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Following is a speech by the Secretary for Financial Services and the Treasury, Mr Frederick Ma, at the "First Annual Journal of Contemporary Accounting and Economics Symposium" organised by the Hong Kong Polytechnic University today (January 6):
THE HONG KONG FINANCIAL MARKETS: GROWTH PREMISED ON ADVANCEMENT IN QUALITY
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Professor Poon, distinguished guests, ladies and gentlemen,
Good morning to you all. For those participants coming from abroad, may I first warmly welcome you. Last month Hong Kong hosted the Sixth Ministerial Conference of the WTO. The event has been a great success and it also provided an opportunity for more than 10,000 guests from overseas to explore the different facets of Hong Kong, Asia's World City. You may wish not just to visit prominent icons like Disney or other world-class facilities, but also experience the local cuisine or the scenic views in the rural areas which are equally enjoyable.
I am honoured to give a speech at today's inaugural symposium. The topic I would like to share with you is "The Hong Kong Financial Markets: Growth Premised on Advancement in Quality" - this is an important topic in my mind, ever since I took up the office of Secretary for Financial Services and the Treasury three and a half years ago in one of the world's leading financial centres.
To begin with, perhaps let's rewind a bit and look at the financial markets in Hong Kong some 30 years ago. Back in 1973, the year when I graduated from university, the total annual turnover of Hong Kong's stock markets was only about HK$49 billion, roughly equivalent to US$9 billion. There was no futures or bond market in Hong Kong, not to mention more sophisticated and recently very popular investment products such as the real estate investment trusts. In those days, a person did not need a licence to become what we now call an investment analyst. There was also no market regulator like the present Securities and Futures Commission which was established in the late eighties. Indeed, the territory's first securities ordinance was not enacted until 1974.
What has changed since 1973? Quite obviously, with the time available, it would not be possible for me to set out every change. Suffice to say that Hong Kong has achieved really tremendous growth in various aspects. Just use the GDP as an illustration. Hong Kong's GDP in 2004, the latest year where the statistics are available, was some HK$1,290.8 billion (US$165.7 billion), representing six-time growth in real terms compared with 1973. In the case of the financial markets, the growth is even more phenomenal. Over the same period, our stock market turnover has rocketed by more than 60 times to more than US$570 billion a year. As at end-November 2005, our stock market ranked 8th in the world in terms of market capitalisation.
Our stock market is now deep enough to support very large listings. Hong Kong's capability in capital formation is well appraised by international investors. In the first 10 months of 2005, our stock exchange ranked first in Asia and fourth in the world in terms of capital raised. The listing of the China Construction Bank in Hong Kong in 2005 was reported to be the world's largest IPO in the past four years.
Indeed, Hong Kong is not just a capital formation centre for the Mainland, but the premier centre. Over the past years, Hong Kong raised more than US$139 billion for Mainland enterprises. The trading of securities of Mainland enterprises with dual listings often shifts from the other listing locations back to Hong Kong soon after the IPOs. For example, by the end of 2004, of the 28 stocks cross-listed in Hong Kong and the US, Hong Kong market accounted for 81 per cent of the trading in those shares.
Hong Kong is also a leading asset management centre in Asia. In 2004, Hong Kong's total asset management business jumped by 23% to HK$3,618 billion [or more than US$460 billion]. Virtually all global fund houses have some sort of business presence in Hong Kong. Furthermore, last October, the World Investment Report released by the United Nations reported that Hong Kong ranked second as the most preferred destination for foreign direct investment in Asia, for the fourth consecutive year.
On the debt or bond market side, Hong Kong's achievements are also impressive. For the past 10 years, the total outstanding amount of the Hong Kong dollar debt market has more than tripled, and the amount as a percentage of GDP has also shot up from 14% to 47.1%. The markets have also grown in depth with the introduction of many new products and the participation of newcomers. For example, over 20 Mainland enterprises have their bonds listed in Hong Kong. On the part of the Government, we issued a HK$6 billion toll road securitisation bond in May, 2004, followed by a HK$20 billion global bond offering two months later.
The facts and figures I have just mentioned vividly demonstrate the growth of Hong Kong's financial markets in terms of quantity. We have scaled new heights indeed. But equally important is that our markets are also growing up in terms of quality. In particular, we have put in place, and are committed to maintaining, an effective regulatory regime. Such a regime is essential for enabling sustainable growth in the financial markets and also ensuring that the markets trade and operate in an orderly and efficient manner.
Hong Kong's regulatory regime for the financial markets is in every single aspect on a par with international standards. It is the result of years of hard work and insightful contributions by various parties including the regulators, professionals, academics as well as market participants. For instance, we have completely overhauled our securities legislation soon after the Asian financial turmoil. The new Securities and Futures Ordinance, which has taken effect since April, 2003, is a piece of modernised legislation that meets the sophistication of modern global financial transactions and facilitates market developments. More importantly, with the objective of meeting latest international standards in mind, the legislation supports a regime that stresses corporate governance disclosures, accords greater accountability on the part of issuers and dealers, and combats market misconduct more effectively. In a nutshell, it modernises our regulatory regime for the securities and futures markets, and has laid solid foundation for the further development of the relevant sectors in the years to come.
