Following is the speech (English only) by the Secretary for Financial Services and the Treasury, Mr Frederick Ma, at the Pacific Rim Conference - "Globalisation and Regionalism" today (January 14):
Meeting the Challenges of Financial Globalisation
Good afternoon, Ladies and Gentlemen,
First of all, I am very pleased to have the opportunity to address this conference today. I want to thank Professor Ho for inviting me to share my thoughts with distinguished speakers and guests here, one of whom, Professor Edward Chen, was my Economics Professor some 30 years ago. I have carefully picked a topic which describes a major part of my work in one sentence - "Meeting the Challenges of Financial Globalisation". I would like to focus my address on how globalisation has helped to shape our prominent financial services sector today, and what we, the policymakers, are doing in continuing to meet the challenges brought by this process.
Financial globalisation refers to the integration of a place's local financial system with international financial markets and institutions, characterised by active participation of local borrowers and lenders in international markets and a widespread use of international financial intermediaries. Financial globalisation brings about both opportunities and challenges. The extent to which a financial market may benefit from this process depends very much on whether it has the necessary pre-conditions for financial globalisation and the strong fundamentals for taking advantage of the opportunities brought about by this process.
The degree of globalisation varies among different financial markets. The speed of this process hinges on a number of factors, including-
* The openness of its economy;
* The existence of the necessary financial infrastructure which facilitates the integration with other financial markets;
* Government policy with regard to convergence with the financial laws and regulations in other major financial markets; and
* The potential and thus attractiveness of the market itself.
Financial Globalisation and Hong Kong
While many places may wish to benefit from financial globalisation and develop themselves as an international financial centre, not all of them could fulfil their aspirations in this regard. Hong Kong is well-placed to take part in the financial globalisation process. We have one of the most opened economies in the world. Indeed, for the 11th consecutive year we rank the first among over one hundred places as the freest economy in the world by the Index of Economic Freedom published jointly by the Heritage Foundation and the Wall Street Journal. We have no restrictions on the free flow of capital, nor any exchange control. We are well-known for our policy in support of a free market economy and are committed to providing a level-playing field for business operators from all parts of the world.
In addition to our free economy, we have first-class financial infrastructure which enables investors in Hong Kong to conveniently access financial products in other parts of the world and facilitates international investors and fund raisers in making use of our market facilities and services. Businesses in Hong Kong could also easily gain access to funds provided by international financial intermediaries and investors. For instance, the Central Moneymarkets Unit (CMU) operated by the Hong Kong Monetary Authority provides efficient clearing, settlement and depository services for both Hong Kong dollar and other international debt securities. The CMU is linked up with regional and international central securities depositories, thereby allowing investors in Hong Kong and other parts of Asia to hold and settle international securities directly through CMU members.
On top of the above, the Government is keen to ensure that our financial regulatory system is in line with international practices and standards. We have been closely monitoring the developments in other financial markets and participating actively in international organisations and conferences as well as making regular reviews and implementing necessary changes to our regulatory system having regard to our local market development needs and international development trends.
Above all, the most important factor affecting the progress of financial globalisation is the potential of the market itself. Enterprises and talents go to where there are good business opportunities, and investors' money goes to where the investors have confidence and see profitable investment opportunities. Our efficient, transparent, fair and advanced financial system, underpinned by our rule of law and other favourable conditions for doing business, is a magnet to investors, fund raisers, international financial intermediaries from all over the world. The importance we attach to promoting corporate governance and ensuring market quality helps to win confidence from local and international investors. As Asia's world city, our high quality of living together with other fundamental strengths also helps to attract financial services talents from other major financial centres.
Due to the above factors, Hong Kong has undergone rapid financial globalisation in the past two or three decades as manifested in the following developments.
* According to a survey conducted by the Securities and Futures Commission (SFC), the total assets in the fund management business in 2003 amounted to HK$2,947 billion, of which 63% originated from overseas investors. More than 80 international fund houses from the US, UK, Japan, Singapore, Switzerland, France and other parts of the world have operations here.
* As at the end of December 2004, 485 or 37% of the SFC licensed corporations were controlled by substantial shareholders outside Hong Kong, and 50% of the firms licensed to carry out asset management business had foreign controlling shareholders.
