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Following is the speech by the Financial Secretary, Mr John C. Tsang, at the Wharton Club luncheon today (November 29):
Distinguished guests, ladies and gentlemen,
Good afternoon.
I am delighted to be speaking today here at the Wharton Club luncheon. We are nearing the end of what has been an especially busy year for us in Hong Kong. Our 10th anniversary as a Special Administrative Region of China has seen a number of international organisations holding conferences in our city, including the Wharton School Global Alumni Forum in May. I believe this highlights not only the importance of Hong Kong in the international business environment, but also the growing influence of Asia. It is little surprise then, to see an increasing number of Asian students applying for places in Wharton business school courses and making a success of their careers.
This year has been one of progress, as well as some deep reflection for us in Hong Kong. Looking back over the 10 years since reunification with the Mainland, we have all come a long way. You will be well acquainted with the main events of the past decade that began amid the turmoil of the Asian financial crisis. We experienced also the bursting of the housing and dotcom bubbles, SARS, two outbreaks of avian influenza, a prolonged period of deflation and fallout from the 9.11 attacks in the US. I am pleased to say that we have come through it all in pretty good shape.
But, today I will not dwell on the past. I will instead look to the future, and talk about how Hong Kong will enhance its status as an international centre for business, what our role will be within the region and how we are going to play our part as China's global financial centre in the years to come.
We enter the second decade as a Special Administrative Region of China on a strong footing. Our economy has advanced on all key fronts over the past few years, an achievement that is closely aligned to the Mainland's continued robust growth. We are on track for another record year in terms of tourist numbers. The stock market has reached heights, and perhaps violence never seen before. Unemployment is at a nine-year low, and we are on course to hit our full-year GDP growth forecast of 6%.
So where do we go from here?
Our stock market is certainly ranking high in terms of market capitalisation. Total market cap topped some US$3 trillion at end-October this year, the seventh largest in the world and third in Asia. Not bad for a city our size. But to be a more internationally oriented business centre we need to attract an ever larger number of overseas companies to list on the stock exchange.
An important step in that direction came in March this year when the Hong Kong Exchanges and Clearing Limited (HKEx) and the Securities and Futures Commission (SFC) published a statement on opening the equity listing regime to overseas issuers. This clarified that the Listing Rules do not restrict applicants to companies just from the so-called recognised jurisdictions, namely Bermuda, the Cayman Islands and the Mainland.
New procedures will also make it easier and quicker for foreign companies to list in Hong Kong. Naturally they will have to meet the appropriate standards for shareholder protection, but each application will be judged on its own merits.
The Exchange has already made promotional trips to countries such as Vietnam, Russia, Thailand, Malaysia and Kazakhstan. I will also be encouraging our friends in India to consider listing in Hong Kong when I visit this great nation next month.
In addition, the Financial Services and the Treasury Bureau has been leading delegations to cities in the Mainland to promote Hong Kong as a preferred listing venue.
Another exciting prospect is bringing Middle Eastern investors to Hong Kong. Just last week the SFC gave the go-ahead for our first retail fund based on Islamic laws. Although Islamic financing is a relatively new venture for Hong Kong, we are actually ideally positioned as a platform for investors looking to capitalise on the Mainland's rapid economic growth. Our stable and freely convertible currency, flexible regulatory regime and world class financial infrastructure and settlement systems make Hong Kong an attractive choice for investors from all over the world, including the Middle East. The Islamic financial sector is worth an estimated US$700 billion to US$1 trillion, and is expected to grow by 15% annually.
We see significant potential in this area, but admittedly we have some catching up to do in terms of Islamic financing, but we are definitely ahead of the game when it comes to China.
Mainland enterprises have highlighted Hong Kong's potential as a premier capital-raising platform. So far they have raised about US$224 billion through Hong Kong listings. Earlier this month Alibaba.com alone raised more than US$1.5 billion with its IPO. As at the end of last month, 397 Mainland enterprises were listed on the local stock exchange accounting for a third of the listed companies, and about 60% of market capitalisation.
The challenge in the next few years will be to more closely streamline our two financial systems and fulfil our role as China's global financial centre. This task was outlined in our nation's economic blueprint last year, the 11th Five Year Plan. It affirmed support for the development of financial services in Hong Kong and guaranteed our status as China's global financial centre.
Premier Wen Jiabao said last year that a strategy was needed to develop a "mutual-assisting, complementary and inter-active relationship" between our two financial systems. In a positive response, our Chief Executive convened an Economic Summit to discuss the best way forward. This included the setting up of a high-powered focus group to respond to the challenges in the 11th Five Year Plan. The focus group outlined five broad areas to achieve this goal.
