pushing its neighbours to create an Asian debt market which would both help ease the current financial crisis and reverse the massive flow of Asian funds into United States Treasury bonds.

In an interview with The Independent Sir Donald Tsang, Hong Kong's Financial Secretary, said the idea was "highly supported" by all his Asian counterparts, although it had met its "reservations" from the United States.

Sir Donald said that as matters stood the bulk of the very considerable foreign reserves held by countries such as China, Taiwan, Singapore and Hong Kong itself, were invested in US Treasury bonds. "This creates a mismatch," he explained, "we invest long term and then have to go the United States to get short term help." This means that Asian countries get relatively low returns on their US investments but have to pay dearly to borrow from the Americans at times such as these when there is no other source of funds.

He is urging either the Asian Development Bank or the World Bank to float Asian bonds, preferably on the Hong Kong market, and pledged that "if they can come up with an instrument, I would buy it".

Sir Donald first put the idea to fellow Asian finance ministers last November, a month after the financial crisis started to make an impact. He described it as a "creative way" of helping to solve the liquidity crunch which is dragging down Asian currencies and stock markets.

The problem, as Sir Donald admits, is that now is a difficult time to raise money for Asian paper but he is convinced that when the crisis eases this idea will be "a runner".

Meanwhile Hong Kong is busy conducting its own post mortem examination on the lessons of the financial crisis, which have seen unsuccessful speculative attacks on the local currency, enormous increases in interest rates and some high profile corporate failures which have all contributed to an atmosphere of unease.

The results of this review will be made known later this month, says Sir Donald. It is likely to reveal that the Government has no intention of tampering with the currency board arrangements which maintain the Hong Kong Dollar at a fixed parity with the US Dollar. Sir Donald concedes that the present system is painful in as much as it necessitates high interest rates to protect the peg at times of pressure, but says that all other alternatives have more disadvantages than advantages.

The collapse of the financial conglomerate Peregrine and one smaller local finance house has persuaded the government that greater controls need to be imposed on finance houses attached to stock brokers. Sir Donald said that he has been concerned about this connection for some time but that now "is a good time to get their agreement" to stricter regulation over the way they handle investor's funds.

He is also looking to introduce measures which will stimulate "greater transparency" in equity markets.

However the review is unlikely to yield radical changes to the regulatory environment for Hong Kong's financial markets, which were recently given a clean bill of health in an International Monetary Fund report.