7. How do banking and finance fit into all of this? We expect to see two main developments over the next few years. The first is the greater demand for banking services resulting from the growing volume of business that will follow WTO accession. The second is the financial deepening, stimulated by more rapid financial liberalisation, greater banking competition, and product innovation induced by the terms of WTO accession. These developments will accelerate the reforms already in train within China’s domestic banking sector – reforms that cover the whole spectrum of banking management and services from corporate governance to the professional training of staff. The developments will also progressively open China’s business environment to competition from banks from outside the Mainland. In two years’ time, foreign banks will be able to conduct RMB business with Chinese enterprises in Shanghai, Shenzhen, Tianjin and Dalian. Within five years, they will be able to deal with all Chinese enterprises without any geographical restriction. The advantages for banks with a base in Hong Kong are obvious. Many of them have a head start on the Mainland, with networks of branches and more than a generation of practical experience. They also have all the advantages of geographical proximity, a common language and culture, yet separate financial and legal jurisdictions that Hong Kong’s unique position in China brings. Forty per cent of the Mainland’s trade is routed through Hong Kong. Hong Kong is the Mainland’s largest source of foreign direct investment and China’s main financial conduit and funding centre.

The process of globalisation is not, as we are frequently reminded, a universally benevolent force. But the process has largely ensured that international capital is allocated to where it can be most efficiently used, and that nations produce goods and services for which they have a competitive advantage. And, whatever the risks and shortcomings, the more efficient the global financial system, the more effective the process of globalisation is. As a result, global growth and development benefit. 11. It is possible to discuss this subject from a number of angles and for a very long time. But I should like to focus on two aspects today. One is how globalisation, as we are experiencing it today, is changing the role of governments. The other is the implication of globalisation for the choice of exchange rate regimes by individual jurisdictions. 12. To benefit from globalisation, national economic systems have made a distinct movement towards what Alan Greenspan has called ‘market-oriented capitalist structures’. Fifty years or more ago, the clear trend was towards state regulation, centralisation, and – at the extreme – nationalisation. Today, it is in the opposite direction: the themes are liberalisation, privatisation and deregulation. Indeed, economies are now graded on the extent of their market orientation. Governments have become smaller relative to the economies they serve. Market competition, freed from distorting regulation or dirigiste policies, has come more fully into play, with lower transaction and information costs and increased market efficiency.