Mr. Dai looks at the possibilities of strengthening financial co-operation
between China and Hong Kong in order to promote economic prosperity and stability
Speech by the Governor of the People's Bank of China, Mr. Dai Xianglong, at the Hong Kong
Association of Banks' Dinner on 13/11/96.
I would like to thank the Hong Kong Association of Banks for inviting me to Hong
Kong to meet with you and to attend this dinner function. Although this is my first visit to Hong
Kong since taking up my post in the central bank, we follow closely the economic developments
of Hong Kong. All of you have contributed to the prosperity of Hong Kong. I greatly appreciate
the wisdom and the spirit of the people of Hong Kong. They are industrious and always striving
for the better. Hong Kong's success is partly attributable to the characteristics of its people. We
have good reasons to believe that through our joint efforts, Hong Kong will have an even better
future.
I would like to take this opportunity to give a brief description of the current
situation of the economic and financial reforms in the mainland as well as the basic principles and
policies towards the financial relationship between China and Hong Kong after 1997. In addition,
I would also say something on co-operation and joint development between the financial sectors
of China and Hong Kong.
I. Mainland China's economy is experiencing a stable development
First of all, I would like to talk about the financial and economic conditions of
China which is a hot topic for discussion among professionals from the Hong Kong financial
sector. This is because Hong Kong's future is closely linked with the economic and financial
developments of China.
China's economy began to pick up in 1992 with a dynamic national economy.
However, there was also hyper-inflation. During the latter half of 1993, the Chinese Government
began to adopt an appropriately tight monetary policy. The adoption of this policy means firstly,
price increases should be kept at a level lower than the rate of economic growth. Secondly, the
growth of money supply should be slightly above the sum of the rate of economic growth and the
target rate of the price increase. Thirdly, indirect monetary instruments should be used more
frequently for relating money supply so that the economy will not be too volatile. Our efforts in
the past three years are beginning to pay off. We have successfully curbed inflation by making
macro-economic adjustments.
Firstly, the growth of the money supply has slowed down. It is expected that the
total money supply at the end of this year will be 26% higher than the previous year. This growth
rate is 3.7% lower than the average annual growth rate during the period under the "Eighth
FiveYear Plan".
Secondly, price increases have slackened noticeably. During the period from
January to October, retail prices have risen by 6.4% as compared to the same period last year. It is
expected that the growth rate for the whole year will be around 6.5%.
Thirdly, the economy continues to grow at a relatively high rate. During the period
from January to September, GDP rose by 9.6%. It is anticipated that the annual growth rate will
exceed 9.5%.
Fourthly, our foreign reserves continue to grow. As at the end of October, our
foreign reserves reached US$ 98.8 billion. We are certain that our reserves will exceed US$ 100
billion by the end of the year. The trade surplus is estimated to be over US$ 100 billion this year.
There is also US$ 40 billion of foreign direct investment. The supply of foreign exchange exceeds
demand and the exchange rate of the renminbi remains stable. Moreover, the renminbi has
become fully convertible in the current account. Our experience proves that we are right in
adopting an appropriately tight financial and economic policy. Our ability in performing
macro-economic operations has improved greatly and our achievements are recognised
internationally.
Despite the foregoing, several major problems remain to be solved. The percentage
of financial revenues in GDP is still falling. The asset quality of banks still needs to be improved.
The basic elements of the agricultural sector remain relatively weak and it is unlikely to have any
improvement in the operational efficiency of state-owned enterprises in the short run.
In view of the current economic situation, the focus of economic and financial
reforms in the coming year will be placed on promoting the reform of the economic system and
changing the pattern of economic growth. We will continue to adopt an appropriately tight
financial and monetary policy. Further efforts will be made to adjust the structure of the economy
so as to foster new areas of economic growth. In order to ensure steady growth of the national
economy, efforts will also be made to develop domestic as well as overseas markets. Based on the
above considerations, it is desirable that next year's target annual GNP growth rate should be set
at 8-9% while the retail price increase be contained at a level below 6%. In order to achieve these
targets, the People's Bank of China is prepared to:
1. Control money supply. Our preliminary proposal is to contain the increase of
next year's total money supply (M2) within the range of 23% to 25%.
2. Adjust the credit structure. The total amount of loans to the agricultural sector
will be increased. Economic integration and the setting up of conglomerates will be encouraged.
Efforts will also be made to promote the development and sale of residential property.
3. Conduct monetary operations. Employ more frequently monetary policy
instruments such as interest rate policy, reserve requirements and open market operations to
regulate the money supply.
4. Deepen financial reforms. Reforms of state banks should be stepped up. New
commercial banks will be set up. The policy of transforming rural credit co-operatives into
co-operative financial institutions will be maintained. Direct financing will be developed in a
prudent way with better management. In addition, the financial sector will continue to open up.