First of all, we need to expand the presence of our financial institutions in the Mainland. Our financial service providers are strong, efficient and well received in the Mainland. There is also a huge appetite for investment across the boundary where total domestic savings is estimated to be about US$2 trillion.
Our free trade agreement with the Mainland, the Closer Economic Partnership Arrangement, or CEPA, is the ideal vehicle to gain greater access to the Mainland market. The arrangement gives greater flexibility to our financial services providers in doing business across the boundary. Under CEPA, insurance agencies can set up wholly-owned enterprises in the Mainland and provide services to Mainland insurance companies. Qualified securities and futures companies from both places are also able to form joint ventures. Banks, especially mid-tier banks, also stand to benefit from CEPA because it lowers the global asset threshold for Hong Kong incorporated banks from US$20 billion to US$6 billion. Both sides have also agreed to give priority to applications from lenders wishing to set up businesses in the central, western and northeastern areas as well as Guangdong province.
My second point involves playing a greater role in the outward mobility of funds from the Mainland. I believe our stock market will have a significant role to play in this in the future. An important avenue for this outward flow of capital is the Qualified Domestic Institutional Investor scheme, or QDII.
The scheme was recently expanded to enable more banks, securities and insurance companies to invest in the Hong Kong stock market and overseas. The State Administration of Foreign Exchange (SAFE) said in July this year it had approved a US$20.5 billion QDII quota. This includes US$14.8 billion for 19 banks and US$5.2 billion for four insurance companies.
Thirdly, as our two financial systems become more closely linked, there will be greater scope for financial instruments issued in Hong Kong to be marketed to Mainland investors. These instruments could be traded through the stock market, inter bank market or over the counter. However, there is a word of caution. As you probably know, different prices are offered for the same stock in Hong Kong and the Mainland so we must be careful to maintain confidence and stability. I believe price volatility will be more limited as the overall size of the stock markets increases and we achieve greater intermediation efficiency.
This brings me to the fourth point, currency. Hong Kong has been a reliable testing ground for renminbi-denominated transactions since they were launched here in 2004. Significant progress has been made since then. By end-July this year, renminbi deposits amounted to some 28 billion yuan with some 40 banks eligible to offer renminbi services. And in June this year, Hong Kong became the first place outside the Mainland to offer a renminbi bond market. So far three banks, China Development Bank in Hong Kong, ExportImport Bank of China and Bank of China have issued renminbi bonds raising a total of 10 billion yuan.
As China's economic stature grows, so will the importance of its currency. That will in turn encourage the further development of renminbi business here, benefiting both Hong Kong and the Mainland in the long run.
Lastly, there is room to further dovetail our two financial systems. Hong Kong has a world-class multi-currency settlement system. So we are encouraging the Mainland to settle its foreign currency transactions through Hong Kong. Relaxing controls while modifying policies will make for a more efficient system without increasing the risks. And looking ahead, we expect more frequent use of Hong Kong as a platform for outward investment by fund managers, investors and financial institutions. So there is a need to develop new links to cater for the increasing flows of funds and instruments between our two financial systems.
In his policy address last month, the Chief Executive expanded on this when he said there would be stepped up cross-boundary co-operation at all levels to enhance the scale and efficiency of both financial markets. Hong Kong's financial market would become deeper, broader and more vibrant, strengthening our position as a global financial centre.
Before I close, I wish to talk about capital of a different kind, human capital. Hong Kong's long-term prosperity depends largely on the ability of our workforce to constantly upgrade and stay one step ahead of the competition.
I hope that your alumni network will continue to encourage the rising stars of the business world to come to Hong Kong to live and work and contribute to our society here. I'm sure they will like what they see.
One thing we are doing to attract more high-calibre individuals to the city is relaxing the criteria for people wishing to apply to join our Quality Migrant Admission Scheme. By lowering the age limit and adjusting other prerequisites, the scheme will be available to more people from overseas.
We are also opening up our tertiary education establishments to more non-local students and making it easier for them to remain in Hong Kong and work after they have finished their studies. As well as improving the quality of our workforce, this will also help to broaden the horizons of our own students.
I believe Hong Kong has much to offer students in the region. Four of our universities are in the top 200 in the world according to The Times Higher Education Supplement 2007. The University of Hong Kong is the highest ranked of the local universities coming in at number 18, just four places below the University of Pennsylvania.
Ladies and gentlemen, Hong Kong is forging a new direction in its development. A direction that best achieves the goals of enhancing our status as an international business centre and as China's global financial centre. And a direction towards greater long term stability and sustainability.
If history is any indication, you'd better hold onto your hats because it promises to be quite a ride.
Thank you very much.
Ends/Thursday, November 29, 2007
Issued at HKT 19:12
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