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Following is the speech (English only) delivered by the Secretary for Financial Services, Mr Stephen Ip, at the Asia Australia Investment Conference & Expo held in Sydney today (May 16):

Hong Kong as a Regional Financial Centre

The Outlook for Growth and its Future Role

Distinguished guests, ladies and gentlemen,

It is a great pleasure to be here today to take part in this important conference on financial services and investment growth opportunities in Asia. Make no mistake, there will be plenty of opportunities. The size and dynamism of the Asian market holds enormous potential. Asia accounts for 60% of the world's population, a quarter of the world's exports and GDP, and more than 40% of global forex reserves.

At the heart of this enormous market lies Hong Kong, my home, and a city I know that many of you will be familiar with. We are within five hours' flying time of half the world's population. Sitting on our doorstep is a market with perhaps the greatest potential for economic development we will ever see in our lifetime - the Mainland of China. And those of you familiar with Hong Kong will know that if there's one thing we take seriously, it is business. That is why we remain as committed today, as we have ever been, to a package of core values that underpin our success: free trade, open markets, a level playing field for business, the free flow of information, and a tried and trusted legal system.

Some of you may have read the recent 'Fortune' magazine cover story that posed the question 'Who needs Hong Kong?' This is the same magazine that seven years ago, in another cover story, predicted the death of Hong Kong. Those of you who have visited us lately - and I'm sure some of you came up for our world famous Rugby Sevens in March - will have found that reports of our death were greatly exaggerated. We are very much alive and kicking and, to use a rugby metaphor, kicking plenty of goals, too. We revel in the rucks and mauls of the global market, where economies that are flexible, fast and able to withstand a hard knock or two will always do well. So, who needs Hong Kong? Let me answer that with another question: Who chose Hong Kong?

More than 3,200 international companies with a regional base in Hong Kong - they have chosen Hong Kong as the best place in Asia to do business. More than 100,000 companies sourcing products in China for the global market - they have chosen Hong Kong as the best place to do business with China. More than 250,000 expatriates, including well over 20,000 Australians paying a maximum of 15% salaries tax or 16% corporate profits tax - they have chosen Hong Kong. Seventy-six of the world's top 100 banks - they have chosen Hong Kong. More than 100 international insurance companies, including 11 of the world's top 20 - they have all chosen Hong Kong. Actions really do speak louder than words.

In the financial services sector, Hong Kong has firmly established itself as the premier financial centre in the Asia-Pacific region.

As market watchers know, Hong Kong's growth and development has been closely linked with that of Mainland China. Years of strong economic growth in the Mainland have produced an accumulation of wealth and capital. China's GDP has reached US$1 trillion, and is growing at about 7% per annum. Some think it could reach US$2 trillion within a decade. One estimate also puts China's stock market capitalization at US$2 trillion by 2011. Such phenomenal growth will create great demand for a wide range of professional services - lawyers, accountants, fund managers, brokers, insurance agents. I have seen one report that estimates China will eventually require the service of 20% of the world's actuaries. Hong Kong is China's natural international financial and capital formation centre.

Since the middle of 1993, an increasing number of large state-owned enterprises in the Mainland have issued H shares in Hong Kong's stock market. By March this year, 50 such enterprises were listed on the Main Board, while nine have listed on our second board, the Growth Enterprise Market, since it was established in November 1999. In total, these companies raised more than US$16.5 billion in capital through Hong Kong. In addition, another 69 China-related companies we refer to as Red chips have listed on the Main Board since 1986. And they have raised more than US$68 billion in capital. Financial transactions between banks in Hong Kong and the Mainland have also grown substantially over the past years.

China's accession to the World Trade Organisation late last year opens up enormous possibilities for the future. We estimate that we can see an extra 0.5 percentage point added annually to our GDP growth as a result of the extra business created for Hong Kong as a result of China's accession. As more and more Mainland companies look outside their traditional domestic market, there will be huge demand for funds and financial services. The Central People Government's priority project to open up the Western Region of China will involve mammoth scale infrastructure works. This in turn will create opportunities to fund these projects through Hong Kong's world-class intermediaries. The rise of MinYing enterprises - that is, private enterprises with no government funding - will also provide a powerful force in deepening China's economic reform. Already, about 100 MinYing enterprises have shown strong interest in listing on the Hong Kong Stock Market. So we think Hong Kong is ideally placed to benefit greatly from a fast-developing, more open and more prosperous China market.

I know that some of you here are not as bullish about Hong Kong as I am. And I am certain that some of you are even muttering the 'S' word right now. But which one would that be? Shanghai? Shenzhen? Sydney? Or Singapore?

