Following is the speech by the Secretary for Financial Services and the Treasury, Mr Frederick Ma, at a luncheon organised by the Funds Flow Forum of the Hong Kong Japan Partnership Roundtable and the Institute for International Monetary Affairs in Tokyo today (September 27) (English only):
Hong Kong's Development as an International Financial Centre
Distinguished guests, ladies and gentlemen,
It is my great honour to speak to so many distinguished guests in the Japanese business community and to share with you Hong Kong's experience in building up and maintaining our position as an international financial centre. In this respect, Hong Kong and Japan have a lot to share with each other.
Japan has made remarkable achievements in building and sustaining a strong financial services powerhouse. The Japanese Government is making considerable efforts to reinforce Japan's position as a leading financial services centre in the region and around the globe. We have learnt about the progress you have made in areas such as the utilisation of proper "Early Warning System" and the reduction of non-performing loans in the banking sector. In Hong Kong, we are following developments in Japan closely, and we are keen to learn more from your experience.
As far as Hong Kong is concerned, we have transformed ourselves from a trading entrepot several decades ago to a well-known international business and financial centre with impressive developments in various financial services covering banking, securities and futures, fund management, foreign exchange trading as well as insurance.
As a result of the concerted efforts of both the Government and the private sector, we have made remarkable achievements in many aspects of the development of our financial services sectors:
(a) On the banking side, we have 211 authorised institutions and 87 local representative offices. More than 75 of the world's top 100 banks have an operation in Hong Kong.
(b) Our securities market is one of the most liquid markets in the world. Our growth in the securities market has been remarkable.
There are 1,077 listed companies in both the main board and the GEM board, with a daily turnover of US$1.5 billion (JPY167 billion) and a total market capitalisation of about US$741.3 billion (JPY 82,284 billion).
(c) We have also made good progress in fund management. According to the Fund Management Activities Survey conducted recently by our Securities and Futures Commission (SFC), the fund management business in Hong Kong amounted to some US$378 billion (JPY 41,958 billion) as at the end of 2003.
(d) The implementation of the Mandatory Provident Fund (MPF) Schemes in Hong Kong since December, 2000, also provides a stable source of impetus to the long term growth of our capital market. Total net asset value in the MPF system has already exceeded US$13 billion (JPY 1,443 billion), and a monthly impressive growth of US$256 million (JPY 28 billion).
(e) We also have the highest concentration of insurers in Asia. There are 182 authorised insurers in Hong Kong, with half of them were incorporated outside Hong Kong with assets in 22 different countries. The insurance industry in Hong Kong has continued to achieve an excellent annual double-digit growth in the past decade, with gross premium income in 2003 reached US$13 billion (JPY 1,443 billion), which amounts to about 8% of our GDP.
Our financial services sector is one of the key pillars of Hong Kong's economy, employing about 5% of our working population and contributing well over 12% of our GDP. Renowned international organisations, such as the International Monetary Fund (IMF) and reputable credit rating agencies, continue to pay a high regard on Hong Kong. The FSAP (Financial Sector Assessment Programme) Mission under the joint IMF-World Bank programme, which last visited Hong Kong in 2002, commended us for the strong resilience of our financial system and for our policies and performance in the field of financial services.
Our financial markets are well-developed, liquid and efficient, and have demonstrated strong resilience both in the face of external shocks and during cyclical downturn. We have a world-class market infrastructure which is both highly efficient and sophisticated by international standard. And our regulatory system is transparent, open, fair and effective.
The above strength in our financial system is underpinned by a unique combination of institutional and economic fundamentals - our rule of law upheld by an independent judiciary; a free and open market; free flow of capital and information; non-existence of exchange control; a level playing field for all businesses; world-class infrastructure; a rich pool of professionals with profound knowledge about Mainland China; a simple and low tax regime and a clean and efficient administration. They have all contributed to our standing as an international financial centre and are the pillars for our success. On top of this, we also have another edge over other cities in the region in our close relation with Mainland China and the successful implementation of the "One Country, Two Systems". It places us in a distinct position in serving as a platform for accessing the Mainland market and exploiting the rich business opportunities in our hinterland.
