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Following is a speech by the Secretary for Financial Services and the Treasury, Mr Frederick Ma, at the 90th Annual Conference of the Investment Industry Association of Canada today (June 26, Vancouver time):
Hong Kong as a preferred platform for accessing the business and investment opportunities in Mainland China
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Distinguished guests, ladies and gentlemen,
Good morning. I am honoured to be invited to speak at the 90th Annual Conference of the Investment Industry Association of Canada. I feel very much at home here because I have lived six years in the eighties in Toronto and worked for a Canadian securities firm for 10 years. I was a Canadian citizen until I joined the Hong Kong Special Administrative Region Government in 2002. I always cherish the opportunity to come back and renew ties with my friends in Canada. Some of those are here today. The title of my speech is "Hong Kong as a Preferred Platform for Accessing the Business and Investment Opportunities in Mainland China".
Hong Kong after the reunification with China
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As you can tell from my resume, I was born and raised in Hong Kong. Since we returned to China in 1997, all of the key features of Hong Kong as a free and vibrant city have remained firmly rooted. All the freedoms that Hong Kong enjoyed before the reunification remain intact today: the freedom of speech, of the press, of assembly, of religion, of travel, etc. We are home to a large foreign community, who enjoy these same freedoms and who operate their businesses on a level playing field. In short, Hong Kong is as vibrant and dynamic a city as it's ever been. And just as free.
Hong Kong not only keeps all its fundamental strengths intact, but also gains new momentum for growth and development. Our bonds with overseas economies have become even stronger than before, with an increase by 144% in inflows of foreign direct investment (FDI) and 93% in outward direct investment from 1998 to 2005. Our trading activities with, and investment in, Mainland China have also grown in tandem with the tremendous economic growth in our motherland. Compared to 1997, the total volume of our trade with Mainland China has increased substantially by 85% to C$321 billion in 2005. Our cumulative direct investment in Mainland China has also doubled, reaching C$314 billion in 2005.
The Mainland's development in the last 10 years
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The economic growth achieved by Mainland China has been very impressive. With its rapid and broad-based economic development, China now ranks as the 4th largest economy in the world. Over the past 10 years, GDP has increased at an average annual rate of 9%, and its per capita income has risen three-fold, to about C$2,070. The growth momentum has further strengthened in the first quarter of 2006 with GDP increasing by over 10%. FDI in the first quarter of 2006 alone reached C$16.4 billion, which represents a 6.4% year-on-year increase.
China is becoming a key engine of global economic growth. With her huge growth potential and abundant opportunities, the Mainland is now an enormous magnet for foreign capital. In the past, overseas enterprises used to focus on the Mainland's comparative advantages in terms of low labour and land costs. Nowadays, their attention is shifting towards the Mainland's huge domestic market and abundant funds for investment. There are just more business and investment opportunities than what you can imagine.
Hong Kong as a unique city in China and Asia's world city
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Hong Kong is not only part of China, but also a unique city in China under the principle of "one country, two systems", with our own political, legal, economic and financial systems, distinct institutional strengths and state-of-the-art infrastructure. We are well-known for our fundamental strengths, which include:
* rule of law supported by an independent judiciary;
* free flow of information and capital;
* a stable currency pegged to the US dollar;
* non-existence of exchange control;
* a well-established and advanced financial infrastructure;
* a robust and effective regulatory regime;
* a low and simple tax regime; and
* a rich pool of talent.
Indeed, our strengths in having an open economy and providing a favourable environment for doing business are widely recognised. Hong Kong has been ranked as the world's freest economy by the Heritage Foundation for the 12th consecutive year. We were recently named the "Asian City of the Future" and the city with the best FDI potential by fDi magazine. Inflows of FDI to Hong Kong in 2004 amounted to C$44.2 billion, second only to Mainland China in Asia, and 7th in the world.
Hong Kong has the privilege of participating in the Mainland's rapid growth. When China began opening up in the late 1970s, our manufacturers were the first to come forward and invest heavily in the Pearl River Delta. Today, in Guangdong Province there are over 50,000 Hong Kong-linked companies employing over 12 million workers. The on-going reform and opening up of the Mainland economy, along with co-operation initiatives like the Closer Economic Partnership Arrangement (CEPA) between Hong Kong and the Mainland, have further strengthened our economic ties. Hong Kong's superb financial, marketing and professional services as well as sophisticated infrastructure offer complementary support to the sustained development of the Mainland's fast-growing manufacturing and services industries.
Mainland China is now Hong Kong's largest trading partner. Thousands of international companies involved in China trade have chosen to establish their beachhead in Hong Kong. Many overseas corporations are working hand in hand with Hong Kong firms to expand into the Mainland. Others may choose to establish presence in Hong Kong, using our well-developed infrastructure as their platform for entering the Mainland market.
