Efficient payment systems in a variety of currencies can help minimise financial market volatility created by international fund flows.

This is the message from Monetary Authority Chief Executive Joseph Yam in his weekly Viewpoint column issued today on the authority's website.

Mr Yam said one characteristic of an international financial centre with a liquid platform, which attracts foreign savings looking for investment opportunities in different jurisdictions, is that its financial markets tend to be more reactive to external events.

"This is the case for Hong Kong. There are substantial savings - domestic as well as foreign - flowing into financial instruments structured upon investment opportunities on the Mainland that are traded in Hong Kong."

One good example is the investment of foreign funds in the H-shares or red chips listed in Hong Kong, he said.

"So, significant events on the Mainland that affect the economic and financial outlook there, for example the implementation of macro-economic adjustments measures, may lead to sharp movements in the stock market in Hong Kong."

HK marries savings, investments that are both foreign

Unlike other international financial centres, he said, the Hong Kong financial platform plays the additional, important role of marrying savings and investments that are both foreign.

He said increasing political pressure for a more flexible renminbi exchange rate in the second half of last year, for example, affected Hong Kong, adding that the freely convertible Hong Kong dollar was used as a proxy for hedging against, or speculating on, a possible appreciation of the renminbi.

Substantial fund inflows increased the Aggregate Balance and pushed Hong Kong dollar interest rates at the short end down to zero, he said.

Easy monetary conditions helped end deflation

"In the event, the resulting very easy monetary conditions, which still prevail, now have been helpful, in terms of getting deflation out of the system. But in other times they could well affect Hong Kong in an unfavourable way."

At the same time, the matter has also led to sharp fluctuations in the fairly sizeable non-deliverable renminbi forward market in Hong Kong, he said.

"But since this market is very much one for professionals, who are able to manage their own financial risks, the volatility has had no effect on Hong Kong."

He said the financial platform in Hong Kong, which facilitates the marriage of savings and investments both of outside origin, should be structured in a way that provides various options of currency denomination for financial products.

Varying currency denominations aids in managing risk

"This is both for the convenience of the market participants, in terms of risk management (the elimination of exchange risk of the Hong Kong dollar), and in the interest of maintaining monetary and financial stability in Hong Kong."

This is why we have developed efficient payment systems in different currencies and hope of course to include the renminbi when circumstances permit, he said.

"And we have no objection to the pricing of financial products, for example the listing and trading of shares, in different currencies, if this is considered appropriate."