Following is the speech by the Permanent Secretary for Financial Services and the Treasury (Financial Services), Mr Tony Miller, at the 2nd Annual Asiamoney Equity Forum today (November 20):
Hong Kong - Opportunity Knocks
Distinguished guests, ladies and gentlemen, good morning. And for those of you travelling from other places, welcome to Hong Kong.
I am delighted to have been invited to address this Forum; delighted not least because of your superb sense of timing. The last few months have seen a most welcome change in market sentiment, with the Asian region apparently back in favour with foreign funds. These last few days have also seen celebrations in Beijing on the tenth anniversary of the introduction of H shares on the Hong Kong Stock Exchange, not to mention Tuesday's announcement and yesterday's signing of new arrangements allowing Hong Kong banks to conduct renminbi (RMB) business.
A quick disclaimer and health warning before I start: I am not here to offer investment tips, but I am going to hype Hong Kong shamelessly. The title I have chosen for my address, "Hong Kong - Opportunity Knocks", says it all. You have chosen to meet at the heart of the fastest growing economic region in the world. There is no shortage of opportunity elsewhere in the region, but this is the region's great market place; buzzing with information, bustling with activity; a magnet drawing together adventurous companies in search of capital, and capital in search of competitive ventures.
When opportunity knocks, it is up to you whether or not you open the door. Risk and reward are there in equal measure. So in fairness to you I will endeavour to give you a perspective on both. However, I make no apologies for the natural optimism, which comes from having witnessed Hong Kong's successive, successful transformations of the last thirty years. Hong Kong people have a unique competitive edge when it comes not just to capturing opportunities, but creating them where others see only adversity.
"The PRD Revolution"
For example, you only have to roll the clock back twenty years or so to see Hong Kong at the height of its powers as a centre for light industry, with a focus on the manufacture of textiles and clothing, watches and clocks, toys and electrical goods. And then China opened its borders to investment and the whole competitive cost equation changed over night. Since then the paddy fields of Shenzhen, Dongguan, Zhuhai and Zhongshan have been transformed into a production powerhouse manufacturing US$300 million worth of goods each day, every day of the year. Tens of thousands of factories employ millions of workers. Many of them were set up with Hong Kong capital and are run from Hong Kong. Almost all of them rely in part on logistic and financial services provided by Hong Kong. The process of transformation from a manufacturing to a predominantly services economy -services now account for 87% of our GDP - has not been painless. Nevertheless, the fact that it has been accomplished tells you all you need to know about Hong Kong's entrepreneurs and professionals, our workforce and their will to win.
Just to give those of you from abroad some sense of scale, Guangdong Province is about the size of the United Kingdom. So when we talk about the Pearl River Delta, we are talking about the equivalent of a medium sized member of the European Community with a population of 42 million not including Hong Kong's 6.8 million people. We are also talking about the top four mainland Chinese cities in terms of per capita income. We are talking about the workshop of the world, but we are also talking about a huge concentration of newly affluent consumers.
Let me just underline that last point. In a remarkably short time, China's economy has grown to become the sixth largest in the world at around US$1.3 trillion. Its GDP growth has averaged 7.7% over the last five years; 8% last year and it shows few signs of slowing. As a producer, it has had a global impact on investment decisions and radically altered economies of scale. At the same time, it has put mobile phones and DVDs within the reach of people who even ten years ago could only dream of owning such modern goods. Consumer China - what was once put down as the "mythical market of one billion" - has suddenly become a voracious, brand conscious reality.
Now the impact of all this on trade and investment flows has been nothing short of phenomenal. Significantly, intra-regional trade has more than doubled over the last decade, from US$375 billion to US$775 billion. Significant, not least because the pie is growing so fast that even with changing relative shares everyone is getting a bigger slice. No complaints from us. Container through-put, at 19 million TEU, is three times what is was only twelve years ago, and our air-freight terminal is the busiest in the world, handling 2.5 million tonnes last year. And significant for our service sector, off-shore trade intermediation is expanding exponentially, reflecting Hong Kong's "Rotterdam" role in relation to our Pearl River Delta hinterland.
Hong Kong as THE capital formation centre for Mainland enterprises
On the investment side, switch continents and think Manhattan, for that is the role our competitive strengths mark us out for. Industrial growth, first in the PRD and then elsewhere in the Mainland, has bred a huge demand for capital. Initially, in the 1980s, capital raised by Hong Kong manufacturers in the Hong Kong stock market helped fuel industrial development in the PRD. Come the 1990s, as economic reform in the Mainland accelerated, it was again Hong Kong companies, often with substantial business activities in the Mainland, which were among the first to raise capital by selling "China concept" stocks.
