Mr. Yam looks at the future of Hong Kong as a financial services centre for
China and the Asian region Speech by the Chief Executive of the Hong Kong Monetary
Authority, Mr. Joseph Yam, JP, to Coopers and Lybrand Financial Services Conference in Hong
Kong on 28/10/97.
I have been asked to speak on Hong Kong's role as a financial services centre for
China and the Asian region. As you know, many of the economies of the Asian region, including
of course the mainland of China, have been undergoing a rapid process of financial
liberalization. This has brought tremendous benefits to the region, through providing the
mechanisms for channelling savings into investments, domestically and internationally, thus
promoting growth and development of the region. The process has brought substantial risks to
the region as well, as clearly you have witnessed in the past few months when financial turmoil
spread in the region.
2. Notwithstanding the financial problems now being faced by the region, the
balance of opinion is still firmly that financial liberalization is of long-term benefit. The correct
response to such problems is clearly, at least for the immediate future, to take the right medicine
and implement the necessary economic adjustment programmes, prescribed if necessary by the
International Monetary Fund. Indeed, this has very much been the focus of recent attention when
one looks at individual economies in this region that have been subject to financial turmoil. But
prevention is always better than cure. Much attention will also be required, in the fullness of
time, to make sure that the financial systems through which financial intermediation takes place
are robust so that the benefits of financial liberalization could be maximized and the associated
risks could be minimized and prudently managed.
3. As a financial services centre which operates with a highly liberal regime,
Hong Kong has important roles to play in all this. There is not enough time to go into details
here on this occasion, so I shall just identify three general areas for your consideration.
4. The first area concerns financial intermediation within individual economies, in
other words, the channelling of domestic savings into domestic investments. Here Hong Kong,
at this stage at least, largely only plays an advisory role. The less liberalized financial systems in
this region are very much dominated by domestic financial institutions, particularly in the
banking market. Further, domestic politics and a desire to protect domestic financial institutions
from undue competition are such that liberalization to admit foreign financial institutions to take
part in domestic financial intermediation would only proceed at a pace dictated by these
considerations. For example, it will, I think, take some time and patience for Hong Kong-based
banks to gain a physical presence in the mainland of China, be allowed access to renminbi
banking business and command a significant share of that business.
5. But Hong Kong's expertise in developing markets, in building the market
infrastructure and, where necessary, in regulating markets and supervising market participants to
uphold the efficiency and integrity of financial markets is there for everybody to see and tap.
Furthermore, we know the region, and particularly in the case of the mainland of China, I would
argue that we know a lot more than others, and so we are in an advantageous position to perform
an advisory role. And the financial community of Hong Kong, including the regulators, have
been actively playing that advisory role. I can speak from experience here, although it would not
be appropriate for me to be too specific. In many of the Hong Kong Monetary Authority's
contacts with, for example, our counterparts in the mainland of China, the subjects for
discussion are increasingly on financial affairs in the mainland rather than those in Hong Kong.
6. I believe that in performing this advisory role effectively we will open up
opportunities for the financial services industry of Hong Kong. As markets are built and
liberalized in these neighbouring economies, I am confident that our own financial institutions
will gain access to the business in those markets through establishing a presence there, and
eventually compete, I hope, on a level playing field with the domestic financial institutions. In
any case, the need for a physical presence with a large branch network in the provision of
financial services may soon become a thing of the past with the advancement of
telecommunications and information technology. It is still early, I think, to come to a definitive
view, but the prospects are that electronic money and the use of the internet for banking and
other financial services are breaking down geographical boundaries. Barriers to entry and
restrictive practices may lead to the diversion of business to offshore markets in locations with
liberal practices.
7. The second area concerns financial intermediation in the international
dimension, involving the flow of savings into investments across international boundaries. Hong
Kong as a financial services centre has a business role of providing the markets, in banking, debt
and equity, supported by other efficient financial services and the rule of law, to facilitate the
international flow of funds in this region. Our markets have the freedom, the liquidity and the
integrity to attract international investors managing institutional savings to come here and those
in need of funds to raise them here. The opportunities in this region, in particular in China, are
enormous, and international investors would have a preference to operate in markets in which
the rules of the game are transparent and familiar to them, and are of internationally accepted
standards. And that means coming to Hong Kong.