Nevertheless, we are fully aware that there is no room for complacency, particularly in this fast changing competitive environment within which we are operating. Our future success depends on our ability to continue to build on our fundamentals for success. And like Japan, we are also mindful of the need to make continuous efforts to reinforce our position as an international financial centre.
Fortifying Hong Kong's Position as an International Financial Centre
To maintain and reinforce Hong Kong's position as an international financial centre, we have made tremendous efforts to establish a world-class regulatory framework, foster strong corporate governance and promote market development. And I would like to share with you briefly some of our key initiatives in this respect.
We attach great importance to maintaining a quality market in Hong Kong. As one of the key milestones in enhancing our regulatory regime, our new Securities and Futures Ordinance came into effect in April last year. It strengthens our requirements for corporate disclosure and the investigation powers of SFC, putting us on a par with the best prevailing international standards and providing us with a solid foundation for further development of Hong Kong's securities and futures markets.
On the banking regulatory system, Hong Kong is one of the first economies working on the implementation of the new capital adequacy standards for banks recently issued by the Basel Committee on Banking Supervision, better known as the "New Basel Capital Accord" or "Basel II". This is expected to further enhance the stability of our banking sector by improving its ability to take on and manage risk. On a par with the world's top international financial centres, we have plans in hand to implement Basel II in Hong Kong by end-2006.
Legal framework alone could not ensure good market quality. We need to work on another crucial factor, which is good corporate governance. The Government of Hong Kong SAR has taken the lead to work with the SFC and the Hong Kong Exchanges and Clearing Limited (HKEx) to develop a "Corporate Governance Action Plan" to ensure that our corporate governance requirements are in line with the best international standards and practices.
In the next 12 months, we are working on legislative amendments to provide statutory backing to important listing requirements so as to give the Listing Rules stronger teeth. We are also pressing ahead with initiatives on the oversight of auditors and the quality of financial reports. These include the establishment of a Financial Reporting Review Panel and an Independent Investigation Board, which will promote the quality of financial reporting and oversee the auditing profession.
Of no lesser importance is the provision of an appropriate and adequate framework for the protection of investors, especially the smaller ones. In Hong Kong, following the enactment of the Deposit Protection Scheme Ordinance in May 2004, we are now preparing for implementation of the deposit protection scheme to provide further safeguards to enhance the stability of the banking sector in Hong Kong. We have also amended the Companies Ordinance to provide for statutory derivative actions by shareholders. On the insurance front, our Insurance Authority is exploring whether a scheme for enhancing protection for policyholders should be introduced in Hong Kong.
Development of Our Bond Market
While Asia's savings rate is high in comparison with other regions in the world, the bond markets in many places in Asia (with Japan as an exception) have not been developed to their full potential. Businesses here tend to rely on bank and equity financing, and investors are not familiar with bonds as a tool of investment. In Hong Kong, we see more could be done to foster the development of our bond market, and this is an area in which we would like to learn from Japan's successful experience. In recent years, we have made considerable efforts in promoting our bond market, and I would like to highlight some of the latest developments here.
In addition to encouraging public corporations to issue bonds and exploring new channels for the distribution of bonds, we, the Government of Hong Kong SAR, took one step further to launch a HK$6 billion (JPY 85 billion or US$770 million) bond programme in May this year. This bond programme securitised the revenue of government-owned toll tunnels and bridges. Under this programme, we set the head start for the securitisation of toll facilities in Asia and it was also the first time that such bonds were offered to retail investors, in addition to institutional investors.
In July this year, we launched our first global bond offering of HK$20 billion (JPY 289 billion or US$2.6 billion), which included the issue of institutional notes and retail bonds denominated in Hong Kong dollars and institutional notes denominated in US dollars. This was the biggest-ever dual currency and multi-tranche bond offering in Asia, available to both retail and institutional investors. The response was most encouraging. More than 100 well-established institutional investors from around the world subscribed. Various overseas investors demonstrated their confidence in the future of Hong Kong by placing large subscriptions, as high as over US$300 million (JPY 33 billion) for one single order.
