IT IS A strange world indeed whenlegislator Emily Lau Wai-hing regretsindulging in freedom of speech andsuggests that key public policy issuesnot be discussed in public.

She as much as did so last weekafter the stock market took a brief scarefrom her earlier proposal that theLegco secretariat study the linkedexchange rate system.

Legislators with the penny stockdebacle still in mind instantly fell overthemselves in their haste to retracttheir previous support and even shebecame apologetic for it.

In fact she said a possibleapproach for future Legco studiesinvolving market sensitiveinformation would be to make themavailable to legislators on aconfidential basis and not to the generalpublic.

Yes, that was Emily Lau,champion of our civil liberties. Wouldyou believe it?

Listen, Emily, there is nothingwrong with you or any other legislatorasking whether we should keep thepeg and nothing wrong with society atlarge debating the question.

If the thing is so fragile that a littletalk will destroy it then it is goneanyway and the sooner the better inthat case.

There are only three people whoshould restrain themselves in publicwhen talking about the peg. They areChief Executive Tung Chee-hwa,Financial Secretary Antony LeungKam-chung and Hong Kong MonetaryAuthority boss Joseph Yam Chi-kwong.

And the reason they shouldrestrain themselves is purely one ofexecutive prudence. It is they whowould have to make the decision if thepeg were to be dropped. If they drophints in advance that it may go theywould invite speculative raids on thecurrency, which would either force theissue on them or, at the very least,destabilise our economy.

Their choices for publiccommentary are either a statement offirm support for the peg or anannouncement that a new monetarysystem has been put in place and,since the first of these would make themliars if it were ever followed by thesecond, they are better off to say nothingat all. Their position requires that theyspeak with deed, not word, in thismatter.

But this is no reason why theyshould not debate it among themselvesor why the rest of us, legislatorsincluded, should not debate it in public.The peg is not an icon of religion thatwe blaspheme if we as much as mentionits name.

If stock market frights ought tomake us shut our mouths, shall weresolve in the future never again totalk of property prices, war in Iraq,corporate scandal or the share price ofthe CyberWok? The peg is anadministrative convenience adoptedto ensure a reasonably stable currencyafter we had proved abject failures indoing it in other ways. I personally thinkit is a very strong system, not leastbecause it restrains Mr Tung and MrLeung from their penchant fordabbling in things they do notunderstand. They cannot print moneyor monkey with interest rates while wehave it. Let us all rejoice.

However, there may well becircumstances in which we would bebetter off to drop the peg and adoptsome new arrangement. I cannot thinkof any just now, that is how good asystem it is, but the last thing any of usshould want to do is stop anyone else,apart from three people, from raisingthe question and talking about itopenly.

That way would lie certain doomfor a city that has become prosperousthrough a free market and a respectfor civil liberties.

Stop grovelling, Emily. It does notbecome you to act like just anotherbought-in Legco mouse, running andsqueaking to its hole for cover. We aremore likely to weaken the peg thanstrengthen it if we decide that we cannoteven debate it in public.

JUST INSIDE THE gates of the ShanghaiAircraft Manufacturing Factory, theChinese flag flies high over the mainbuilding and a billboard declares ‘‘Pur-suing No 1’’.

Now the factory is showing its patri-otism in another way – pursuingChina’s dream of building its ownaeroplane.

China’s plans to produce a smallregional jet to meet massive demandare finally starting to take wing. Butmaking the project a commercial suc-cess will be difficult, according to in-dustry officials.

It has been two years since state-owned China Aviation Industry Corp I(AVIC I), parent of Shanghai AircraftManufacturing Factory, announcedplans for the ARJ (advanced regionaljet).

The five-billion-yuan project isstarting to move forward with recentapproval by the government and afunding grant. According to state me-dia reports, China hopes to start trialflights of the 70-seater plane by 2005and begin commercial production by2007.

AVIC I has already set up a companyto design and produce the plane, draw-ing on resources from its plants in thecities of Shanghai, Xian and Shenyang.

China sees the ability to produce itsown plane as a matter of nationalpride.

Shanghai mayor Chen Liangyu hasexpressed a desire on China’s part toreduce dependence on foreign compa-nies.