In retrospect, however, the year 1993 is the most important milestone. That was the year that Tsing Tao beer listed: the first H share to be listed on the Hong Kong stock exchange. From Tsing Tao's point of view, the benefits of this listing were more than just the capital raised. Equally, if not more important was the international exposure, which came with it; the brand recognition; and the surge in global sales which followed. Since then many other Mainland firms, including state-owned enterprises, have followed suit, seeking to tap international capital and secure international recognition, in what has been a win-win for us and for them.
I am not going to do a roll-call; the aggregate figures speak for themselves. Over the last 10 years, a total of 247 Mainland enterprises (Note 1) listed in Hong Kong. It is not an exaggeration to say that Chinese companies have altered the landscape of the market:
* They account for 15% by number.
* The account for well over a quarter in terms of market capitalization, close to US$180billion.
* They account for over a third of daily turnover on the exchange.
* 4 out of the 10 biggest listed companies in Hong Kong are Mainland enterprises.
* In the past 10 years, of the 8 largest IPOs the top 7 were all Mainland enterprises, the eighth is a local Hong Kong one - the Mass Transit Railway Corporation, our metro system.
* Over the past 5 years, three quarters of the funds raised in the Hong Kong market were for Mainland enterprises.
That is a pretty impressive record. It speaks volumes for a common view of the mutual benefits for Mainland enterprises, leveraging off Hong Kong's internationally recognised regulatory standards and global reach, in order to gain international acceptance.
This last point deserves emphasis. Hong Kong's great strengths are its world class financial services, the rule of law, the free flow of capital and information, and a well-regulated and highly liquid market. Mainland firms list here not just to secure access to capital, not just for the PR benefits, but because they want the benchmarking. Listing here demands that they subject themselves to scrutiny by the professionals employed by international banking, accounting and legal firms. Securing a listing in Hong Kong gets them a 'Q' mark. They are seen to be meeting international standards and that is good for business. That is why they are queuing up to list here. That is why Hong Kong has become the premier capital formation centre for the Mainland.
In Hong Kong, we are keenly aware that market sentiment is a fragile thing that can easily be tarnished by one or two cases of corporate mis-governance. Thus the Secretary for Financial Services and the Treasury, Mr Frederick Ma, has been campaigning for better corporate governance. He is pushing in particular for directors' training, improving the regulatory regime of accountants, tightening the regulation of IPOs, and continued work in reforming our legislation to suit the needs of the times. We believe this is vital for our continued success in attracting high-quality companies to list in Hong Kong, and in attracting both individual and institutional investors to put their money in our market.
Just now I used the word queuing. Currently there are roughly a hundred firms in the Hong Kong Stock Exchange's listing queue and more than half of them are Mainland companies. As the Mainland continues to press ahead with economic reforms, the demand for capital by Mainland enterprises, and the number of new listings in Hong Kong, can only grow. So the opportunities are huge; the potential rewards are huge; but we must be alive to the risks. It is an inexorable law of markets that some businesses prosper while others do not. It is the function of the market to weed out the latter. However, at the point of application to trade in the market, it is the shared responsibility of both sponsors and regulators to ensure that quality assurance standards are met. Rest assured that while our regulators aim to be market friendly, they have no intention of lowering quality in pursuit of quantity.
Notwithstanding the occasional hiccup and the occasional grumble, it is pretty clear that that position has earned both favour and respect. For a long time now our market has been more than just a local or a regional one. Nevertheless the growing prominence of Mainland stocks in the Hong Kong market has brought with it an increasing level of international interest. One third of Hong Kong's total trading value is now attributed to overseas investors, the majority of them being institutional investors (Note 2). Our market capitalisation is now around three times our GDP (Note 3) - and this makes the Hong Kong stock market a truly vibrant and international market.
Integration and Reform
Hong Kong's economic integration with the Mainland began when China reopened to the world at the end of the seventies. Since the return of sovereignty in mid-1997, it has continued apace to mutual advantage under the "one country, two systems" policy. In June this year you have witnessed the signing of CEPA, the Closer Economic Partnership Arrangement between the Mainland and Hong Kong. This document recognises and strengthens Hong Kong's role in the Mainland's economic development.
In simple terms, CEPA gives "first mover" advantages to Hong Kong manufacturers and service providers ahead of and beyond the Mainland's WTO commitments. These range from tariff free treatment for 273 products, to improved market access for 18 services sectors, including the financial sectors in which we excel, e.g. banking, insurance, accounting and securities. Allow me to highlight the very liberal definition of what constitutes a Hong Kong company, a definition which is entirely in keeping with our open international tradition, and which will doubtless attract many more foreign firms to set up here.