In 2005, there were over 6,000 regional headquarters, regional offices and local offices established by companies outside Hong Kong. As at June 2005, 90% of the regional headquarters and 84% of the regional offices set up by foreign companies in Hong Kong were responsible for the companies' operations or business in Hong Kong as well as in the Mainland. Our extensive and close links with Mainland China have given us unparalleled advantages in facilitating the international community to explore the immense business opportunities in the Mainland.
Hong Kong/Canada relationship
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Our pivotal role as the gateway to Mainland China gives rise to lots of opportunities for cooperation between Hong Kong and Canada. Indeed, we have a long history of cooperation. Canadians have invested C$4.5 billion in Hong Kong. In 2005, our bilateral trade amounted to C$5.5 billion a year. Trade between Canada and Mainland China that routed through Hong Kong amounted to C$4.5 billion, representing about one-fifth of the total trade between Canada and Mainland China. There are over 70 Canadian companies in Hong Kong, including large corporations such as Air Canada, the Canadian Imperial Bank of Commerce, the Toronto-Dominion Bank, the Royal Bank of Canada and the Manulife. Hong Kong is the second largest investor in Canada from Asia, after Japan. As at the end of 2004, Hong Kong's direct investment in Canada amounted to C$5.2 billion, covering a wide range of businesses including electronics, financial services, hotels, manufacturing, oil and gas, real estate development and telecommunications. To enhance our economic partnership, I would like to take this opportunity to share with you what Hong Kong can offer in facilitating Canadian companies to explore the vast business and investment opportunities available in Mainland China.
Premier capital formation centre for Mainland China
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Hong Kong has established its position firmly as an international financial
centre. Our stock market is deep and liquid with market capitalisation ranking 8th worldwide and 2nd in Asia. In 2005, the total amount of equity funds raised through the Stock Exchange of Hong Kong amounted to an impressive C$47 billion, ranking fifth in the world and first in Asia. Hong Kong is the world's 15th and Asia's 3rd largest international banking centre and the 6th largest foreign exchange market. These achievements are indeed impressive for a small city like Hong Kong.
In the Mainland, the ongoing restructuring of state-owned enterprises and the flourishing of private enterprises have generated substantial financing needs for their business activities. The majority of Mainland enterprises that have listed outside the Mainland have chosen the Hong Kong stock market. For those listed in Hong Kong and overseas concurrently, about 80% of the trading took place in Hong Kong. Recently, the listing strategy of Mainland enterprises has shifted from dual listings to listing in Hong Kong only. So why do Mainland enterprises choose Hong Kong and Hong Kong alone? I can think of at least six reasons.
(1) Our stock market's fund-raising capacity is well-proven;
(2) The corporations seeking listing want to be close to the listing venue, ideally in the same time zone, for obvious business, strategic and management reasons;
(3) Hong Kong, as compared with other international financial centres, has
more investors who have knowledge and interest in investing in the Mainland;
(4) Many international well-known investment banks, law firms, accounting firms and other related professional institutions have based their Asian operations in Hong Kong for a long time, and have accumulated rich experience in serving Mainland enterprises;
(5) International investors have confidence in our regulatory standards, which are recognised world-wide; and
(6) It is more cost effective to list in Hong Kong compared with other IFCs, such as the US.
Today, a total of 348 Mainland enterprises are listed in Hong Kong covering a wide spectrum of businesses, ranging from financial institutions, telecommunications, coal and gold mining, oil and gas, automobile manufacturing, garments to supermarkets. They have raised more than C$170.4 billion through listing on our exchange. Mainland enterprises currently account for about 30% of the listed companies and 43% of the market capitalisation in Hong Kong. Investor interest in those enterprises is tremendous: trading of shares of Mainland enterprises accounts for 57% of total market turnover in the first five months of 2006. The 10 largest IPOs in Hong Kong's history all involved Mainland enterprises. The presence of Mainland enterprises has significantly increased the depth and breadth of Hong Kong's equity market.
With 13 years of experience in raising capital for Mainland companies, Hong Kong has firmly established its position as the preferred listing venue for Mainland enterprises. The IPO by the Bank of China last month, which was reported to be the biggest IPO worldwide in the recent six years, has demonstrated again to the world the growing participation of Mainland enterprises in the global capital markets as well as the substantial fund-raising capability of Hong Kong's stock market. Some C$12.4 billion were raised. We expect that the Mainland will continue to be the principal growth driver of our capital markets as more state-owned enterprises undergo restructuring. And our financial services industries will continue to capitalise on the growth opportunities in the Mainland. Our markets offer an abundant supply of investment opportunities with huge growth potential to investors from all over the world. We strongly encourage you to make use of the platform provided by Hong Kong to get a slice of these lucrative investment opportunities presented by the rapidly growing economies in the Mainland and other places in Asia.
