. these processes have positive implications for domestic banks incorporated in the mainland and for foreign banks, including banks incorporated in hong kong. for the domestic banks, expanding business and the challenge of foreign competition provide an impetus for reform and innovation. the banking reforms currently in progress in china are proceeding well. these include, among other things, the establishment of asset management companies to carve out the bad assets inherited from the days of policy lending. they also include the full introduction of commercial principles and market - based credit policies, and improvements in accounting standards. there will also be a profound impact on the governance and culture of the commercial banks, in terms of much better transparency and accountability, especially if these banks are to be floated as intended. to meet foreign competition, they will also put much more emphasis on recruiting good people, including those studying abroad, and giving them proper training. a good example is the recent joint venture between qinghua university and harvard business school to provide extensive training for bank managers in the mainland. they will also need a much clearer business and it strategy, which could include the need for consolidation. wto entry will mean a phased opening of china ’ s banking market to foreign banks. restrictions on foreign banks ’ operations, in terms of the scope of business, clients and geographical coverage, will be gradually relaxed. there is therefore a strong need for china ’ s banks to gear up and gird themselves for the challenges that will be posed by their sophisticated foreign competitors. for foreign banks, the opportunities brought by financial liberalisation on the mainland, in the context of wto, are immense. 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 obvious advantages for hong kong ’ s banks in this process are the same advantages that have taken hong kong ’ s other industries into the mainland. hong kong ’ s banks were among the first to open branches on the mainland, especially in the southern cities : they know china well, speak the language, have extensive branch networks, and maintain strong relationships, some of which have grown up over more than a generation. there are niches in which hong kong ’ s banks should maintain and extend their competitive advantage. for example, they should be able to continue to derive substantial business from the extensive involvement of hong kong companies in the manufacturing and retail sectors in china, in the

non - deliverable forward exchange rate, which tracked each other very closely until the end of 1998, when they began to diverge. the decoupling suggests that the market has drawn the obvious conclusion from the fact that, since the linked exchange rate was introduced in 1983, the renminbi has depreciated by more than 70 %, while, during the same period, the hong kong dollar has remained rock solid. and this was confirmed by the calmness with which the market took the raising of the possibility of greater flexibility for the renminbi exchange rate by premier zhu. our own study further suggests that, contrary to popular intuition, a devaluation of the renminbi might actually provide a stimulus to the hong kong economy : this is because the positive impact on demand arising from the complementarities between the two economies would outweigh the negative impact of any loss of competitiveness in those relatively few activities where the two economies remain in competition with each other. such complementarities are in part reflected in hong kong ’ s role as a major entrepot for mainland exports. for any renminbi devaluation, while hong kong ’ s own direct trade balance with the mainland will deteriorate, our re - exports of mainland origin should rise. indeed, with the surge in mainland re - exports activities since the early 1980s, the margins earned on such re - exports are now larger than all other components of hong kong ’ s trade with the mainland combined. conclusion i have suggested in this address that china ’ s accession to the wto will bring benefits to hong kong on a number of fronts. wto entry will see a vast and rapid increase in china ’ s external trade. not all of this additional trade will go through hong kong, but nor will it all avoid hong kong. more important still, the stimulus to liberalisation, globalisation and better corporate governance will expand and deepen hong kong ’ s well - established role as a fund of professional expertise, a centre of international experience and a source and channel of investment. hong kong ’ s banking sector, with its strong reputation and long involvement in mainland business, stands to benefit greatly from the liberalisation in this area, providing that it can position itself to make the best out of the opportunities. in the monetary sphere, the various predictions about the future development of the renminbi in the light of wto membership - which include the possibility of greater exchange rate flexibility - would most likely have positive implications