Following is a speech (English only) by the Secretary for Financial Services and the Treasury, Mr Frederick Ma, at the luncheon organised by the Hong Kong Economic and Trade Office (Tokyo) and supported by the Federation of Korean Industries today (June 17):
Hong Kong as an International Financial Platform for Investing in China: the World's Fast Growing Economy
Distinguished guests, ladies and gentlemen,
Good afternoon. Today I am very delighted to be here in Seoul. I first visited your lovely city in 1976 - exactly 30 years ago. Over the years, I have made numerous visits to Seoul and I must say that I am very impressed by the economic developments in your country.
It gives me great honour to speak to so many distinguished guests in the Korean business community and to share with you Hong Kong's experience of being an international financial platform for investing in Mainland enterprises.
A Brief Overview of China's Economy
Over the past two decades, the economy of China has been expanding robustly. Its GDP has grown at a rapid rate to US$1,417 billion in 2003, which accounted for 12.4% of the global GDP in Purchasing Power Parity terms (Note 1). Indeed, its economy grew by over 8% for the past 10 years and 9.4% in the first quarter of 2005 alone (Note 2).
China's impressive growth rate and scale of development undoubtedly presents enormous opportunities for foreign enterprises. By the end of 2004, 509,000 foreign-funded enterprises have been established in Mainland China, involving US$562.1 billion of realised foreign direct investment (Note 3). With continued liberalisation and opening up of the Mainland economy driven by China's accession to the World Trade Organisation (WTO), supported by an extension of growth from the coastal regions to more areas of the territory and an increasingly affluent domestic market of 1.3 billion people, China will no doubt become an even larger magnet for foreign direct investment.
Korea's Investment in China
I am sure that many of our friends here today have already invested or are looking into investment opportunities in China. Many Korean manufacturing enterprises including chaebol like Hyundai, Samsung, Ssangyoung, SK Global and numerous SMEs have already featured prominently in the Mainland.
In fact, Korea's investment in China has continued to draw a steep upward curve in recent years. By the end of 2004, Korea has invested a total of US$25.9 billion in China, with US$6.25 billion of investment made in last year alone (Note 4). Korea is currently China's sixth largest source of realised foreign direct investment and fourth largest trading partner whilst China has become Korea's largest trading partner in 2004.
Hong Kong as the Gateway to the Mainland China
Naturally, being at the doorstep of China, Hong Kong is located at the best strategic location for being a gateway to the Mainland for foreign investors. With accumulated hands-on experience and knowledge in the Mainland market, supported by a sound legal system, established global links, free flow of funds, a critical mass of foreign investors and a world-class financial infrastructure, Hong Kong is the first choice for foreign investors to tap the tremendous business opportunities in the Mainland. Hong Kong is now the chosen base for over 3,600 regional headquarters and regional offices representing multinational companies from around the world. More than one-third of the multinational firms active in the Asia-Pacific area have their regional headquarters/offices in Hong Kong, including those of many successful Korean enterprises, such as Samsung, POSCO and LG Electronics. LG-Philips Display has even chosen us as their headquarters and global office.
The Closer Economic Partnership Arrangement, or CEPA, which has been implemented since January 2004, has brought Hong Kong's relationship with the Mainland, our motherland, even closer. CEPA provides a major force in furthering mutual economic benefits for both the Mainland and Hong Kong, and through Hong Kong to international businesses established in Hong Kong. It not only provides Hong Kong enterprises, whether it is 100% local or foreign owned, with "first mover" advantages to access the China market ahead of the WTO timetable, but more importantly, it provides these enterprises with preferential treatment which is above and beyond China's WTO commitments. We encourage you to set up your businesses in Hong Kong to benefit from CEPA.
Under "One Country, Two Systems", Hong Kong is a unique city in China, with our own systems, distinct institutional strength, state-of-the-art infrastructures and an open economy. And on the financial services side, what distinguishes us from other cities in the Mainland is our position as an international financial centre, which makes Hong Kong your best platform for investing in the enormous and quickly expanding market of China.
Hong Kong as the International Financial Platform for Investing in China
As an international financial centre, Hong Kong is the world's 6th largest centre for foreign exchange trading; the 7th largest centre for foreign exchange and OTC derivatives; the 9th largest stock market; and the 13th largest banking centre. And with over 180 insurance companies from all over the world, we also have the highest concentration of insurers in Asia. I am going to highlight some of Hong Kong's strengths as an international financial platform for investing in the Mainland China.
