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The following is a speech by the Chief Executive, Mr Donald Tsang, at the Hong Kong Association of Banks Luncheon at Four Seasons Hotel this afternoon (April 26): (English only)
Peter, distinguished guests, ladies and gentlemen,
It gives me great pleasure to address this gathering today. Not only does the occasion give me the opportunity to meet many old friends and make new ones, it also underlines the importance that the Government attaches to the banking industry as a major pillar of our economy. Today, I would like to share with you a few thoughts on the industry and where I see it going.
Hong Kong is blessed with a strong banking sector, which has underpinned the rapid and successful transformation of our economy from a light industrial hub to an international financial centre. In 2004, the banking sector accounted for 8% of our GDP -- twice as much as the rest of the financial services industry combined. And the banking industry has been growing strongly, recording an average annual growth rate of nearly 10% in the past five years. Today, by any measure, Hong Kong is among the largest banking centres in the world.
The strong, resilient and innovative entrepreneurial spirit of our banking industry in pursuing excellence has been a key driver behind its success. Despite an ever-changing operating environment, our banks have managed to stay on top -- providing efficient, flexible and state-of-the-art services to their local and international clients. The entry of new market players and the abolition of the interest rate agreement, for example, have enhanced competition in the banking sector, resulting in greater market sophistication as the profit margins for traditional deposit-taking and lending business become narrower. The industry has continued to find new market niches and creating new products. In embracing intensified competition and globalisation, the industry has quickly turned electronic. The liquidity crisis and recession following the Asian financial turmoil, and the threats from SARS and avian flu were some of the risks that our banks had to manage during the past eight years. They have survived these and other challenges with flying colours -- a prime example of the entrepreneurial spirit that makes Hong Kong tick.
Of course, credit also goes to the Hong Kong Monetary Authority (HKMA) for putting in place a world-class regulatory regime. I would like to mention two new initiatives that will strengthen the stability of our banking sector: the launch of the Deposit Protection Scheme later this year and the implementation of Basel II beginning early next year.
The Deposit Protection Scheme will give small depositors additional comfort and will help deter rumours and panic-driven bank-runs. Basel II will bring about better risk management in our banks. I am pleased that the industry sees the business case for these changes, and has provided the investment and infrastructure for their implementation. Being among the first jurisdiction to introduce the new Basel II capital adequacy standards, Hong Kong is demonstrating to the world the determination of our banking sector to upgrade itself by readily adopting emerging international standards.
As in other sectors of our economy, the number one growth opportunity for our banks is the Mainland. Given its many competitive strengths, our banking sector is uniquely positioned to capture a sizeable share of the opportunities that arise in the Mainland, as its economy rapidly develops and its financial market opens up under its WTO obligations. At the same time, Hong Kong's banking sector can make a useful contribution to our country's development by complementing the reform of the Mainland banking sector.
Over the years, our banks have made strategic moves to expand their business to the Mainland. As part of its WTO accession, the Mainland's banking market will be fully opened to overseas banks, including banks in Hong Kong, by the end of this year. Because of our cultural and language links, our geographical advantage, the investments we have made over the past two decades, and above all the special arrangements under CEPA, our banks have an unparalleled advantage over their overseas competitors in tapping the potential of the Mainland market. Many Hong Kong banks have already opened branches there, either by fulfilling the normal entry criteria or through the CEPA framework. Some of our banks have also become strategic partners and minority shareholders of Mainland banks. Today, Hong Kong's banking sector has a greater presence in the Mainland than any of its overseas competitors.
The Mainland is home to a growing number of successful private enterprises and an increasingly affluent population. Its financial market continues to open and develop. I foresee that Hong Kong banks, with their experience and knowledge, will play an even more important role in the provision of financial products and banking services in the Mainland, including non-interest services.