* The contributions from overseas investors account for 39% of the total market turnover value of the Hong Kong Stock Exchange for the 12 months ending September 2003 as compared with 25% over the corresponding period in 1994. As of the end of December 2004, 82% of our listed companies in terms of number are incorporated outside Hong Kong whereas the figure for 1994 is 61%.
* Hong Kong is the world's 12th largest banking centre in terms of the banking system's external transactions. Of the 100 largest banks in the world, 70 have operations here. As at end-December 2004, there were 208 authorised institutions and 85 representative offices of overseas banks from 37 countries. The aggregate lending from banks in major industrial countries to Hong Kong rose from US$71 billion in 1985 to US$237 billion in June 2004.
* As for insurance, with 180 insurance companies from over 22 different countries, we have the highest concentration of insurers in Asia. In addition, almost all the top 20 reinsurers in the world are conducting business in Hong Kong.
The above illustrates how globalised our financial market has become. Financial globalisation brings about more opportunities for both investors and fund raisers. At the market level, it also helps to enhance the development of our financial market.
At Market Level
From the macro perspective, financial globalisation can help to enhance liquidity and deepen our financial market. In a financially integrated world, funds can flow freely from places with excess funds to where there are favourable investment opportunities. The participation of international fund raisers and investors in our stock market has significantly enhanced our liquidity and market development. You may not be aware that the turnover on the Hong Kong Stock Exchange's Main Board in 2004 is about 80 times the size of the yearly turnover of the four stock exchanges in Hong Kong in 1984, and the total market capitalisation has increased 35-fold during the same period. The financial services sector now contributes to about 12% of Hong Kong's GDP as compared with about 6.5% 20 years ago.
Financial globalisation also facilitates the exchange of financial expertise and product knowledge, leading to increased sophistication of our financial market. The strong presence of international financial intermediaries in Hong Kong and our close links with other major financial markets act as a catalyst to accelerate the development of our financial infrastructure, technologies and techniques and foster product innovation.
Besides, financial globalisation also helps to improve corporate governance. In widening their shareholder base through listing in overseas stock markets, enterprises in Hong Kong have become subject to the monitoring of investors in other places in addition to those in Hong Kong. This could help to provide an impetus to strengthening efforts made by these enterprises to enhance the standards of their corporate governance. It would in turn foster the culture of corporate governance in Hong Kong, providing a further push to raise the quality of our financial market.
Investors in Hong Kong now enjoy more investment opportunities with a wider scope of financial products, instruments and services offered by corporations and financial intermediaries in different financial markets. Other than enhancing their investment returns, our investors could also achieve better risk diversification across different markets.
To Fund Raisers
Today, businesses in Hong Kong are able to tap funds from many sources such as by listing their shares in stock markets in different parts of the world, issuing bonds to international investors and borrowing loans from banks incorporated in different places. Cross-listing may also be associated by lower volatility due to the fact that the company shares are now held by a wider pool of investors. With a much wider range of financing alternatives and the huge liquidity of the international financial markets, fund raisers enjoy lower cost of capital and could acquire longer term capital to meet their financing needs.
Challenges of financial globalisation
Financial globalisation not only brings opportunities, but also gives rise to immense challenges due to increased competition and risks.
The increased presence of foreign funds in terms of large portfolio flows, which are more volatile than domestic savings and more sensitive to shifts in market sentiment, could give rise to problems at times, particularly when the effects of various shocks could be easily amplified by cross-country financial linkages. During the last two decades, we have seen financial or currency crises coming up one after another. These crises were often preceded by large private capital inflows and triggered by sudden shifts in market sentiment leading to massive capital outflows, and then a long and painful process of macroeconomic adjustments.
The best way to safeguard our financial market from these increased volatility and risks as a result of financial globalisation is to strengthen our market fundamentals to give investors the full confidence that the attractive financial super-highways today are not only open, but also remain stable, safe, fair, efficient and up to international standards, which can help them to get their money to, or source capital from, wherever in the world they want. To achieve this, the HKSAR Administration is focusing our efforts on the following areas.
First, formulating sound macroeconomic policies. Prudent financial management policy contributes to the stability of monetary and financial systems, investor confidence and overall economic development. In Hong Kong, we have adopted a three-pronged approach to restoring fiscal health through boosting economic development, cutting public expenditure and raising revenue. Apart from fiscal management, it is important for an economy to adopt an appropriate exchange rate regime and maintain currency stability, as well as to manage its reserve in a prudent and effective manner. We also need policies which enhance social mobility and labour market flexibility so that the workforce can better respond to macroeconomic adjustments.
