Following is the speech by the Chief Executive, Mr Donald Tsang, at the Distinguished Speaker Luncheon of the Hong Kong Association of Banks today (November 1):

Peter, distinguished guests, ladies and gentlemen,

     It is a great pleasure to join you today, and to meet so many friends from the banking sector, a sector so crucial to Hong Kong's development in the past, at present and in the future. And thank you Peter particularly for your reassurance that while you guys and gals are playing golf, you are playing less. As a consequence, let me thank you for producing a record excellent year of banking in Hong Kong in 2007. And let me congratulate all of you in advance on the size of the bonus you are likely to get at the end of the year.

     It's been 18 months since we last had lunch when I told this joke about playing golf. You may remember the last time we met, I spoke about the QDII scheme that had just been announced by the Mainland authorities. Since then, of course, there have been further significant developments in the financial services sector. So today, I'd like to talk about potential growth areas for the banking industry, and also give you an update on the initiatives that I announced in my Policy Address last month particularly the areas in which we are likely to enhance Hong Kong's attraction as a global financial centre.

     This year, the banking sector has welcomed further liberalisation measures from the Mainland. The QDII scheme has been expanded. In May, the China Banking Regulatory Commission announced that Mainland commercial banks could widen the scope of their overseas investments. In June, Hong Kong became the first place in the world other than the Mainland to issue an RMB denominated bond. And in August, the Mainland authorities announced a new pilot scheme that would allow individuals in the Mainland to directly buy stocks in Hong Kong market.

     Hong Kong banks also continue to expand their operations in the Mainland. A number of banks has established locally incorporated subsidiaries in the Mainland - an important development in the Mainland's banking sector. Some banks have continued to enhance their Mainland networks by setting up new branches and sub-branches. CEPA IV, signed on June 30, will allow our banks on the Mainland to enjoy even more liberalisation measures from January 1 next year. This will include the lifting of the asset and qualifying requirements early next year.

     Our banking sector has also remained resilient in the face of major international challenges. The US sub-prime problem and the resulting liquidity crunch have badly hit some in the international banking sectors. Yet, the problem has not had a significant direct impact on our banks. This is in no measure due to our effective regulatory regime, sound corporate governance and prudent risk management in the banking community.

     As you all know, despite the current buoyant state of the industry in Hong Kong, standing still is not an option. We need to be constantly thinking of ways to reinforce our role as a global financial centre in Asia, and as our country's premier international capital centre. That's why this year's Policy Address contains a number of initiatives to achieve these goals.

     There is no doubt that China's re-emergence on the world stage brings enormous opportunities in many services sectors, but especially in banking and financial services. Hong Kong's role as an international financial centre for our country has been reaffirmed in the National 11th Five Year Plan. So, we should make sure that we can play that role effectively.

     As I mentioned in my Policy Address, we will continue to advance co-operation with the Mainland to develop a mutually assisting, complementary and interactive relationship between our respective financial systems.

     In this regard, we will seek to expand the presence and scope of business offered in the Mainland by Hong Kong financial institutions. To tap the massive liquidity in the Mainland market we will work to enhance Hong Kong's intermediary role as more Mainland funds move off-shore. We will continue to expand the scope of RMB business, including the settling accounts of imports from the Mainland in RMB.

     While we continue to develop our Mainland-related business, we will also look for opportunities in other markets. Product diversification is a key factor for success in the ever-changing financial market.

     That is why we will work to develop an Islamic bond market in Hong Kong. The Islamic financial sector has enormous potential and opportunities. Globally, the Islamic financial sector is worth an estimated US$700 billion to US$1 trillion, and is expected to grow by 15% annually. At present, assets worth more than US$300 billion are being held by some 300 Islamic financial institutions in 75 countries. A further US$400 billion is managed by the Islamic business units of international banks.

