Yam Warns On Market Volatility

by Mary Swire, for LawAndTax-News.com, Hong Kong

30 May 2006

Hong Kong's Monetary Authority Chief Executive, Joseph Yam has reminded investors to be cautious, suggesting that strong forces pulling financial markets in different directions will make the markets volatile.

In his latest Viewpoint article, Mr Yam said financial market volatility is likely to increase, and added that the most obvious factor weighing on financial markets is the external imbalance, specifically the United States' current-account deficit.

"At over 6% of GDP, and in the absence of any consensus that the inevitable adjustment will be a benign one, this is a very strong force influencing market sentiment," he observed.

The movement of the renminbi's exchange rate has also become the focus of much market attention following the introduction of greater flexibility to the exchange-rate system last July, he added.

"Given the capital-account controls on the Mainland, a few Asian currencies - fortunately not the Hong Kong dollar - are being used as proxies in taking a possibly speculative position on the renminbi, or as alternatives to holding US dollars."

"Strong political pressures have also been fuelling such position taking, so has the urge for jurisdictions with substantial current-account surpluses to diversify their ever-increasing foreign assets."

Mr Yam went on to suggest that the recent historically large surge in oil prices represents another strong force with the potential to influence international financial markets sharply, through its effect on inflation and interest rates.

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