Another notable example showing our on-going commitment to upgrading Hong Kong's regulatory regime is the reform in the regulatory system for the accounting profession in recent years. Professional accountants and auditors are important gatekeepers on the corporate governance front, as many of us have learnt from the incidents of Enron and Worldcom. Shareholders, creditors and many other stakeholders, directly or indirectly, rely on auditors to ensure that the financial statements give a true and fair view of the company concerned, and in the process to blow the whistle whenever frauds or errors are suspected. The privilege of auditors to stamp their approval or otherwise in their reports represents the trust and responsibility the public has placed on them.
We are committed to ensuring the auditing profession is subject to an effective and transparent regulatory regime. In this regard, the Government of HKSAR has joined with the Hong Kong Institute of Certified Public Accountants (HKICPA) in implementing a comprehensive reform. The first phase of reform was completed in 2004, with the enactment of the Professional Accountants (Amendment) Ordinance in July that year. Among other things, the Amendment Ordinance opens up the governance body, as well as the investigatory and disciplinary systems, of the Institute. Lay persons are now appointed to the council as well as the Investigation and Disciplinary Panels of the Institute to enhance the independence of these bodies from the profession. Moreover, the Institute's disciplinary proceedings are now open to the public, thereby promoting transparency and accountability in the process. Indeed, among various professions in Hong Kong the accountancy sector is a forerunner in opening up its disciplinary system.
The second phase of reform currently under way is the proposal to establish a statutory Financial Reporting Council (FRC). The council will be tasked with two main functions. The first is to carry out independent investigation into any irregularities concerning the auditors of listed corporations, and the other is to conduct enquiry into the financial reports of listed corporations to ensure their compliance with relevant regulatory requirements. The ultimate objective is to ensure the quality of and enhance market confidence in the financial reporting of listed corporations. We believe that the FRC will play a pivotal role in upgrading our corporate governance regime and thus fortifying Hong Kong's status as an international financial centre.
In parallel with the reform of the regulatory regime, the HKICPA has also taken a number of initiatives to align its requirements with international standards. For example, the Hong Kong Financial Reporting Standards issued by the Institute have fully converged with the International Financial Reporting Standards in all material aspects since January, 2005. We can now say to the international business community that Hong Kong listed companies, including those incorporated in the Mainland, adopt the same set of standards in financial reporting as those in the EU or Australia. The Institute has also just converged its professional ethics requirements with the International Code of Ethics for Professional Accountants published by the International Federation of Accountants. Moreover, the HKICPA is in the course of reviewing its Practice Review Programme to make it more effective and efficient, for example, through adopting a risk-based approach in selecting practices for review. The focus of the programme would shift somewhat from guidance to quality assurance.
Effective enforcement or implementation is as important as a sound regulatory framework. If you want to find out what happens on the ground, you may talk to the people involved. If you know any investment banker, lawyer, sponsor, accountant or auditor who has dealt with our financial services regulators, ask them to share with you their experience. They will confirm to you that Hong Kong regulators are as vigorous as any gatekeeper one will find in a mature capital market.
Of course, we know there is no room for complacency. Maintaining a competitive edge for Hong Kong in the fast-changing global financial landscape is like rowing upstream: not to advance is to lag behind. We are working hard to learn from each other on how to regulate more wisely. Looking ahead, we aim to give statutory backing to the more important listing rules, in order to further enhance the regulation of the listed sector. Hong Kong will be among the forerunners to adopt Basel II, in order to further strengthen the risk management of our banks, which have already received very high scores on this front. We are also planning to modernise and rewrite our company law, so as to provide a 21st century legal framework that meets the needs of the current business world and can be adapted flexibly to cope with future changes.
Furthermore, we will not lose sight of upholding the well-known "basics" that underpin Hong Kong's competitiveness, including the rule of law, modern infrastructure, free flow of capital and information, a low and simple tax regime and so on.
Ladies and gentlemen, adding the city's hard-working and vibrant people into the mix, we have adapted to many challenges and eventually written remarkable reams of Hong Kong success stories. We have become a leading financial centre as well as Asia's World City. Since 1973, our financial markets have grown considerably, both in terms of quantity and quality. Our markets have achieved quantum advancement in quality. We now have an excellent and effective regulatory system. This has provided an important foundation for the impressive development of our markets as evidenced by the significant increase in our trading volume and scale of fund raising activities.
With these remarks, I wish you all a fruitful symposium these two days, and to all our visitors, please enjoy your stay in Hong Kong, which is truly Asia's World City. Thank you very much.
Ends/Friday, January 6, 2006
Issued at HKT 10:51
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