At the regional level, we are also joining hands with various Asian governments to develop the regional bond market and I am pleased to note that we are making substantial progress in this regard.
Hong Kong as a Premier Capital Formation Centre for Mainland China
The remarkable economic growth in Mainland China provides great opportunities for the further development of Hong Kong's financial markets.
Hong Kong is playing a significant and unique role as the gateway for investors around the globe, including those from Japan, to the China market, and I see great future for Hong Kong as the premier capital formation centre for Mainland enterprises. Industrial growth, first in the Pearl River Delta and then elsewhere in the Mainland, has created a huge demand for capital. Our proximity to and close ties with the Mainland, coupled with our well established financial infrastructure and wealth of expertise, have made Hong Kong a natural and most popular choice for leading Mainland enterprises seeking to tap the international capital market and to establish their standing in the international arena. As at end August, 2004, more than 280 Mainland enterprises were listed on the Hong Kong Stock Exchange, accounting for about one fourth of the listed companies in Hong Kong; and the daily turnover of these companies accounted for about 50% of the total market turnover. Since the listing of the first H-share eleven years ago, Mainland enterprises have raised more than US$110 billion (JPY 12,210 billion) in Hong Kong. Indeed, the presence of Mainland enterprises has enhanced both the breadth and depth of Hong Kong's securities and futures markets.
Mainland China itself is of course a huge and growing market. Some of you may have already heard about the signing of "CEPA": the Closer Economic Partnership Arrangement between Hong Kong and the Mainland which provides various Hong Kong's businesses, including our financial services sector, with a number of WTO-plus market liberalisation advantages. This landmark free-trade pact which came into effect in January this year allows Hong Kong-based companies to gain a unique competitive edge well ahead of and beyond China's WTO commitments in becoming first movers into the Mainland market, including the securities and futures, banking and insurance sectors. The very liberal definition of what constitutes a Hong Kong-based company is entirely in keeping with our open international tradition. Any overseas company, regardless of its nationality, size and ownership structure, can take advantage of CEPA by incorporating in Hong Kong or forming a joint venture with a Hong Kong company. I have no doubt that businessmen around the world wishing to enter the Mainland market will find Hong Kong the perfect place to start their venture.
The launch of the Renminbi (RMB) personal banking business in Hong Kong has also laid another important milestone in promoting closer economic ties with the Mainland. It has opened a new channel for the flow of RMB funds between Hong Kong and the Mainland through the banking system and facilities cross-border spending between the two places. This should also help to broaden the business opportunities for Hong Kong's banking sector. As at the end of July this year, the total amount of spending in Hong Kong using Renminbi debit/credit cards already exceeded US$103 million (JPY 11 billion), and the total amount of Renminbi deposit outstanding was RMB 7.2 billion yuan (JPY 95 billion). And I believe that there is potential for further growth and development in the Renminbi personal banking business in Hong Kong.
Hong Kong and Japan are closely linked to each other in many respects in the financial services sector. As at the end of May, 2004, financial claims of authorised institutions in Hong Kong on banks in Japan reach US$57 billion (JPY 6,327 billion), accounting for 16% of the total claims on banks abroad. Financial liabilities of Hong Kong authorised institutions to banks in Japan amounted to US$45 billion (JPY 4,995 billion), accounting for 21% of the total liabilities to banks abroad.
Against the backdrop of economic recovery in Hong Kong and the fast-growing economic development in the Mainland China, there are enormous business opportunities in Hong Kong. Under the operation of the "One Country; Two Systems", Hong Kong enjoys a unique position which distinguishes itself from other financial centres, including those in the Mainland. Ladies and gentlemen, we in Hong Kong have the skills, knowledge and resources to help serve as the gateway to China. We welcome more Japanese companies to come to Hong Kong to establish their footholds, and joining hands with us to explore the enormous business opportunities to our mutual benefits.
Thank you. Doumo arigatou gozaimasita.
Ends/Monday, September 27, 2004