     Middle Eastern investors and issuers have become increasingly active in international capital markets. To capture this business opportunity, many leading international banks, most of which have offices in Hong Kong, have devoted considerable resources to creating and servicing a variety of Islamic financial products. Some financial centres outside the Middle East have already taken steps to tap the opportunities brought by the market. To further consolidate Hong Kong's position as a global financial centre, we should do more in this regard.

     Our focus will be on the bond market. The Hong Kong Monetary Authority, in conjunction with the financial sector, has set up a dedicated team to study the related issues such as taxation, legal and regulatory frameworks and make recommendations for the early introduction of Islamic debt offerings in Hong Kong.

     Another significant growth area is asset management. Continued economic growth and wealth accumulation in Asia generally, coupled with ongoing liberalisation measures by the Mainland authorities, points to promising prospects for our asset management business. Following the abolition of estate duty and the exemption of offshore funds from profits tax in 2006, we will take further measures to foster market growth. In particular, we will review the Trustee Ordinance to modernise the provisions concerning trustee's duties and powers to facilitate effective trust administration and the use of modern investment services by trusts. This will support the growth of the trust services industry in Hong Kong and ensure that our legislation is on a par with that in other financial centres such as the United Kingdom and Singapore.

     In pursuing market development, we have not lost sight of the need to enhance corporate governance. It is our firm belief that only sustained development of the financial services sector must go hand-in-hand with effective corporate governance. That is why we are committed to establishing and maintaining a fair, transparent, and orderly market at the macro level; and to providing a sound institutional framework to encourage good corporate governance at the micro level.

     Over the years, we have implemented a series of measures to improve corporate governance. For example, we amended listing rules to require listed companies to have a minimum of three independent non-executive directors. We also introduced a new sponsor regulatory regime whereby only intermediaries that have met the eligibility requirements are allowed to carry out sponsor/compliance adviser work. In July this year, the Financial Reporting Council commenced operation. This is another major step in our development of corporate governance.

     Our corporate governance standard is now in a leading position in the Asian region. A recent survey by CLSA and the Asian Corporate Governance Association on corporate governance standards of 11 Asian markets, placed Hong Kong in first place ahead of Singapore. But as I mentioned earlier we won't stop here. We need to ensure ongoing review and upgrade of corporate governance standards. We are now rewriting the Companies Ordinance to ensure that our statutory framework provides the best possible infrastructure for Hong Kong as an international financial and business centre in the 21st Century. We aim to publish a White Paper for consultation in mid-2009 before introducing the Companies Bill, a new bill, to the Legislative Council before the end of 2010.

     Here, I would like to thank the Hong Kong Association of Banks for its active contributions to our work on the Companies Ordinance rewrite process. We will continue to look to you for advice and suggestions in the upcoming consultations.

     Ladies and Gentleman, these are exciting times for Hong Kong's banking and financial services sectors. Don't rest on your laurel even the latest survey on competitiveness by the World Economic Forum placed us generally on the 12th position, and ranked Hong Kong's financial services sector competitiveness (sophistication) no.1 in the world. But don't rest on that. We must as I say move on and stopping is not an option. The rapid economic development in the Mainland and elsewhere in Asia has created a golden opportunity for our financial services sector to grow and prosper. The accumulation of wealth and foreign exchange reserves in the region has led to strong demand for financial services. Against this backdrop, Hong Kong is blessed with a privileged position as the pre-eminent international business platform for the Mainland. We have the Central Government's unswerving support in this regard. The future does look bright.

     For our part, the Government will work hard to create the best business environment, not just in Asia but the world, to help the financial services sector grasp these significant and emerging opportunities.

     But, at the end of the day, it's up to you guys and gals to make it happen. Over the past decades, your innovation, adaptability, diligence and strong entrepreneurial spirit have led the banking sector through a period of rapid growth, diversification, modernisation, expansion ... and profitability. Going forward, I'm sure your determination, agility and business savvy to tap these enormous opportunities and take the first mover advantage will see our banking sector soar to new heights.  My administration will be with you all the way.

     Thank you very much.

Ends/Thursday, November 1, 2007
Issued at HKT 15:43

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