‘‘China ought to have its own civilaircraft. Every year we buy so manyBoeing and Airbus planes. At least wecan produce a regional jet,’’ he said ina recent interview.

US aircraft giant Boeing and Euro-pean consortium Airbus dominate theworld market for large passengerplanes.

Even though China boasts the re-gional jet will be locally made, industryofficials say the project will draw heavi-ly on foreign technology.

There will be no foreign partners –AVIC I has opposed such a move. But itis talking to several overseas firmsabout supplying components.

The company was in discussionswith General Electric of the UnitedStates to supply engines and Ukrainianaircraft maker Antonov for the fuselage,industry officials said.

AVIC I officials said the companywas also seeking foreign vendors forthe plane’s avionics – electronic andelectrical devices.

‘‘What is lacking is a foreign partnerthat acts as a kind of systems integratorto say how the overall design works.That’s something AVIC I feels proudthat they can and should do them-selves,’’ an industry official said.

But China’s past forays into buildingplanes, even with foreign help, havebeen failures, analysts said.

The MA-60, a turboprop built byAVIC I and based on the overhaul of aRussian design, has fallen far short ofits sales target of 50 planes from 2000to 2005. Tiny Sichuan Airlines is one ofthe few domestic carriers which hasbought the plane amid concerns oversafety and reliability.

In 1998, China quietly scrappedplans to build 20 MD-90 aircraft in adeal with McDonnell Douglas that wasonce hailed as a symbol of Sino-USbusiness co-operation.

China originally agreed to build 40planes, but cut that number in half in arenegotiated deal in 1994 because oflack of demand. Only two planes, as-

sembled from kits, were eventuallybuilt.

In another widely-trumpeted deal,Airbus and China said in 1996 that theywould jointly build a 100-seat ‘‘AsianExpress’’ jet which would become partof the Airbus family.

Disagreements over technologytransfer and the size of the planecaused the project to founder, eventhough both sides denied the deal wasin trouble as late as 1998.

Some industry officials express con-cern China wants to build the regionaljet for the wrong reasons, allowing pa-triotism and pet projects to hold swayover commercial considerations.

‘‘If you look around the whole spec-trum of Chinese industry, every singleindustry seems to have a pet project –it’s a national pride thing,’’ anotherindustry executive said.

AVIC I is also keen to make a splashat the Zhuhai Air Show in early Novem-ber and compete with sister companyAVIC II, which is planning a smaller 50-seater regional jet.

China created the two companiesfrom the break up of the former Avia-tion Industries of China in 1999.

Unlike AVIC I, AVIC II has activelysought a foreign partner for its project.

Fairchild Dornier was on the vergeof signing an agreement with AVIC IIlast year, but disagreement over termsand the US-German aircraft maker’s

filing for insolvency scrapped the deal.Canada’s Bombardier also looked atthe project, but rejected it.

China has just approved plans forAVIC II and Embraer to assemble theBrazilian firm’s ERJ-145 regional jetfrom kits. Industry officials said the twowere still haggling over the details, in-cluding the size of their stakes and taxconcessions.

Yet the potential demand for a re-gional jet is massive.

Boeing estimates that China willneed 450 new regional jets in the next20 years, driven by rapid economicgrowth, increased tourism and thepush to develop western regions.

Derek Sadubin, manager of informa-tion services for the Centre for Asia-Pacific Aviation, said: ‘‘Regional aircraftprospects in China are so large that theChinese government would like to makesure some of the benefits are retainedlocally rather than sending the dollarsoverseas to foreign manufacturers.’’

China’s homegrown regional jet willbe heavily subsidised by the govern-ment and strongly dependent on for-eign technology, but some say theproject just might fly this time arounddespite earlier failures.

‘‘It could be a commercial successin its own right but not immediately,’’Mr Sadubin said. ‘‘These things do takesome time to bear fruit in a commer-cial sense.’’

AN UNEASY CALM returned yesterday.The immediate outlook on interestrates – as well as speculative views onwhere Hong Kong’s dollar is headed –appeared more settled.