More recently, you will have heard this week's announcement allowing banks in Hong Kong to conduct RMB business. This includes deposit, conversion between RMB and HKD, remittance of RMB to individuals in the Mainland, and acceptance of Mainland credit cards. Obviously this will significantly facilitate day-to-day cross-border activity, including both Hong Kong visitors to the Mainland and Mainland tourists visiting Hong Kong. Equally important is the foot-in-the-door advantage it gives banks in Hong Kong in developing cross-border customer relations. While the relaxation is limited to flows between individuals and will not turn Hong Kong into an RMB offshore centre, it is an important step for the Mainland to establish the first formal channel outside of the Mainland for RMB flow, and for it to be in Hong Kong.
A point worth underlining is the incremental impact of all of these reforms. World attention tends to focus on single big events, such as China's entry into the WTO, or the occasional apparent set-back. My advice to you is that you pay less attention to the bumps in the road and more to the secular trends. Since Deng Xiaoping re-opened China's door, there has been a steady succession of reforms, some major, many more apparently minor, but all of them pointing in the same direction. Unlike the Big Russian Bang, this is a gradualist process of managed reform. There may be no publicly announced timetable, but the reforms keep coming and the impact on the Mainland, on Hong Kong and on the wider global economy has been both huge and healthy.
Of course, we all have our wish-list of things not yet done. Thus the Mainland has stepped up the pace of tapping foreign capital by allowing the experimental scheme for qualified foreign institutional investors (QFII) this June. All of us are waiting for the other shoe to drop. Rumours abound. For example, we are told that consideration is being given to allowing the state-owned US$17 billion National Social Security Fund to invest in Hong Kong. We will welcome it when it comes. In the meantime, other opportunities continue to knock.
Return of capital flow to Asia
The opportunities offered by the Mainland have benefited not only Hong Kong, but also the rest of Asia. Many analysts have noted a recent resurgent retail interest in Asian equity, citing increased capital flows and rallies in the regional stock markets. Locally, for example, from the end of 2002 the H-share index has risen more than 90%, compared to a 30% rise in the general Hang Sang index, and 35% rise in the Red Chip index. Elsewhere in Asia, led by the strong economic performance in the Mainland and the region, stock markets such as those in Thailand, Japan, Taiwan and Singapore have all experienced healthy growth (ranging from 30 - 70%) since end 2002.
Now might be the time for a Government health warning, but you are all adults so you do not need me to tell you that investment entails risks. Instead, remaining officially cautiously optimistic, allow me to point to the clear indications, in the World Bank's East Asia Half-Yearly Update (released in October) that the growth in the equity market is driven by real economic performance in the region. The Bank's forecast for East Asia remains strong despite SARS, with overall growth this year expected to be 5%, and growth next year close to 6%. The Bank also highlights the increasingly dynamic economic integration within the region, as the Mainland emerges as a centre for regional production networks and a market for exports of specialised components, which are assembled in China for export to the rest of the world, or for consumption in China.
The Bank notes that exports from other East Asian countries to the Mainland and Hong Kong have grown by 40% in the first 5 months of this year, while the rest of their exports grew by only 6%. Trade within the region (including Japan) accounts for 60% of export growth. And more than 80% of Japan's overall export growth was contributed by exports to the Mainland and Hong Kong. This trend is expected to grow with further liberalisation of the Mainland market given its WTO commitment. In time, the Bank forecasts that there is real potential for Asia to emerge as an integrated economic entity rivalling Europe and America.
So opportunity knocks in Hong Kong, in mainland China, in the wider Asian region. My advice to you: go for it!
The challenge for Government here in Hong Kong is to hold the ring. We see the potential rewards and we see the potential risks. We are mindful of the example of serious markets elsewhere in the world, which have allowed greed to undermine reputation. We have no intention of allowing that to happen here. Rather you should expect to see prudent reform and firm public advocacy, accompanied by equally firm regulatory insistence on appropriate standards of corporate governance.
Ladies and gentlemen, I see that you have a very full programme today. Indeed, you have speakers of considerable authority to amplify on just about everything I have sketched in these introductory remarks. Allow me to add only an open invitation to all of you to knock on our door. You will always be welcome.
In conclusion, allow me to re-emphasize five reasons why, at a time when opportunity is positively hammering on the door, you would be wise to set out your stall in Hong Kong. First, we are what we have always been, an open, international and dynamic market. Second, we have an abiding belief in light, transparent but prudent regulation. Third, we already have the right critical mass of financial institutions and financial service providers. Fourth, China is awake and at our doorstep. Fifth, our bureaucrats do their best to stay out of the way of businessmen in a hurry.
Note 1: This figure includes H share, Red Chips, and other civil enterprises.
Note 2: Speech by Lawrence Fok, 17.9.2003
Note 3: Hang Seng Economic Monthly, February 2003.
End/Thursday, November 20, 2003