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Following is the speech by the Secretary for Financial Services and the Treasury, Mr Frederick Ma, at the Distinguished Speaker Luncheon hosted by the Singapore Chamber of Commerce today (November 18):
Robert, Jim, Distinguished Guests, Ladies and Gentlemen,
It is a great pleasure to be here today at the Distinguished Speaker Luncheon hosted by the Singapore Chamber of Commerce, in conjunction with nine other international chambers. It is a particular pleasure because your presence underlines Hong Kong's international character. And that open international character is vital to our retaining our position as an international financial centre.
You have invited me to share with you my vision for our financial market. Before doing so, let me share with you my recent discussion with a group of university students. They are very concerned about Hong Kong's current economic environment and very concerned about their job prospect and career future. I told them when I graduated in 1973, the economic condition then was as bad, if not worse than what we are facing today.
Historical Perspective
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1973 was the year of the first OPEC oil shock. Inflation was rampant; raw materials were in short supply, so were grains; our manufacturers and traders faced a whole raft of new trade restrictions. The Financial Secretary was not a happy man! On top of all these, it was the year of Hong Kong's great stock market boom and bust!
Prior to the bust, our stock markets had the reputation for being just a little bit wild. I said "markets", there were in fact seven of them, of which four were active: the Hong Kong Stock Exchange, the Far East Exchange, the Kam Ngan Stock Exchange and the Kowloon Stock Exchange. Total turnover taking all four together was just over HK49 billion for the whole year of 1973. There was no futures market.
There were no institutionalized listing arrangements. There was no SFC. From a record high of 1775 points early in the year, the Hang Seng index fell to 400 at year's end and turnover the following year dropped by 77% to just over HK$11 billion for the whole year of 1974. The Hang Seng fell to a record low of 150 points by December 1974. The market was to stay in the doldrums for five years and banks remained the prime movers of capital.
In 1973, there were 74 licensed banks in Hong Kong, and some 66 "representative offices" of foreign banks. A moratorium on the issue of new licenses had been in place for seven years following serious problems, including the failure of two banks, in the wake of the 1965 recession. Fund management had not yet emerged as a distinct business.
However, 1973 is also the first year that the expression "regional financial centre" appeared in the then Governor's Policy Address. The rest, as they say, is history;
- a Futures Exchange for cotton in 1976, and later sugar, soybean and gold futures;
- a working party on exchange unification in 1977;
- unification, finally, in 1986;
- the Hang Seng Index Futures Market in the same year;
- the progressive dismantling of barriers to entry for foreign banks in the 80s;
- the Securities and Futures Commission in 1989;
- the Hong Kong Monetary Authority in 1993;
- the Mandatory Provident Fund Authority in 1998.
Take a look at us now! We have one of the highest concentrations of banking institutions anywhere in the world. As at end-September 2002, we have 228 authorised institutions and 99 local representative offices. Over 70 of the world's top 100 banks have an operation in Hong Kong.
In the securities market, our performance since 1973 has been equally remarkable:
- turnover has increased about 40 times;
- market capitalisation has multiplied about 70 times; and
- the benchmark Hang Seng Index has increased approximately 26 times.
Hong Kong is now the 2nd largest market in Asia and 9th largest in the world. As of end-Sep 2002, there were 952 listed companies, with a total market capitalisation of about US$ 433 billion. Hong Kong's securities market is also among the world's most liquid. In 2001 our total turnover was the 5th largest in Asia, at US$255 billion.
We have also made good progress in fund management. The SFC Fund Management Activities Survey of 2001 shows that as of end-December 2001, there were 172 companies in Hong Kong, which provided fund management or related advisory services, or derived gross operating income from such activities. These companies in aggregate had total assets under management or advisory services amounting to approximately US$208 billion. Of these 62% were institutional funds and 23% pension funds.
This is a growth area. While in 1973 the community was still some years away from its first tentative debate on the pros and cons of such retirement benefits, the MPF is now up and running. There are 311 MPF constituent funds, with a net asset value of about US$ 5.4 billion and a monthly fund inflow of about US$250 million. The funds' accrued assets will grow to about US$123 billion in 30 years, with annual contributions of US$ 7.7 billion by then. This provides a stable source of impetus to the long-term growth of our capital markets.
As at end September 2002, there were 199 authorized insurers in Hong Kong (including 48 long-term insurers, 132 general insurers and 19 composite insurers). Gross premium income in 2001 reached HK$76 billion, equivalent to about 6% of our GDP. We maintain a level playing field for all market players irrespective of their places of origin.
Financial services, including insurance, real estate and business services now account for fully 15% of our workforce (489,300 jobs) and nearly a quarter (23.2%) of our GDP. As you can see, Hong Kong delivers on its promises and is an international financial centre today.
Vision for the Future - China's International Gateway
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So much for the rear view mirror; now for the crystal ball. What kind of financial centre do we want Hong Kong to be in, say ten years' time? Let me share with you my vision.
I see Hong Kong's role as China's international gateway being further enhanced. I see Hong Kong as a major International Financial Centre in the Asian Time Zone playing the twin and complementary roles of the main centre for raising foreign capital for Chinese enterprises and Joint Ventures in the mainland, and regional financial services hub.
I see great potential for the development of our bond market. We will have here in Hong Kong the largest and most varied range of international banking houses in this region, together with their associated financial expertise. We will be the region's fund management centre. We will be the region's centre for insurance and reinsurance.
The Challenges
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Given today's doom and gloom, I have no doubt that I will be told that I am being too optimistic. What about deflation? What about the deficit? (That's something we did not quite have in 1973!) What about this painful problem of economic adjustment? My response is a simple one. Take another look in the rear view mirror. You will see two things. First you will see the road we have come by, and all the similar challenges Hong Kong has faced and successfully overcome in the past. And second you will see the competition in which Hong Kong emerges as the front runner and we are the winner. I have a feeling that, looking back in ten year's time, people will regard today's problems the same as we regard those of 1973, a bump in the road.