Benchmark three-month Hong Konginterbank offered rate, or Hibor – therate at which banks lend their surplusfunds to one another – reversed lastweek’s dramatic daily advances andeased from Friday’s high of 1.979 percent, to 1.949 per cent.

On currency markets, the one-yearforward HK dollar rate fell from anunlikely premium of 230 ‘‘pips’’ abovespot rates to which they had spiked onFriday, to around 150 – representing aforward rate of HK$7.8144 to the USdollar, versus a spot rate of HK$7.7999.

Fresh from reading those markettea-leaves, the consensus from analysts

is that the latest in a series of mini-panics over the future of Hong Kong’scurrency peg appears to be over.

For the moment at least.Adding weight to that reading was a

check on the market for Hong Kongdollar corporate bonds, which showedthey had remained largely insulatedfrom the sudden surge of static comingfrom money and exchange rate mar-kets. Had investors in the bonds ofHong Kong’s blue-chip borrowers be-lieved for a moment that the HongKong dollar was in imminent danger ofbeing decoupled from its fixed pegagainst the US dollar, they would havedumped their investments in droves.

That did not happen, said StephenCheng, UBS Warburg’s head of fixedincome credit research for Asia.

‘‘There was no notable widening ofthe spreads at which Hong Kong cred-its trade over their US counterparts,’’he said. ‘‘I think investors realise this is

a medium-term issue that Hong Kongneeds to resolve and manage, andcredit markets did not react too nega-tively to the knee-jerk speculation overthe future of the peg.’’

That speculation was sparked bytwo recent events – a research reportfrom an investment bank that the fixedpeg was hampering the integration ofthe Hong Kong economy with China’s;and news last week that Hong Konglegislative councillors had consideredconducting a review of the peg.

A mistaken international view thatthe Legislative Council could – andmight – be on the point of scrappingthe peg, contributed to the mini run onthe currency.

But to put the ensuing events intocontext, the 230-point forward premi-um to which the currency rose againstits spot rate compared with a 6,000-point surge in forward rates during theAsian financial crisis of 1998. And

short-term interest rates – which havenow spiked from 1.7 per cent to 1.97per cent, compare with a leap in ratesto 17 per cent during the crisis.

Tommy Ong, head of currency trad-ing for DBS in Hong Kong, said theoutlook was for the one-year forwarddollar rate to return to trading in itstypical range of a premium of between50 basis points and 200 basis pointsabove the spot rate; while Hibor rateswere likely to retreat from their presentpremium of around 15 basis pointsabove equivalent US rates, to a moretypical risk-based premium of 10 basispoints.

Edmund Harriss, investment man-ager for Investec Asset ManagementAsia, said market jitters appeared over.

‘‘There was some speculative for-ward trading on the currency, andthose on the wrong side of the tradeswould have been caught – but I doubtthere were any large positions taken,’’

he said. ‘‘The fact is the Hong Konggovernment has huge resources at itsdisposal with which to defend the peg,and it has demonstrated that it is will-ing to use those resources to do so.’’

But looking further ahead, severalanalysts continue to believe that HongKong will ultimately have to abandonthe peg – even though this might nothappen for at least five years.

In a weekly research advisory toclients, JP Morgan’s Bernhard Esch-weiler said while no break was likelywithin this period, the market could beunderpricing the risk of a regimechange. ‘‘Thus, we would choose not tobe booking profits opportunistically atthese levels, but look instead to buildpositions on dips,’’ he wrote.

Echoing this view, Ron Otsuki, HongKong chief executive of asset managerManulife Funds Direct, said a decou-pling was likely in the next ‘‘five to 10years’’.

FORUM, PAGE 2 PAGE 3

Analysis & Markets

FLEEING INVESTORSSEEK SAFE HAVENIN SWISS FRANC

PRIVACY COMMISSIONERUNVEILS PROPOSALS ONPOSITIVE DATA SHARING

Business2 Tuesday September 24 2002

MONITOR

Jake van der Kamp(jakeva@scmp.com)

Believing in a jet planeChina is forging ahead with plans to build aircraft for regional routes, writes Bill Savadove

Mini peg panic over . . . for the moment at leastLouis Beckerling

‘Every industryseems to have apet project –it’s a nationalpride thing’

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