5. Foster risk management. Continue the rationalisation of financial order and
prevent and eliminate financial risks.
It is envisaged that China's economy and society will continue to develop steadily
in the coming years and objectives embodied in the "Ninth Five-Year Plan" can be achieved.
China will enter the 21st century with a dynamic economy and society.
II. Basic principles and policies governing the financial relationship between mainland China and
Hong Kong after 1997
As China and Hong Kong have different currencies and financial systems, people
from Hong Kong as well as the international community are very much concerned with how the
principle of "one country, two systems" can be implemented as regards financial issues. It is
because the implementation of this principle has direct bearings on the prosperity and stability of
Hong Kong as well as the status of Hong Kong as an international financial centre.
"The Basic Law of the Hong Kong Special Administrative Region of the People's
Republic of China" lays down specific provisions relating to Hong Kong's status as an
international financial centre, its monetary and financial policies, the status of the Hong Kong
dollar and the issuing arrangements, capital flows and the role of the Exchange Fund. Our national
leaders have reiterated on different occasions that the People's Bank of China, which is the central
bank of the People's Republic of China, should insist on implementing the "Basic Law" and the
principle of "one country, two systems". We should also protect the financial relationship between
Hong Kong and the mainland which can be summarised as "one country, two currencies, two
monetary systems and two monetary authorities" within a sovereign state and deal with issues
relating to this relationship in an appropriate manner.
At the IMF/World Bank Annual Meeting which was held in late September this
year, I stated in my speech our principles governing the financial relationship between the
mainland and Hong Kong. Mr Chen Yuan, the Deputy Governor of the People's Bank of China,
also presented these principles in a systematic manner at the Bank of England seminar which was
held in September this year. Both the People's Bank of China and the Hong Kong Monetary
Authority (HKMA) have been offered membership in the Bank for International Settlements. This
is a clear demonstration of the above principles and shows that the mutually independent financial
relationship between the mainland and Hong Kong are widely accepted by international financial
organisations.
Now I am going to give an outline of the main issues relating to the financial
relationship between the mainland and Hong Kong after 1997.
Hong Kong will continue to maintain its own system of currency issuance and
management after 1997. The Hong Kong dollar and the renminbi will circulate as legal tender in
Hong Kong and the mainland respectively. Hong Kong's existing note-issuing arrangements will
remain unchanged. Moreover, China supports Hong Kong's commitment to the maintenance of
the linked exchange rate system.
It follows from the two mutually independent monetary systems of the mainland
and Hong Kong that the two monetary authorities, i.e. the People's Bank of China and the
HKMA, will also be mutually independent. The HKMA will be accountable solely to the Hong
Kong Government. The People's Bank of China will not take the place of the HKMA and will not
set up any office in Hong Kong. The People's Bank of China will strengthen further its present
sound co-operation with the HKMA. The HKMA has made great contributions to the stability of
the local currency and the supervision of financial institutions. Such efforts by the HKMA help
promote the prosperity and smooth transition of Hong Kong.
The Hong Kong Government will continue to supervise local financial institutions.
The supervision will continue to be undertaken in accordance with Hong Kong's laws and
international rules and practices. mainland financial institutions in Hong Kong shall not enjoy any
privileges. They shall be regulated by the relevant supervisory authorities in Hong Kong.
The Exchange Fund of Hong Kong shall be managed and controlled by the Hong
Kong Government. The financial revenues of the Hong Kong Special Administrative Region shall
be used exclusively for its own purposes and the Chinese Government shall not levy taxes in
Hong Kong. Moreover, China will not draw on or resort to Hong Kong's Exchange Fund or other
assets in any way and for any reason.
All financial transactions between the mainland and Hong Kong will be conducted
in accordance with the rules and practices of international financial activities. Claims and
liabilities between institutions from the mainland and those from Hong Kong will continue to be
regarded as external claims and liabilities. When participating in the Hong Kong market, Chinese
entities will have equal treatment as other international and local market participants.
Apart from the above, it is also important for Hong Kong as an international
financial centre to continue to develop its international monetary relations and participate in the
activities of international and regional financial institutions. There are therefore provisions in the
Joint Declaration and the Basic Law that Hong Kong may, on its own, maintain and develop
financial relations with other countries, regions and relevant international organisations after
1997. The 1997 World Bank/IMF Annual Meeting will be held in Hong Kong just a few months
after China resumes the exercise of sovereignty over Hong Kong. This is a magnificent financial
event and I am confident that it will be successful.
III The strengthening of financial co-operation and the promotion of economic prosperity and
stability between the mainland and Hong Kong
Mainland China and Hong Kong have close financial links with each other. Since
the implementation of financial reforms and the open-door policy, such links have been
strengthened further. It is necessary to further enhance such a mutually beneficial relationship
between the two places.
