Hong Kong Bank Shift Brews

Looks like somebody's been down here with the ugly stick.

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Official silence over the retirement plans of Hong Kong's de facto central banker, the only man to hold his position since it was created in 1993, is creating unease at a time when the territory is drawing closer to China's financial orbit.

Joseph Yam, chief executive of the Hong Kong Monetary Authority, is expected to leave the post in September, according to people in government familiar with the matter. In Hong Kong, the imminent departure is treated as an open secret.

Mr. Yam is widely respected for having helped to create much of the city's financial infrastructure, for the sound regulation of its banks, and for protecting the Hong Kong currency's longstanding link to the U.S. dollar.

Norman Chan, a former deputy to Mr. Yam who is now a close aide to Hong Kong Chief Executive Donald Tsang, is considered the favorite to take his place, the people familiar with the matter said. Government officials have declined to officially comment. Spokesmen for Messrs. Tsang, Chan and Yam declined to comment.

Few people anticipate big changes when Mr. Yam leaves, but some believe any uncertainty surrounding such an important post could undermine confidence in Hong Kong's status as a premier financial center.

The government 'should have come up with something faster and in clearer terms,' says Alex Fong, who runs the Hong Kong General Chamber of Commerce. Though he said he's generally supportive of Mr. Chan, he added, 'This is not a thing that's good for the market.'

Apart from his other duties, Mr. Yam manages foreign reserves that in March totaled US$186 billion. Last year, Mr. Yam made US$1.5 million, making him one of the highest-paid government officials in the world.

It's unlikely a transition would lead to a change anytime soon in the policy Mr. Yam is best known for maintaining: Hong Kong's 26-year-old peg of its currency to the U.S. dollar, which is often credited with keeping the city attractive.

However, expectations of a change in leadership at the HKMA come at a time when Hong Kong and mainland China's financial systems -- kept separate by the terms of Hong Kong's handover from British to Chinese sovereignty in 1997 -- are drawing closer together. Hong Kong banks are preparing to trade more in Chinese yuan, China is looking at letting its banks issue yuan bonds in the territory, and stock exchanges in Hong Kong, Shanghai and Shenzhen are working on ways to cooperate.

Moving closer financially to China while keeping the U.S. dollar peg could be a sensitive process. Mr. Tsang, the top Hong Kong official, drew unwanted attention in March when he spoke about possible links between the Hong Kong dollar and the yuan once the Chinese currency was fully convertible. He noted, however, that achieving yuan convertibility would be complicated and any rethink of Hong Kong's peg to the U.S. dollar would be 'many, many, many, many years down the road.'

Unofficially, government officials confirm reports that two years ago, he signed a letter agreeing to retire by the end of September 2009, by which time he will be 61.

The HKMA chief is appointed by Hong Kong's financial secretary, though there's no precedent for a change in leadership. It is believed a new chief would need the blessing of China's central government, although officially there's nothing in the law that requires Beijing's approval.

Mr. Chan's experience makes him a natural candidate to succeed Mr. Yam. A top executive of the HKMA who joined during its start-up in 1993, he left in 2005 to became Standard Chartered PLC's vice chairman for Asia. His close ties to Mr. Tsang could be even more significant. Mr. Chan served as the chief executive's adviser during political campaigns in 2005 and 2007 that helped to secure his position as Hong Kong's leader.

'It's a reward for Norman Chan in helping Donald Tsang to campaign for [his] office,' says Albert Ho, chairman of Hong Kong's Democratic Party, which often challenges government policy. Mr. Ho says he disapproves of the government's silence on Mr. Yam's successor and believes that there should be 'an open selection process' for such a key job.

In recent weeks, Mr. Yam and the HKMA have come under fire from lawmakers for not doing enough to restrict or regulate the sales of so-called minibonds -- risky structured financial products -- backed by the defunct Lehman Brothers and distributed by a number of local banks. They have also criticized a 15% rise in Mr. Yam's pay package last year, when the Hong Kong Exchange Fund lost 5.6% of its value.

In a statement to legislators, Mr. Yam defended the HKMA's regulatory efforts and noted that 'no regulatory system is able to prevent all incidents of non-compliance.'

In defending Mr. Yam's pay package, a government official said HKMA staff compensation is meant to be competitive with the private sector, and Mr. Yam's pay is determined by a committee advised by independent consultants.

Peter Stein

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