Hong Kong's Stock Market as a Premier Capital Formation Centre for the Mainland
Hong Kong's stock exchange ranked third in the world after New York Stock Exchange and Spanish Exchanges in terms of equity funds raised in 2004. A total of 1,096 enterprises, of which over 80% are incorporated outside Hong Kong, were listed. Their market capitalisation amounted to US$858 billion and our annual turnover reached an all time high at US$510 billion last year.
Currently, 28% of listed enterprises in Hong Kong are from the Mainland. These 306 listed enterprises, of which only a minority is also listed in other overseas markets, account for roughly 30% of our market capitalisation and 40% of our market turnover. About 70% of their trading is conducted in Hong Kong. Since the listing of Tsing Tao Brewery as the first H-share company in 1993, the Mainland enterprises have already raised over US$110 billion through our stock market. Hong Kong has clearly become the Mainland China's premier capital formation centre. And I firmly believe that this will continue, and we are already seeing more Mainland companies and foreign companies with Mainland operations approaching us.
Hong Kong has put in place a robust regulatory regime for listing. All enterprises, including those from the Mainland, must meet our corporate governance requirements, which are on a par with international standards, before their applications for listing on our stock exchange will be accepted. Our determination in maintaining market quality has won confidence of not only local, but also international investors. It is well illustrated by the overwhelming responses from investors around the world to the listing of Mainland enterprises, such as the China Life Insurance Company Limited and more recently the Bank of Communications, in Hong Kong. Investing in Mainland corporations through the Hong Kong stock market is one of the success formulas for you to embark on your investment in China.
Listing on the Hong Kong's stock exchange is a favourable channel for foreign enterprises to raise funds to invest in Mainland China. Hong Kong has a large pool of financial services professionals who possess extensive experience in serving Mainland China enterprises and in-depth knowledge about the Mainland market. In fact, enterprises like the Dream International, one of the world's largest toy manufacturers from Korea, has already chosen our stock exchange to raise funds to expand into the China market.
Furthermore, Hong Kong is one of the most prominent asset management centres in Asia with a large concentration of fund managers. As at end 2003, total assets in our fund management business amounted to US$377.8 billion, of which 63% originated from overseas investors. There were nearly 200 companies providing fund management or advisory services in Hong Kong. The funds under management include pension funds, institutional funds, unit trusts, collective investment schemes, etc. The approval given by the Mainland authorities for the Mainland insurance companies and the National Social Security Fund to invest outside the Mainland laid an important milestone for the country's liberalisation policy. Hong Kong, with our well-established asset management industry and expertise in serving the Mainland enterprises, will certainly be Mainland entities' prime choice for global investment. We strongly encourage you to take a slice of the cake by setting up asset management businesses in Hong Kong.
Merger and Acquisition Services
For those of you who are considering merger and acquisition as a path to enter China's market, Hong Kong is also your best choice. In recent years, merger and acquisition activities in China have been surging. According to an industry journal (Note 5), the aggregate value of China's merger and acquisition deals (including Hong Kong) announced in 2004 amounted to US$52 billion, representing a significant increase of 50% from the year before. Since Hong Kong has actively participated in most of these transactions, we have developed a very strong pool of sophisticated professionals who are experts in serving and advising prospective investors in such projects. We are favoured by both the Mainland enterprises and foreign investors, and you are welcome to make use of our expertise in engaging in merger and acquisition investments in the Mainland.
Hong Kong also provides another favourable channel for local and international enterprises to raise funds. Our bond market has made significant growth in recent years. For the past 10 years, the total outstanding amount of our debt market has tripled from US$29 billion in 1994 to about US$98 billion in the third quarter of 2004. We have also witnessed a remarkable increase in foreign participation in the bond market. Since 1997, the outstanding Hong Kong dollar-denominated debt securities issued by overseas borrowers have increased 20 times. The success of the two bond programmes launched by the HKSAR Government in 2004, which include the securitisation of Government-owned tolled bridges and tunnels of about US$770 million and our first global bond offering of about US$2.6 billion, has demonstrated that we have the necessary infrastructure and expertise for issuing sizable bonds.
In fact, we have been making an all-out effort to promote our bond market through enhancing financial infrastructures, offering tax incentives and simplifying the issuance process. Our debt securities clearing, settlement and custodian system, the Central Moneymarkets Unit, is a multi-currency system with linkages with regional and international securities depositories, including Euroclear, Clearstream and Korea Securities Depository. Adding to this, last year we have also established a one-way inbound link with the Mainland's Government Securities Book-Entry System to foster cross-border debt securities settlement between the Mainland and Hong Kong. This further strengthens our position as the major platform for issuance of foreign currency bonds by the Mainland enterprises. Hong Kong provides a convenient channel for Korean investors to invest in bonds issued by Mainland entities and for Korean entities to issue bonds.