8. The banking market in Hong Kong is of course a very international one, with a
total of 182 licensed banks, 151 of which are incorporated outside Hong Kong. 81 of the largest
100 banks in the world are licensed in Hong Kong. Collectively they provide a wide range of
banking and other financial services, not just for Hong Kong but for the region as a whole. The
banking sector of Hong Kong is reputed to be amongst the most efficient and profitable in the
world.
9. Hong Kong's debt market, which has developed quite rapidly in the past eight
years, is also playing a significant role in the region. Financial intermediation through the debt
market is still relatively underdeveloped in the region, but the prospects are good. As the very
substantial savings of the region is increasingly institutionalized through the establishment of
provident funds and pension funds, the demand for debt securities would grow, perhaps much
faster than that for banking and equity instruments. At the same time, the huge investments
envisaged for the development of the physical infrastructure in the region will require much debt
financing, thus increasing the supply of debt securities. With the first class infrastructure in our
newly developed debt market, Hong Kong is in a very favourable position to take advantage of
these good prospects.
10. Hong Kong's equity market is of course one of the largest and most liquid in
the world, and, notwithstanding recent volatility, is the favourite market for institutional
investors and for those wishing to raise funds. One popular area recently is, of course, the use of
Hong Kong's stock market for raising funds by Chinese state-owned enterprises. Up to late
October, 38 enterprises from the mainland of China have made their initial public offerings in
Hong Kong in the form of the issue of "H" shares. These shares were bought by investors both
in Hong Kong and overseas. It is important to note that when mainland enterprises sought to be
listed on the Hong Kong Stock Exchange, they are required to comply with all the listing rules
and other relevant regulations in Hong Kong. No favouritism or preferential treatment has been
or will be given to mainland companies. Thus, in addition to fund raising, the listing of mainland
companies in Hong Kong facilitates the upgrading of corporate governance of these listed
companies in line with the international standards practised in Hong Kong. Through this process,
Hong Kong has also played a strategic role in the reform of the state-owned enterprises in the
mainland.
11. The third area concerns the management of systemic risks arising from but not
limited to financial liberalization in this region. There is clearly identified a need for much
greater monetary cooperation in this region, and here Hong Kong has been actively playing, and
hopes to continue to play actively, a promotional role. We have been instrumental in promoting
greater Asian monetary cooperation, not just in the more visible efforts to deal with the financial
turmoil we all are facing, in one way or another, but also the upgrading and standardization of
supervisory practices, and the building of the financial infrastructure of this region to facilitate
safe and efficient international financial intermediation in this region. Our ability to play this
role no doubt enhances Hong Kong's status as an international financial centre, which is
consistent with the requirement laid down in the Basic Law.
12. We took the initiative on the wake of the Mexican crisis in early 1995 to draw
the central banking fraternity of this region together to talk about Asian monetary cooperation,
which led first to a set of bilateral agreements for the provision of liquidity to each other in case
of need. This was followed by the establishment of three working groups to share knowledge
and expertise on financial market development, central bank operations and banking supervision
issues. Separately, we are also promoting the establishment of linkages of the financial
infrastructures of economies in this region, such as payment systems and debt clearing systems,
to facilitate the efficient and safe flow of funds amongst ourselves. These efforts will have
long-term benefits for the region, both in terms of the maintenance of financial stability and the
development of the financial sector.
13. While important progress is being made, this has recently been overshadowed
by financial turmoil in the region, and the focus of attention has as a consequence been diverted
to the provision of credit to assist Asian economies in need in making structural adjustments. We
had the financial package for Thailand, and there have since been many ideas put forward for a
general facility of some sort. These are being actively considered and we are taking an active
part in the discussion, although there are currently still quite significant differences of opinion.