Second, maintaining robust legal and supervisory framework. Some recent studies suggest that the productivity and growth of economies are strongly influenced by factors like the degree of corruption, the rule of law, and the quality of financial supervisory and other institutions. Hong Kong is renowned for its sound legal system and rule of law. We also have competent, duly empowered and independent financial regulators which perform their supervisory functions in accordance with the laws. It has always been our major task to keep the regulatory regime fair, efficient, transparent and on a par with international standards. For example, on the banking regulatory framework, Hong Kong is one of the first group of economies working on the implementation of the new capital adequacy standards for banks issued by the Basel Committee on Banking Supervision, commonly known as Basel II. The new standards will further enhance the risk management capability and stability of our banking sector. We are also mindful of the need to enhance cross-sector coordination among the regulatory agencies in view of institutional integration and development of new financial products.
Developing a deep and balanced financial system is the third mainstay. One of the common features of most Asian financial systems is heavy reliance on short-term foreign currency bank loans, running the risks of maturity and currency mismatches. The Asian financial crisis highlighted the importance of establishing a deep, liquid and mature bond market so as to avoid over-reliance on bank and equity financing. The presence of a well-developed bond market, particularly in local currency, will enhance the region's long-term economic development and significantly reduce the likelihood of future financial instability.
That is why I have been strongly advocating the development of Hong Kong's bond market. Our work to promote the bond market in recent years include providing the necessary financial infrastructure, simplifying the issuance process, offering tax incentives, encouraging public corporations to issue bonds, and launching two government bond programmes of HK$26 billion in total last year. More would need to be done, but I believe the message that investing in bonds as a viable investment for the medium and long term has been put across to many in our community who might not even have thought about it a few years ago. We will continue our work to provide an environment conducive to the development of the bond market. And Hong Kong has also joined forces with other Asian economies to develop the regional bond market through various initiatives to promote new products, improve market infrastructure and minimise regulatory hurdles to further broaden and deepen the domestic and regional bond markets.
Promoting transparency and good corporate governance is important to enhancing our financial sector's stability and resilience to external shocks. We have been promoting corporate governance on several fronts - by enhancing the regulatory regime and public oversight of accountants; by equipping directors to discharge their duties diligently and responsibly; and by empowering shareholders. Our major initiatives this year include giving statutory backing to important listing requirements, as well as establishing the Independent Investigation Board and the Financial Reporting Review Panel for the accounting sector.
Last but not least, the existence of sufficient and good quality human resources is key to Hong Kong's further development as an international financial centre amidst financial globalisation. It requires talents covering a wide spectrum of professions including fund managers, financial analysts, lawyers, accountants, and so on. In order to be able to capitalise on the opportunities brought by financial globalisation, we must enhance our pool of human resources in terms of both quality and quantity. It requires work at different levels within the education system and at workplace. On the part of the Government, we attach great important to enhancing the quality of education and the grooming of talents in various professions. The fact that we devote one-quarter of our budget to education speaks for itself. Certainly, our tertiary institutions and professional bodies also play a key role in expanding and upgrading our pool of human resources. I have already heard of shortage in some of these professions such as accounting. We need to step up our efforts in expanding our pool of talents through both strengthening local education and training and attraction of talents from outside. In addition to increasing investment on education to upgrade the quality of our manpower, we are also working, as the CE mentioned in his Policy Address, on a strategy to attract talented people from the Mainland and overseas to develop their careers in Hong Kong.
Ladies and gentlemen, the benefits of financial globalisation can be fully realised only if our financial system is strong enough to capture the gain and at the same time withstand the associated risks of volatility. I believe that all the five specific areas of work I just mentioned are desperately needed, not just in Hong Kong, but also in all other emerging economies. And since global integration is constantly moving forward with new technologies and new products, it is important that we keep our fingers on the pulse of the market to constantly review our policies to cater for market needs. At the end of the day, all our efforts will always boil down to one thing: investor confidence. I can assure you that the HKSAR Government and the regulators will continue to do our very best to provide the most favourable environment for investors to invest and for enterprises to raise funds.
I wish this conference every success and hope all of you have a fruitful and prosperous year in 2005. Thank you very much.
Ends/Friday, January 14, 2005