Bond market
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Apart from the stock market, some Mainland enterprises have chosen to take advantage of the Hong Kong bond market. With our efforts to promote bond market development through enhancing financial infrastructure, offering tax incentives and simplifying the issuance process, our bond market has experienced impressive growth in recent years. Since 1997, the amount of outstanding Hong Kong dollar-denominated debt securities issued by overseas borrowers has increased by over seven times. We have also witnessed a remarkable increase in foreign participation in the bond market. As at May 2006, more than 20 Mainland enterprises have issued and listed their bonds in Hong Kong, raising nearly C$9.7 billion. Over 60% of the funds were raised in the last 18 months. We are optimistic that this positive trend will continue and that we will see more Mainland enterprises using Hong Kong's platform for issuing bonds.
Renminbi business
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Hong Kong is the first place outside the Mainland that can operate renminbi business. This greatly broadens the business opportunities for Hong Kong's financial services sector, and facilitates cross-boundary spending and economic integration between Hong Kong and the Mainland. As at April this year, 39 banks in Hong Kong are providing renminbi deposit-taking, exchange and remittance services. The total renminbi deposits in Hong Kong have reached RMB22.7 billion, which is close to C$3.2 billion. With the launch of the renminbi cheque-clearing mechanism earlier this year, Hong Kong residents can open renminbi current accounts and make payments by cheque for consumer spending in our neighboring province, Guangdong. We have been in discussion with the Central Government on other proposals to further expand the renminbi business, namely to allow cross-boundary trade to settle in Renminbi and to establish a renminbi debt issuance mechanism in Hong Kong.
Hong Kong as a major asset management centre
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Turning to our asset management business, the growth in the recent years has been very encouraging. As at end 2004, our fund management business amounted to C$560 billion, with an increase of 23% over the previous year and 63% sourced from overseas investors. The significant inflow of foreign funds is a clear illustration of the attractiveness of our financial markets to international fund managers.
There are around 200 companies providing fund management or advisory services in Hong Kong. More than 80 international fund houses from the US, the UK, Japan, Singapore, Switzerland, France and other parts of the world have set up operations in Hong Kong, casting a vote of confidence in Hong Kong's asset management industry.
Given high domestic savings in Asia, in particular in the Mainland, positive regional economic outlook and the vast pension scheme assets, there is great potential for Hong Kong to expand our asset management business further. The opening up of the Mainland economy and the financial reforms underway are generating more and more business opportunities for our asset management and private investment industries.
Our Government is fully committed to providing a conducive environment to attract overseas foreign investment. We have recently abolished estate duty and introduced profits tax exemption for offshore funds. These substantially enhance our competitiveness in comparison with other international financial centres, including the US and the UK, and other financial centres in the region such as Singapore. This creates a win-win situation for Hong Kong and our overseas investors.
As far as I am aware, there are a few Canadian brokerage firms in Hong Kong, operating on a limited scale. Given the excellent prospect of Hong Kong's asset management industry, I strongly encourage you to come and make use of Hong Kong as the base to expand your business in the region.
Continually upgrading market quality
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We fully recognise that investor confidence is the key to maintaining our position as an international financial centre, and, therefore, attach great importance to promoting corporate governance and enhancing the quality of our market. To this end, we have been constantly benchmarking ourselves against other major international financial centres, and making continuous improvements to ensure that our regulatory framework is in line with international standards. We have developed a Corporate Governance Action Plan to upgrade market quality.
Among other legislative measures, we have introduced statutory derivative actions to strengthen investor protection. We are also working in full steam to establish a statutory Financial Reporting Council to strengthen the regulation of auditors of listed corporations and to enhance the quality of financial reports. In parallel, we are preparing legislative amendments to give statutory backing to major listing requirements to strengthen the regulation of listing.
Besides, the Hong Kong Exchanges and Clearing Limited has promulgated the Code on Corporate Governance Practices to provide a comprehensive guide for listed companies to evaluate and improve their corporate governance practices.
Concluding remarks
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Ladies and gentlemen, Hong Kong is not only a vibrant international financial centre, but also the premier capital formation centre for Mainland China. In the Eleventh Five-year Plan announced in March 2006, the Central Government also expressed support for upholding Hong Kong's position as an international financial centre. With our unique strengths and close ties with the Mainland, we provide an excellent financial intermediation channel for funds flowing into and out of the Mainland. There is no shortage of lucrative investment and business opportunities, and more and more prestigious fund houses and other financial institutions are coming to Hong Kong. You surely would not want to lag behind.
We welcome more of you to come and make use of our platform to access the favourable business and investment opportunities arising from China's tremendous and robust economic growth.
Finally, may I wish this conference every success, and all of you good health. Thank you.
Ends/Tuesday, June 27, 2006
Issued at HKT 11:27
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