Joseph Yam: Competition and cooperation among global and regional
financial centres
Speech by Mr Joseph Yam, Chief Executive of the Hong Kong Monetary Authority, at the
Concurrent Panel Sessions of the Lujiazui Forum, Hong Kong, 9 May 2008.
* * *
There are two points that I would like to make.
First, given that many jurisdictions claim to be or wish to develop as international financial
centres, we need to be clear about what actually defines an international financial centre. We
in Hong Kong have given much thought to this, principally because Article 109 of the Basic
Law of the Hong Kong Special Administrative Region requires that "The Government of the
Hong Kong Special Administrative Region shall provide an appropriate economic and legal
environment for the maintenance of the status of Hong Kong as an international financial
centre". We obviously do not wish to fail in this legal responsibility.
I do not believe that being the nth largest foreign exchange trading centre or the presence of
many of the largest international financial institutions are good definitions for an international
financial centre. Indeed, with the advancement of information technology, there may be a
tendency for the market place to migrate into cyber space. In my opinion, an international
financial centre is a centre in which the function of financial intermediation, which is so
important for supporting economic growth and development, takes place on an international
dimension. In other words, an international financial centre is an international meeting place
between those with surplus funds and those in need of funds. Thus when Hong Kong
provides a significant platform for investors from, for example, Europe and America to invest
their money in financial instruments issued by fund raisers from the Mainland of China, or
provides the window for investors on the Mainland to access investment opportunities in the
rest of the world, we qualify for the status of an international financial centre.
With this definition in mind, the crucial pre-requisites for an international financial centre are
first the existence of sizeable overseas demand for international financial services - the
mobilisation of savings overseas and the attraction of foreign capital - and the
secondly
willingness for such demand to be satisfied there. Of course, there are also the ability to
provide those financial services and the many attributes that go along with that ability,
including the protection afforded by the rule of law, an efficient financial infrastructure, a
quality environment, and so on. But I think it is the existence of substantial demand for
financial services from a large hinterland that comes first. New York, of course, has the
largest economy in the world that is free and open to support its status as an international
financial centre, providing financial services that mobilise US savings to the rest of the world
and attracting foreign investments, and servicing domestic financial intermediation at the
same time. London, of course, has much of the European economy in addition to the United
Kingdom economy. Hong Kong has the Mainland of China, the third largest trading partner,
the fourth largest economy, the largest foreign reserve holder and home to participants in the
key financial markets that collectively form the largest player in the world.
The second point I wish to make is that, under "One Country, Two Systems", there are two
financial systems in China, both in a position to serve the interests of the country in the
allimportant function of financial intermediation. This is unique and there are no relevant
precedents in the financial history of the world. Because of the uniqueness of this
arrangement, there is understandably considerable scepticism both internationally and within
China on how it might work. Let me tell you. The two financial systems are different in a
variety of ways, with the financial system on the Mainland operating in the developing
environment of a socialist market economy and the one in Hong Kong operating in the
familiar environment of a capitalist free market economy. We all know that where there are
differences, there are opportunities for exploiting relative strengths, addressing relative
weaknesses and maximising synergies between the two systems, remembering always the
national interest of making financial intermediation more efficient for the country as a whole.
In other words, there is a need to develop a complementary, mutually-assisting and
interactive relationship between the two financial systems. This incidentally is national policy,
articulated by Premier Wen on the occasion of the National Finance Working Meeting held
early last year.
Given, however, that there are considerable controls in the financial system on the Mainland,
including capital controls, and that the financial system in Hong Kong is among the freest in
the world, to develop the complementary, mutually-assisting and interactive relationship
between the two financial systems there is a need first to establish channels to promote the
mobility in an orderly manner between the two financial systems of (1) money, (2) investors
and fund raisers, (3) financial instruments and (4) financial intermediaries. Given also the
increasing use and the clear prospects of the renminbi as a medium for international financial
transactions there is also a need to develop the ability of the financial system in
secondly
Hong Kong to handle financial and other economic transactions denominated in the
renminbi. Thirdly, as the mobility of money, investors, borrowers, financial instruments and
financial intermediaries between the two financial systems grows, there will be rapid growth
of financial traffic between the Mainland and Hong Kong. Consequently there is a need for
robust links between the financial infrastructures of the two financial systems. This then is
our strategy. In terms of actual measures - something that Antony also wants me to talk
about - I would refer you to the eighty recommendations in the Report of the Focus Group on
Financial Services published in January 2007 as Hong Kong's response to the Eleventh
FiveYear Plan of the country published in 2006 and as Hong Kong's input to the National Finance
Working Meeting in 2007.
As you may be aware, the implementation of our overall strategy and many of the detailed
recommendations involve the relaxation of controls in the financial systems on the Mainland.
While the benefits of financial liberalisation are clear, so are the risks to financial stability, as
the Asian financial crisis of 1997-98 and the current turmoil in the developed financial
markets demonstrate so vividly. Here there should be a strong emphasis, to quote the
Premier again, on gradualism, controllability and the ability to take initiatives at the right time.
And in the context of pursuing the complementary, mutually-assisting and interactive
relationship between the two financial systems, financial liberalisation should not be seen as
helping Hong Kong. We welcome support from the Mainland in discharging our legal
responsibility in maintaining the status of Hong Kong as an international financial centre, but I
hope I have convinced you that in developing our strategy and our recommendations, we
very much have the national interest foremost in our minds.
As to Antony's question on whether Shanghai is a threat to Hong Kong's status as an
international financial centre, I hope my description of our strategy will bring you around to
the view implicit in that strategy that we see a complementary, mutually-assisting and
interactive relationship, where relative strengths are exploited, relative weaknesses are
addressed and synergies maximised; and not a relationship characterised by cut-throat
competition, as some may have portrayed it.