Following is the speech by the Financial Secretary, Mr John C Tsang, titled "Hong Kong: Asia's Premier Asset Management Centre" at the Annual Conference of the Hong Kong Investment Funds Association this afternoon (September 10):

Elisabeth (Scott), Ladies and Gentlemen:

Good afternoon to you all.

     It gives me great pleasure to join you all today at the first annual conference organised by the Hong Kong Investment Funds Association.  

     First of all, I would like to express my gratitude to the Association for staging this conference for market practitioners and regulators to exchange views about the development of Hong Kong's asset management industry.  I applaud the Association's continuous efforts over the years to foster the development of Hong Kong's asset management industry and promote investor education.

A Major Asset Management Centre in Asia

     Over the last decade, Hong Kong has established its position as one of the largest asset management centres in Asia.  According to the annual survey conducted by the Securities and Futures Commission, Hong Kong's combined fund management business, which comprises asset management, advisory business, private banking, and real estate investment trusts, amounted to some HK$6 trillion at the end of 2006, representing a growth of 36% over 2005, and an accumulated growth of more than 70% over 2004.  Assets under management was more than HK$4 trillion, of which 64% of the funds were sourced from non-Hong Kong investors.  This illustrates Hong Kong's ability to attract foreign funds and investment.

     The robust economic growth in Asia in recent years, particularly in Mainland China, has generated vast savings and wealth in the region.  In 2006, GDP growth in China reached 11.1%.  According to the World Investment Report 2007 published by Merrill Lynch and Capgemini, the overall high-net-worth individual population in Asia-Pacific region - that is, people having net assets of more than  US$1 million, excluding their primary residence and consumables -- grew by 8.6% to 2.6 million in 2006.  The Mainland is among the top countries with the fastest growing number of high-net-worth individuals.  At the same time, the gross domestic savings on the Mainland also rose to more than 48% of its GDP.  As an international financial centre situated at the heart of Asia with the Mainland as our hinterland, Hong Kong is uniquely positioned to tap into the vast savings and asset management business in the region.

Comparative Advantages of Hong Kong as an Asset Management Centre

     Hong Kong's development as a leading asset management centre is based on a number of fundamental strengths, including the rule of law, free flow of capital and information, simple and low tax regime, world-class infrastructure and a well established regulatory system. We also have an abundant pool of professionals with international exposure and good knowledge of China and the region.  On top of these, Hong Kong is one of the most open economies in the world, and our system is well recognised as being fair, mature, efficient and transparent.  Indeed, we have been ranked by the Heritage Foundation as the world's freest economy for 13 consecutive years.  According to United Nations' World Investment Report 2006, Hong Kong ranks second as the most preferred destination for foreign direct investment in Asia for the 5th consecutive year.

     Hong Kong's unique strengths have a great deal of appeal for international investors.  At present, around 80 international fund management groups 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 our asset management industry.  Our expertise in managing investments in Asia is widely recognised. In 2006, around 80% of the assets managed in Hong Kong were invested in Asia.

     The global asset management industry has tremendous prospects for further growth. And Hong Kong has the potential to take a larger share of this market.  Measures under CEPA, which allows qualified Mainland fund management companies, securities and futures companies to set up businesses in Hong Kong, enhances the depth and breadth of the financial intermediary base in Hong Kong.

     In the past few months, Mainland authorities have announced a number of executive measures to facilitate the orderly outflow of capital from the Mainland.  For instance, new measures under the Qualified Domestic Institutional Investor (QDII) Scheme allow Mainland commercial banks, securities firms and fund management companies to invest in, among other things, funds authorised by SFC and Hong Kong stocks.  Given our proximity, linguistic and cultural affinities, and the increasingly close economic co-operation with the Mainland, we are best placed to capture the tremendous opportunities provided under the QDII scheme.  

     Last month, the State Administration of Foreign Exchange (SAFE) announced a pilot scheme which allows Mainland individuals to use their own foreign currency funds to invest directly in securities listed on the Hong Kong Stock Exchange.  This measure creates a "win-win" situation for the Mainland and Hong Kong.  It provides a direct channel for Mainland investors to make use of our investment vehicles and services, thereby creating new business for our financial intermediaries and broadening our client base.

Islamic Finance

     In addition to huge investment demands from the Mainland, we believe Islamic Finance will become another engine of growth in the coming years.  Globally, the Islamic financial market is worth an estimated US$1 trillion, and is expected to grow by 15 per cent annually.  There is enormous potential for Islamic finance to expand and develop. Many leading international banks, most of which have offices in Hong Kong, devote considerable resources to creating and servicing a variety of Islamic financial products to meet this demand.

     Some financial centres outside the Middle East regard Islamic finance as a priority area.  They have adopted a variety of measures to accommodate Islamic finance within their legal and regulatory regimes to tap the enormous potential offered by Middle Eastern investors and issuers.  I believe now is the time for Hong Kong to take the initiative.

     Islamic finance is an important element of the global financial system.  For Hong Kong to be a major international financial centre - not just in the region, but globally - then Islamic finance must be among our portfolio of products and services.  Hong Kong's strong fundamentals will allow us to act as a centre for Islamic finance.  As Mainland's international financial centre, we are in a unique position to attract investments from the Middle East and elsewhere. Many investors in the Middle East are already eyeing opportunities in the Chinese market.  In this connection, Hong Kong is best placed to be the most effective intermediary for structuring and marketing Islamic investment products to meet the needs of Mainland enterprises and Middle Eastern investors.