One of the emerging non-interest lines of business here and abroad is wealth management. In this line of business, our banks should be able to capitalize on the huge domestic savings in the Mainland, as capital controls are liberalised there. Impetus for wealth management will come from the QDII and other relaxation schemes. Meanwhile, we have abolished estate duty and exempted offshore funds from profits tax. These measures will help our banks provide a most attractive financial intermediation platform for Mainland clients.
Project financing and syndicated loan services continue to be the strengths of our banking and financial sector. There will be tremendous opportunities for Hong Kong, as big infrastructure programmes top the agenda of many Mainland provinces. The many Mainland enterprises coming to list in our stock market provide another source of enormous opportunities for our banks and securities firms. The Government will spare no effort in maintaining the highest quality stock market, providing unparalleled liquidity, quality service and security for Mainland entities seeking external capital.
There is also tremendous potential in renminbi business. Hong Kong is the first place outside the Mainland where renminbi business may be conducted. We are aware of the banking industry's wish for expansion of the scope of renminbi business. We are discussing such proposals with the Central Government, specifically to allow cross-boundary trade to be settled in renminbi and to establish a renminbi debt issuance mechanism here. We are preparing ourselves for this development by enhancing the capability of our financial systems to handle renminbi-denominated transactions. Last month, a new renminbi settlement system was put in place to facilitate the clearing of personal renminbi business conducted by banks in Hong Kong. The HKMA is ready to make further modifications to our clearing and settlement infrastructure to cope with any expansion of renminbi business in Hong Kong. In this regard, Joseph is working overtime. By the way, where were you during the last Easter weekend? I suppose some were playing golf out in the Pearl River Delta, some were having a massage or spa in Thailand. But on Easter Friday the PBOC made the announcement No 5 that was on the internet. Have you read it? This is about QDII. And three days afterwards, the issue of provisional arrangements for application, where were you guys? You should have been working on the Easter weekend. You should have been knocking on the door of Zhou Xiaochuan and knocking on the door of Liu Ming Kang. And you guys were playing golf. You missed a trick. As long as our banks remain strong and competitive, much more banking business will naturally flow to our banking sector than to any competitors inside and outside the nation, particularly if the renminbi is to be moved gradually towards freer convertibility. But you must be alert. You must realise, you must be alert and you must acquaint yourself with what is happening on the Mainland, what is being published by PBOC and make sure you are the first movers leveraging on your CEPA position, leveraging on your geographical advantage in Hong Kong. We are at your service. Joseph is at your service. But at the end of the day, the delivery of goods is in your hands. The success of New York and London in maintaining premier financial centre status is a good example. We are in the middle of much larger markets, against many more competitors using the same convertible currencies as against us using completely different currencies from the Mainland. Our advantages, in fact, are larger but you must exploit them. You must make use of them and our competitive edge will never fail as long as you are there.
As our banks tap the huge potential Mainland market we should not overlook developments in the rest of Asia too. This is a high growth region with a high savings rates. We also need to give careful thought to closer regional financial integration which will be a factor in influencing how Asian economies develop in the years ahead.
Well managed financial integration would help the region maximise its economic growth potential by allowing more efficient investment and allocation of resources. Financial integration is a long process requiring concerted efforts and political commitment. While I do not see this happening in Asia any time soon, it appears to be an inevitable global trend. Expanding the effective size of Asian financial markets through greater market integration will also have the advantage of increasing financial stability by encouraging funds to stay within the region. And our financial industry should benefit from greater access to regional markets. We must focus on the priority and that priority I spoke at length at the Boao Forum last week.
So, ladies and gentleman, the National Eleventh Five Year Plan has reaffirmed Hong Kong's status as an international financial centre. Various measures coming from the central authority recently reinforces my personal conviction that we are able to uphold that superiority. The Government is willing at your service. Our monetary authority works equally hard. You are there to make it a permanent success, surpassing all the competitors in the region. Our future is in your hands.
Thank You.
Ends/Wednesday, April 26, 2006
Issued at HKT 17:46
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