I guess it would be Shanghai. Anyone who has been to Shanghai cannot help but be impressed by the enormous strides that have taken place up there over the past decade. This is the future face of cities all over China. But of course, Shanghai will always hold a special attraction because of its prime location at the mouth of the Yangtze River Delta.

But let me just say this: Shanghai's rise will not be at the expense of Hong Kong's demise. For one thing, the figures I mentioned earlier tell a different story. For another, China's market over the next 10 or 20 years will become so big that Hong Kong and Shanghai will become the centres of their own massive regional economies. Other mega economies will also develop throughout the country to service the growing affluence of China's consumers, and funnel exports to major ports along the coastline. I do not believe that Hong Kong and Shanghai will compete with one another, but rather they will complement one another. And next time you are in Shanghai, and you are dazzled by the bright new shopping malls, the high rise buildings, the modern apartment blocks and the trendy bar areas, ask yourself this question: Where did all the money come from? I'll let our Hong Kong developers and entrepreneurs answer that one.

We firmly believe that there will be plenty of business to go around. So what we are doing now is what we've always done: position ourselves as the highest quality market in the region with the highest potential to grow. Quality attracts liquidity. Liquidity begets liquidity.

Our strategy is quite simple - to let the market function at its best. The public sector's role is to provide the framework within which that can happen by simplifying procedures, encouraging flexibility and innovation, setting clear rules that are administered fairly and firmly, and by developing efficient, safe and reliable hard and soft infrastructure.

Our securities and futures market structure has been reformed and streamlined with the demutualisation and merger of the two Exchanges and their three clearing houses in March 2000. The merged entity, The Hong Kong Exchanges and Clearing Limited (HKEx), has been a listed company since June 2000. This allows public trading and ownership of the company.

Parallel efforts have been made to increase the depth and breadth of the market. I chair a Task Force on Financial Market Development to look at ways to increase the user friendliness of our regime, and facilitate the development of new products and services in areas including banking, debt market, equity, insurance and the fund industry.

Now, I would like to say something about the debt market in Asia, which I think is sometimes overlooked. The development of the debt market in Asia may be a victim of our success in other areas, namely the efficiency of our banking and equity markets. There seems to be a lack of recognition about the importance of ensuring that the bond market is robust and efficient enough to provide a channel for the sudden, large flows of savings that may be diverted away from banks or equities when one or the other faces a crisis. The result is latent demand waiting to be tapped.

In Hong Kong, we have taken a conscious step to fully review the debt issuing mechanism and simplify procedures for issuing retail debt. Archaic prospectus requirements are being eliminated without affecting the quality of disclosure to investors. Investor aloofness has also begun to change in the face of historically low interest rates. Recent debt paper offerings by both public and semi-public bodies in Hong Kong have been enthusiastically received. The latest two offers, by the Airport Authority and the Mass Transit Railway Corporation, managed to tap US$ 589 million.

The retail fund sector also has good potential. The number of authorized unit trusts and mutual funds registered with the Hong Kong Securities and Futures Commission (SFC) has grown from 920 in 1992 to 1,890 by the end of March 2002 with an aggregate net asset value of US$285 billion. Naturally, this is good for the fund management industry in Hong Kong. So too has been our Mandatory Provident Fund system which was launched in December 2000 and now attracts inflows of US$260 million a month. Two weeks ago, our regulator announced a set of new guidelines on offering hedge funds to the retail market. This makes us one of the few jurisdictions in the world that allows the authorised sale of hedge funds to retail investors.

I am happy to take this opportunity to reveal that Aussie fund managers can also get a piece of the action in Hong Kong. During my meetings with Senator Ian Campbell and senior officials of the Australian Securities Investment Commission (ASIC) over the past few days, we have reached an agreement on the mutual recognition of mutual fund managers. This means that Australian fund managers licensed by the ASIC to operate schemes which meet the requirements of our Unit Trusts Code will be able to manage schemes authorised by our Securities and Futures Commission. This is a welcome development on the cross-border supervision of fund management activities.

On the equity side, we have streamlined issuance procedures for derivative warrants and lowered administrative fees and charges. We will further streamline the mechanism and related requirements for public offerings.

The banking industry has also undergone liberalization and reform. The final phase of interest rate deregulation was completed in July 2001, allowing banks to compete for deposits freely on the basis of price and product innovation. Market entry criteria for foreign banks have been relaxed and are now on a par with local banks.