     To take the matter forward, our financial regulators will look at ways to develop a local Islamic bond market under our existing financial, legal and regulatory regimes.  Reconciling our system of modern finance with Islamic finance will be a key objective.

Government Initiatives

     A well-established asset management business facilitates capital flow, enhances corporate governance and risk management capabilities, thereby improving the competitiveness of our economy. Asset management services will form a high-value added services chain with other professional services, including legal, accounting and corporate consulting, which strengthens our role as a major financial and commercial centre.  It is a top priority for Hong Kong to continue to develop our asset management business.  This would not only help attract foreign capital and talent to Hong Kong, but also provide further impetus for economic development and job creation, and enhance Hong Kong's position as Asia's World City.

     The Government has spared no effort in fostering a favourable environment conducive to the development of the asset management industry in Hong Kong.  We have exempted offshore funds from profit tax since last year.  This brings us into line with other major financial centres such as New York and London. More importantly, the measure helps attract new offshore funds to Hong Kong and encourages existing offshore funds to continue to invest in Hong Kong.  We have also abolished estate duty since last year to encourage local and overseas investors to hold assets in Hong Kong.  Feedback from the local asset management and banking sectors suggests the industry generally agrees that the abolition of estate duty has generated a positive impact, in that many private banking clients have since relocated their overseas assets back to Hong Kong.

     In addition to tax concessions, we have also embarked on a series of promotional activities abroad as well as in the Mainland to promote Hong Kong as an asset management centre.  In the past year, we have visited a number of countries and cities in the Middle East, Asia and North America to promote our financial services.  Last month, I visited Malaysia to learn about the development of the Islamic Finance there.  In the months ahead, we will continue our promotion efforts and we count on your support and participation.

     I must also mention the positive impact of the launch of MPF back in 2000.  With HK$200 billion of assets accumulated and more than HK$7 billion of contribution rolling in every quarter, the MPF system has brought tremendous opportunities to the local asset management industry.  Of course the MPF System has also served our citizens well so far by providing a decent return and much needed investment education to them.  But the public's expectation of our fund managers grows with time.  It should be a priority to explore how to run the schemes more efficiently to allow lower management fees and to provide more investment options.  I believe these improvements to the MFP system will not only benefit account holders, but also help the industry attract more business, especially voluntary contributions.

     To further expand our asset management business, we are committed to providing a business-friendly environment for fund houses to operate their business in Hong Kong and facilitate the development of a more diversified range of investment products offered to investors.  In this regard, the SFC has announced a set of initiatives to streamline the licensing procedures for overseas fund managers wanting to operate here in Hong Kong.  We believe the measures will help attract quality and world-class fund managers to relocate to Hong Kong, expanding the depth and breadth of our market.  The SFC will continue to review the licensing procedures and requirements to ensure that they are responsive to market development and facilitate development of new investment products for investors.

     Quality human capital is crucial to the sustainable growth of Hong Kong's financial services industry, and the Government attaches great importance to expanding and upgrading our human resources.  The Advisory Committee on Human Resources Development for the Financial Services Sector, which was set up in 2000, is an initiative to draw together the expertise of the Government, the industry, and academia on manpower planning and development in financial services.  To maintain a vibrant workforce, we will strive to attract talents from around the world to pursue careers in Hong Kong through various talent admission schemes.

     During the Policy Address consultation sessions in the last couple of weeks, fund managers and bankers have raised the importance of improving our education system, combatting the air pollution problem, introducing more flexibility to our immigration procedures and facilitating the retention of Mainland graduates from local universities.  I know that many of you share these views.  Please be assured that we hear your views.  The Administration understands fully that these are important issues to our bid to attract more talent in competition with other cities in the region.

     As announced by the Chief Executive in his 2006 Policy Address, Hong Kong will host an Asian Financial Forum on September 21 to reinforce Hong Kong's prestige as an International Financial Centre.  The Forum will provide a high-level platform for distinguished leaders and members of the global financial community to exchange insights on trends and developments in the financial markets, with a particular emphasis on Asia.  The Forum will comprise a plenary session and three concurrent panels.  And we are delighted to have Elisabeth as Chairman of the panel on "Investing in Asian Growth", which will look at how fund managers and administrators can capture the opportunities arising from the growing pool of new money in Asia available for investment.  We are pleased to have obtained support from many public and private institutions, and have secured an impressive line-up of heavyweight speakers like Mr Jaime Caruana, Mr James Wolfensohn and Dr Zhou Xiaochuan.  The Forum will provide a good networking opportunity for the financial and business sectors.  And I am sure you will not miss it.
 
Concluding Remarks

     Ladies and Gentlemen, we see a bright future for Hong Kong as an international financial centre and leading asset management centre.  The HKSAR Government will work hand in hand with market practitioners and our financial regulators to strengthen Hong Kong's competitiveness.  Let's work together to build on Hong Kong's position as a leading asset management centre.  

     Thank you.

Ends/Monday, September 10, 2007
Issued at HKT 14:53

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