Much of our future success, like our past success, will depend on Hong Kong's unchanging fundamentals: free flow of capital and information, an independent judiciary based on the rule of law, clean and efficient government, and a simple and low tax regime. Add to this, no exchange controls, transparent regulation and state-of-the-art telecommunications and you have a pretty good combination. I note with satisfaction that nine years running the Heritage Foundation has ranked us No.1 in its Index of Economic Freedom. But we cannot afford to be complacent in this rapidly globalizing economy. We need to stay ahead of the game. And that is what the Financial Market Development Task Force, which I now chair, was set up to do.
So allow me the luxury of talking to you, the international chambers, about what we are doing to make the dream a reality.
Take a look at our equity market. The listing of Mainland enterprises has boosted the stock market of Hong Kong. Of the total US$205 billion raised directly and indirectly through Hong Kong since 1990, 45%, that is US$92 billion, was for Mainland enterprises. These companies now account for over a quarter (27%) of our total market capitalization, and their turnover accounted for over 36% of the total in 2001.
We are going strong. This year we have seen major listings like the Bank of China (Hong Kong) at about US$ 2.5 billion, and China Telecom at about US$ 1.4 billion. In addition to these major listings, a host of smaller Mainland private enterprises are lining up to list in Hong Kong.
The Government will continue to encourage this mutually beneficial commercial activity through visits and participation in promotional activities. I myself will be going to Nanjing on one of these early next month. We will also enhance our attractions by sensible improvements to and investment in our institutions. State of the art quality market infrastructure, allowing scrip-less transactions and straight-through processing, are important. But good corporate governance and investor protection are also key ingredients. We are making good progress on these fronts, but I will do no more than mention them today.
Bonds
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Meanwhile, given the favourable international market conditions, as in low interest rates and stock market volatility, the bond market is a star of attraction these days. Certainly, it is an area where I see great potential for development.
Until recently the under-developed child of our financial services family, the Hong Kong dollar bond market has made significant progress. New issues of Hong Kong dollar bonds, other than Exchange Fund Bills and Notes (EFBN), was about HK$149 billion in the first three quarters of 2002. Products are now a lot more diverse and retail interest is much stronger. As of end-September 2002, the outstanding Hong Kong dollar bonds, excluding EFBN, stood at HK$409 billion. But we know we can do better and we are acting quickly to remove impediments to growth through legislative and administrative measures.
At the same time as we are removing obstacles in the way of bond issuers, we are also encouraging public sector bodies like the Hong Kong Mortgage Corporation, the KCRC, the Airport Authority, and the MTRC which the Government owns 75% of its shares to come to the market. In so doing, we will bring new and continuous liquidity adding depth to the market and providing private sector issuers a favourable environment to launch their own issues.
Before I leave the subject of bonds, I would just like to put in a plug for a recent APEC initiative. In developing our own debt market, we are mindful of the need to encourage our neighbours to do the same. Together with Korea and Thailand, we are co-leading the Development of Securitisation and Credit Guarantee Markets Initiative, which aims to remove impediments to the development of such markets in the region. We are also actively exploring the setting up of an Asian Bond Fund to improve the flow of savings funds within the region.
Fund Management
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Which brings me conveniently to fund management. We are positioning Hong Kong as the fund management centre in Asia. We have all the right ingredients: free and abundant flow of capital, liquid financial markets, efficient financial infrastructure, the rule of law and a critical mass of professionals. And we are well connected to the China market.
Banking
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In banking, we have already opened up the Hong Kong market to the rest of the world. Since May this year, we have replaced the $16 billion US Dollar asset size criterion, previously applied for foreign bank applicants, with the much lower deposit and asset size criteria applicable to local bank applicants. We have also reduced the period of operation as a restricted licence bank (RLB) or deposit taking company (DTC) from ten to three years, and we have dispensed with the "association with Hong Kong" requirement for locally incorporated RLBs and DTCs wishing to upgrade to licensed banks.
Taken together, these measures mean that the Hong Kong market is now a truly level playing field for all who want to enter. Separately, we have heard from the banking community that they would like to engage in RMB business. I will say no more than that we think this is a very interesting idea!
I also see tremendous growth of private banking business in Hong Kong over the next ten years. Strong economic development in the region, particularly the Mainland, will produce more high net-worth individuals who require private banking services.
Insurance
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Coming to insurance, this is a growth area and a growing and increasingly creative industry in Hong Kong. We will continue to encourage this, subject to a light but prudent regulatory framework. We aim to facilitate the development of reinsurance and captive insurance business. In the past couple of years, we have already refined our regulatory regime to meet the unique characteristics of these lines of business. The Office of Commissioner of Insurance and the industry have established a working group to consider additional facilitation measures. For the future, apart from our domestic market, there is, I believe, given China's growing needs, considerable potential for development as an off-shore insurance base.
Conclusion
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Ladies and Gentlemen, to sum up, I see a great future for Hong Kong as a major International Financial Centre. Our track record speaks much louder than any advertising. We are committed to open markets. We welcome competition. Our experience tells us that such policies not only offer opportunities for the better development of Hong Kong's financial markets, but will also strengthen our competitiveness.
Ladies and gentlemen, I have no doubt that, ten years from now and beyond, companies around the world wishing to enter the Mainland market will continue to find Hong Kong the perfect place to do business. So tell your friends the welcome mat is out at China's International Gateway - we never close!
Thank you very much.
End/Monday, November 18, 2002
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