According to a survey conducted by Hong Kong's Trade Development Council in end 2003, one of the top reasons for foreign enterprises in the Mainland to establish offices in Hong Kong is to make use of our banking and financial system to support their operations in China. We are the third largest banking centre in Asia and there are no foreign-exchange controls. Our banks have excellent expertise in raising capital for enterprises. Having arranged over US$20 billion (Note 6) new syndicated loans annually over the past five years, we are now the Asia's major centre for arranging syndicated loans. Last year, due to large demand for financing new projects and capital expenditures, the volume of offshore Mainland China syndicated loans increased by 30% (Note 7), and almost half of the loans were for foreign corporations' investment in the Mainland. We are also glad to have arranged a syndicated loan for a Korean corporate, [Zhangjiagang Pohang Stainless Steel Co. Ltd guaranteed by POSCO], which was the largest cross-border US dollar financing in the Mainland for Korean firms.
Hong Kong is also an ideal place for Korean banks to expand their operations in the Asia Pacific region. As at end 2004, 10 Korean banks have established a branch or a local banking subsidiary in Hong Kong, which include seven out of eight nationwide commercial banks in Korea. With 70 out of 100 top banks operating in Hong Kong, we can offer you superb banking services for your investment in Mainland China, no matter whether you want to be served by our local banks, Mainland China banks or Korean banks operating in Hong Kong.
Recent Initiatives of Hong Kong's Financial Market
To reinforce Hong Kong's strengths as the premier capital formation centre and platform for global investment for the Mainland, we have made tremendous efforts to maintain a world-class regulatory regime, foster strong corporate governance and promote market development. Just allow me to name a few of our recent initiatives -
(i) on the securities and futures market, our new Securities and Future Ordinance came into effect in 2003, putting us on a par with the international standards;
(ii) on the banking sector, Hong Kong will be one of the first few economies which will put in place the revised framework on capital standards for banks, the Basel II, in accordance with the timetable set by the Basel Committee on Banking Supervision;
(iii) on corporate governance, we have developed a "Corporate Governance Action Plan" to ensure that our requirements are in line with the best international standards and practices. We are also working on legislative amendments to provide important listing requirements with statutory enforcement teeth. At the same time, we are pressing ahead with the establishment of a Financial Reporting Council to strengthen the oversight of auditors and enhance the quality of financial reports;
(iv) on investor protection, we are preparing to launch the Deposit Protection Scheme to provide further safeguards to enhance the stability of our banking sector;
(v) on market development, we are proposing to abolish estate duty and exempt offshore funds from profits tax to encourage investors, both local and overseas, to hold assets in Hong Kong and to attract new offshore funds to Hong Kong; and
(vi) last but not the least, Hong Kong has become the first place outside the Mainland China to conduct personal Renminbi (RMB) business in February last year. This greatly broadens the business opportunities for Hong Kong's financial services sector and facilitates cross-border spending and economic integration between Hong Kong and the Mainland. As at end April this year, total RMB deposits in Hong Kong already exceeded RMB16 billion yuan. For further development of RMB business in Hong Kong, we are exploring with the Mainland authorities ways to expand the scope of RMB business in three strategic directions, including the feasibility of establishing a RMB bond issuance mechanism in Hong Kong. We will also study the establishment of a clearing and settlement platform for RMB transactions. With all these developments, I have no doubt that businessmen around the world wishing to enter the Mainland market will find Hong Kong the right place to start their venture.
The promising economy of the Mainland will certainly offer ample business opportunities in the years to come. Hong Kong, with its well-developed and liquid financial markets plus a rich pool of professionals with profound knowledge about the Mainland China, is in the best position to serve as your financial platform for investing in the Mainland. We look forward to joining hands with you as your strategic partner to explore the enormous business opportunities to our mutual benefits.
Finally, may I wish you all every success in your future endeavours and good health. KAMSA HAMNIDA .
Note 1: World Development Indicators database, World Bank, April 2005.
Note 2: China Statistical Yearbook 2004 and press release from the National Bureau of Statistics of China (28 Feb 2005 and 20 May 2005)
Note 3: Blue Book of China's Economy (Spring 2005), China Commerce Yearbook 2004 and China Monthly Statistics (Jan 2005)
Note 4: China Commerce Yearbook 2004 and China Monthly Statistics (Jan 2005)
Note 5: M&A Asia
Note 6: Press release from the Asia Pacific Loan Market Association (7 Dec 2004)
Note 7: Basis Point, The Asian Debt Markets Newsletter, Issue 614 (7 Jan 2005)
Ends/Friday, June 17, 2005