Just two months ago, on 13 March, our legislature passed a new Securities and Futures Ordinance that will put our regulatory regime on a par with the best international standards. The passage of the Ordinance represents almost a decade of hard work. It consolidates and modernises 10 existing ordinances. In addition, because of greater globalisation and advances in technology, the Ordinance includes a number of key initiatives aimed at enhancing the quality of the market and lowering compliance costs by market participants. These include a new streamlined single licensing regime for intermediaries, new proportionate disciplinary sanctions to combat market misconduct; new measures to protect the interests of investors by criminalizing market misconduct and providing a civil route for action; and a tighter regime for disclosure in listed companies.

Hong Kong is the third major market to pass new securities regulatory legislation in recent months. The UK Financial Services and Markets Act came into force on 1 December 2001. And the Financial Services Reform Act here in Australia became effective on 11 March. For us, work on a considerable body of subsidiary legislation now is underway. We hope to finish the work by the end of this year.

Now let me say a few words about corporate governance.

Two fundamental qualities determine the soundness and stability of financial systems - the quality of information and the quality of corporate governance.

Reliable and timely information is a market fundamental. To have good information, you must have both good accounting standards and good auditing standards. Hong Kong is fortunate that our Hong Kong accounting standards are being harmonized with International Accounting Standards (IAS). Our auditing standards have been very high, because we have the highest concentration of professional accountants in Asia.

Corporate governance was identified as a priority area in Hong Kong well before Enron. Good governance is key to maintaining Hong Kong as a leading international financial centre of quality. Since the Asian financial crisis, we have worked even harder to bring our corporate governance standards up to global standards, even though we can claim to have some of the best and most competitive corporations in Asia. Our Standing Committee on Company Law Reform has already issued its Phase I recommendations on corporate governance, which I am pleased to say match considerably the work being undertaken by the UK Company Law Review Steering Group. Market responses are being considered.

The HKEx and SFC have been busy modernising the Listing Rules and consulting the market on Corporate Governance proposals for amending Listing Rules. There will be improved disclosure requirements, including more frequent reporting of corporate information, increased protection of shareholders' rights, better director and board practices, and strengthened enforcement of the law against false and misleading disclosure of corporate information.

In order to better protect the interests of minority shareholders, the new Securities and Futures Ordinance lowers to 5 per cent of a company - down from 10 per cent - the threshold at which substantial owners must disclose sales or purchases. The new law also reduces the time period in which directors must disclose sales or purchases to three days, from five.

Minority shareholder rights' are also better protected, as the scope of investigations into Listed Companies conducted by the SFC has been widened by the recently passed legislation. There is also a new private right of action for those who have suffered loss as a result of market misconduct. They can seek compensation from those responsible for it.

Our hard work on the corporate governance front is well recognized by the IMF, credit rating agencies and other international organisations. In February this year, Standard & Poor's noted that "the overall support environment in Hong Kong for corporate governance is strong in a global context...the overall governance environment is strong and the trend is positive". But, we also realise that there is still room for improvement and we will continue to work on this as a matter of competitive necessity.

Another main competitive advantage for Hong Kong lies in the robustness and efficiency of our financial infrastructure. Financial transactions have no geographical boundaries in a wired world, and gravitate towards a centre that is safe and efficient. Our latest contribution towards building this competitive advantage is a sophisticated real time payment and settlement system in both Hong Kong and US dollars. It can be geared to other currencies, such as the Euro, if demand warrants.

We will continue to build on this advantage on three fronts:

*Domestic financial activities - to link up domestic debt, equity and payment systems so that straight-through-processing can be achieved in Hong Kong Dollar transactions.

*International financial activities - to provide safe and efficient clearing systems in foreign currency transactions in the Asian time zone and to extend the linkages of our infrastructure with those of others in the region, so that more international financial transactions will be attracted to Hong Kong.

*Mainland/Hong Kong financial activities - to attract Mainland institutions to make more use of Hong Kong as the platform for conducting their international transactions, and to strengthen the linkage of the infrastructure of the Mainland and Hong Kong so that two-way payment and settlement will be made more efficient.

A Steering Committee on the Enforcement of Financial Infrastructure will announce a package of initiatives to implement this world class infrastructure in the coming few months.

Ladies and gentlemen, as one famous Australian once remarked: "Life wasn't meant to be easy." Certainly, over the past five years we have seen some tough times in Hong Kong. The Asian financial crisis knocked the wind out of our sails. No sooner had we picked ourselves up off the ground than we were hit by our second downturn in four years.

But, as you can see, we have been working very hard behind the scenes to set the stage for a sustainable recovery that will be fed by the efficiency and integrity of our markets, the quality of our people and the enormous potential of the giant economy on our doorstep.

In the past, nobody has ever bet money against Hong Kong and won. And I can tell you, in all confidence, that Hong Kong remains a sure bet for the future as well. Not an each-way bet, but a winning bet.

Thank you very much.

End/Thursday, May 16, 2002

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