First of all, the mainland and Hong Kong should work together for the prosperity,
stability and smooth transition of Hong Kong. China's commitment to the implementation of the
"one country, two systems" principle is increasingly accepted and appreciated by the people of
Hong Kong and the international community. Worries and doubts about the future of Hong Kong
which emerged in the early 1980's have largely subsided. We are pleased to note that the financial
situation in Hong Kong is heading towards a smooth transition. We are confident that Hong Kong
will enjoy financial stability before and after 1997. Even though there may be some fluctuations
in Hong Kong's financial market, we believe that the HKMA is fully capable of handling these
situations satisfactorily. If necessary, the People's Bank of China will, at the request of the
HKMA and in accordance with the Basic Law and market practices, offer support to the HKMA.
Financial stability in Hong Kong before and after 1997 is not only essential to the prosperity of
Hong Kong and China but also to financial stability in the Asia-Pacific Region. We are confident
that the international financial community, including the central banks in the Asia-Pacific Region,
will be actively involved in the efforts to maintain Hong Kong's financial stability.
Secondly, the two places should work closely together to maintain and enhance
Hong Kong's status as an international financial centre. Hong Kong has some unique competitive
advantages in being an international financial centre in a number of aspects such as opportunities,
geographic location and people. I have made it clear to the international financial community on
many occasions that after China's resumption of sovereignty over Hong Kong, the status of Hong
Kong as an international financial centre will not be undermined but, rather, it will be further
strengthened. This is because the many unique advantages which Hong Kong enjoys now will
continue to exist after 1997. There is also the Basic Law which guarantees that Hong Kong will
remain unchanged. More importantly, with the sustained, rapid and healthy growth of the
economy in China - the vast hinterland at the back of Hong Kong - numerous opportunities will
be created for Hong Kong's financial sector. All these are favourable conditions for the
maintenance and strengthening of Hong Kong's status as an international financial centre.
Economic developments in the mainland have given rise to strong demand for funds and Hong
Kong will continue to be our major funding centre. We will strengthen our coordination and
cooperation with Hong Kong in areas such as the development of markets and infrastructures in
response to the needs of financial developments in both places. I have met with many central
bankers and major international bankers and they all agreed that Hong Kong should be able to
maintain its status as an international financial centre as regards the future relationship between
Hong Kong and Shanghai. I think as a national economic centre, Shanghai's financial status will
become increasingly important. However, it will not be possible for Shanghai to become an
international financial centre in the longer term and it will not replace Hong Kong.
Thirdly, the mainland and Hong Kong should co-operate fully with each other so as
to promote prosperity and stability. Since the implementation of economic reforms and the
opendoor policy, financial co-operation between the two places has been strengthened which, in turn,
helps to develop economic and trading ties. At present, China and Hong Kong are each other's
major investment and trading partner. As at the end of 1995, Hong Kong's total cumulative
investment in China reached US$ 78.6 billion, accounting for 58% of total foreign investment in
China. In 1995, 90% of the syndicated loans to China were arranged in Hong Kong and 90% of
the Chinese companies listed on overseas stock markets have their primary listing in Hong Kong.
The volume of import and export trade between the two places amounted to US$ 44.6 billion last
year, accounting for 15.9% of China's total external trade. If Hong Kong's entrepôt trade which
came from China is also taken into account, the figure reached US$ 124.1 billion, accounting for
34.1% of Hong Kong's total external trade in that year. The number of mainland financial
institutions in Hong Kong is on the rise and vice versa. These institutions are going to provide a
whole range of financial services which are conducive to the continuous and stable development
of the economic relationship between the two places.
China will further open up its financial markets. This includes the opening up of
more districts, the gradual relaxation of renminbi business and the gradual introduction of the
investment banking mechanism. The Hong Kong financial sector will directly benefit from these
moves since they will offer numerous business opportunities. In the course of stepping up our
pace of financial reforms, we have to keep on learning from advanced international management
experience and to provide training to outstanding personnel. We hope that the financial
community in Hong Kong will provide us with assistance and support in these areas.
Before ending my speech, I would like to point out that the Hong Kong Association
of Banks has contributed a lot in assisting the HKMA to ensure the financial stability of Hong
Kong. I hope all of you will continue to give your support to the HKMA and play a more active
role in promoting economic and financial developments in Hong Kong and its smooth transition. I
would also like to announce that an association of mainland banks will be formed this year. I hope
that the two banking associations will strengthen their exchanges and co-operation and work
together for a more prosperous future.
A delegation from the Hong Kong Association of Banks will visit Beijing in a few
days. I would like to welcome the delegation on behalf of the People's Bank of China. I will meet
with some of you again on that occasion. We can further exchange views on the strengthening of
co-operation between the banking sectors on the mainland and in Hong Kong.