The position that we are taking is that whilst regional solidarity is highly appropriate for a region
with increasing economic, trade and financial integration and increasing interdependence, any
regional financial arrangement must be structured with regard to international standards and
practices. It would not be appropriate, for example, for a regional institution, if there is to be
one, to prescribe medicine, along with financial assistance, that is different from those
prescribed by the International Monetary Fund. It would immediately be seen as a soft window
for financial support, thus creating moral hazard problems. I am hopeful that well-structured
arrangements will emerge in due course. Certainly the climate is right and the momentum is
there.
14. Perhaps I should take this opportunity to put the recent financial turmoil in
Asia in a global perspective. First, the world is in very good economic shape. World economic
output is estimated by the IMF to expand by 4-41⁄2% in 1997 and 1998, the strongest pace in a
decade. In the OECD countries, especially in the US, there is solid growth with low inflation,
while we are seeing signs of broad-based recovery in Europe. Only in Asia have we seen a
slowing of growth, but the growth rates have still been high by world standard and last year
Japan grew by 3.6%, the fastest since the late 1980s.
15. Second, because of high global liquidity and low inflation, asset markets
around the world are at record levels. Capital flows have increased with globalization, and added
to record high stock and bond prices. The fact that Europe has recently raised interest rates, and
the Fed is considering whether to pre-emptively raise rates to prevent wage-push inflation, has
made the financial markets much more nervous despite the growth environment. This explains
why the financial volatility in Asia has become global in nature. It is very flattering to know that
Hong Kong can move even the mighty US and European markets, as much as the other way
around.
16. Third, Asian fundamentals, and especially Hong Kong fundamentals, are
strong. But there have been different degrees of strength in Asia with respect to the
fundamentals. The adjustments in exchange rates of currencies in this region reflect partly the
market perception of fundamentals. But as I said recently at the Per Jacobsson lecture, there is
no perfect exchange rate regime. Some economists think that a shift from a rigid exchange rate
regime to a free float would result in lower interest rates to ease the interest rate pain. However,
recent experience in Asia has shown that the market demands even higher interest rates than
before under a floating rate regime due to the need for hedging, since there is a perception of
higher credit risks and exchange rate risks.
17. I interpret the currency turmoil in the region not as exchange rate volatility,
but as a painful but necessary adjustment in the real economy (manifested through the financial
system and markets) to the new world of greater competition. In essence, we must all work
harder to get greater productivity gains to meet the new challenge. No one can afford to be
complacent in this global world. To the extent that the free market is demanding higher interest
rates because there is a reverse flow of capital from Asia to the OECD markets, we will all have
to bear the pain and adjust accordingly.
18. And not all interest rate pain is bad. Higher interest rates would increase
savings in Hong Kong and bring inflation down further, thus increasing our competitiveness. To
the extent that higher interest rates would reduce house prices, they would also make housing
more affordable.
19. The currency board system with a fixed exchange rate is appropriate for a
small and highly externally-oriented economy like Hong Kong. It further imposes a strict
discipline on public finances. Hong Kong runs budget surpluses, not deficits. On the other hand,
a floating exchange rate adds huge volatility to the businesses of the external sector of the
economy, requiring further costs in terms of hedging. A volatile exchange rate by contrast does
not have quite such serious implications for a large and relatively less externally-oriented
economy like Japan, where external trade accounts for less than 20% of GDP. In Hong Kong,
with external trade accounting for 285% of GDP, a volatile exchange rate creates huge
uncertainties for much of our livelihood, thus undermining our fundamental competitiveness.
20. Hong Kong has always understood that there is no free lunch. We have built up our strengths
and our savings through sheer hard work. If there is greater competition out there, we will adjust
our quality and our skills accordingly. As accountants in a service economy, you know very well
that you cannot price yourselves cheaply in order to compete. Our reputation depends on our
ability to deliver quality service that is value for money. This is the strength for Hong Kong. Let
me conclude by merely giving you the assurance that our linked exchange rate system, which
has served us so well in the past 14 years, is here to stay.