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FS's speech at 61st International Banking Summer School forum (with photo/video) (English only)
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    Following is the speech by the Financial Secretary, Mr John C Tsang, at "Thought Leadership Forum in Banking and Capital Markets" of the 61st International Banking Summer School this (July 16) morning:

Distinguished Guests, Ladies and Gentlemen,

    Good morning,

    It is a great pleasure for me to be here.  A warm welcome to you all.  And a special welcome to those of you who have travelled from overseas.  I hope you enjoy your stay in Hong Kong.

    We are honoured to be hosting the 2008 International Banking Summer School for the first time.  I also congratulate the Hong Kong Institute of Bankers for bringing the Summer School to Hong Kong.  It is a great way to help celebrate the Institute's 45th Anniversary.

    I am delighted that some of our leading lights in the banking sector are among the speakers at the Summer School.  Their in-depth knowledge and expertise also afford me the opportunity to take a macro approach in my remarks today.

    In the next few minutes, I will talk about the changing nature of Hong Kong's financial services sector in the face of national, regional and global influences.

    The theme of this forum, "Taking the Fast Track to Asia", could not be more appropriate with the Beijing Olympics just around the corner.  Hong Kong's relatively swift evolution from a manufacturing hub to an international financial centre makes the city more akin to a sprinter than a long distance runner.

    And, as is often the case in the sports world, our greatest test is the ability to become stronger and wiser with each new challenge.

    The topic of my talk is "the Changing Roles of Hong Kong".  This has been particularly evident since our reunification with the Mainland in 1997.

    These days we are a major city in China, while - at the same time - remaining an international city.  You need look no further than the Olympics to see this relationship in action.  Our athletes compete under the name, Hong Kong, China.  We will have our own team at the Games, yet, at the same time we are a co-host city of the Beijing Olympics.  We will be staging the Equestrian Events of the Games.  If any of our athletes strike Olympic gold, they will raise the Bauhinia Flag of Hong Kong and play the national anthem of China.

    One city with two distinct roles to play.

    Indeed, this is enshrined in the unique "One Country, Two Systems" concept which forms the basis for our reunification with the Mainland.

    Under "One Country, Two Systems", Hong Kong has maintained its capitalist way of life.  We have our own freely convertible currency that has been pegged to the US dollar since 1983.  We continue to follow the common law legal system based on the English system.  Our judiciary is fiercely independent, and Hong Kongers continue to enjoy a full range of freedoms including freedom of assembly, freedom of religion, freedom of association and a free flow of information.

    Furthermore, the concept of "One Country, Two Systems" is guaranteed by our constitutional document, the Basic Law, which came into effect on July 1, 1997.

    In the Basic Law, Article 109 states: (and I quote) "The Government of the Hong Kong Special Administrative Region shall provide an appropriate economic and legal environment for the maintenance of the status of Hong Kong as an international financial centre." (End quote).

    So what is the SAR Government doing to meet this obligation?

    For one thing, we work to create a welcoming business environment that facilitates free trade and economic growth.  Low taxes, efficient services, a hard working and well-educated labour force and world-class soft and hard infrastructure are some of our key attributes.

    We already have one of the highest concentrations of banking institutions in the world.  About 70 of the top 100 banks in the world have operations in our city.  They are among more than 200 authorised institutions in Hong Kong, almost 90 per cent of which are owned by foreign interests.

    These operations bring a great deal of financial expertise and knowledge to Hong Kong that lends clarity to our global outlook and sustains our development as an international financial centre.

    In terms of international appeal, we are moving in the right direction.

    At end-1997, the total assets of the United States and European banks' operations in Hong Kong accounted for 23 per cent of the whole banking sector.  At the end of last year, it was 38 per cent.

    The robust banking sector provides a firm platform for economic stability and growth.  Last year, our GDP grew 6.4 per cent year-on-year.  Our economy today is larger than ever, with GDP stronger over the past three years than we've seen since the boom years of the mid-80s.

    We are in pretty good shape, but it has not been an easy path.

    In the past decade or so, we - along with most other economies in the region - have had to battle the Asian financial crisis.  For us, that brought with it a painful bout of deflation and the bursting of the property bubble.  Negative equity was a widespread problem for homeowners and consumer confidence was low.

    I am pleased to say that our economy has weathered these storms and is now quite strong.  And we are all a little wiser for the experiences.

    Today, we have a much greater focus on areas such as business diversification and financial innovation as well as corporate governance and risk management.

    Let's first look at innovation.

    Following a global pattern, banks in Hong Kong have become less concentrated on the traditional lending business.  They increasingly rely on fee-based business, such as wealth management and agency business. 

    The proportion of non-interest income in total operating income of Hong Kong banks was about 30 per cent at end-1997.  By the end of last year, it was 44 per cent.

    More banks have engaged in innovative products, such as credit derivatives.  Electronic banking has become an established service delivery channel.  And there have been cost-saving initiatives, such as outsourcing operations to strengthen competitiveness.

    There have also been changes to the regulatory environment for banks and improvements in corporate governance and risk management systems in recent years.

    Under the direction of our de facto central bank, the Hong Kong Monetary Authority or HKMA, Hong Kong was among the first jurisdictions to adopt the Basel II framework.

    Since 2003, the HKMA has required all authorised institutions to have stress testing programmes in place.  The Authority and other regulatory bodies carry out regular stress tests on banks to make sure they are financially healthy and can bear the risks they are taking.

    Stress tests have become an integral part of the financial infrastructure in recent years.  But global finance is evolving and advancing so quickly that some of the techniques have become outdated. There is a need to develop more sophisticated techniques.  These would take into account not just direct exposure to risk, but also second and third round knock-on effects of a shock.   

    I notice that the Summer School will devote a lot of attention to this issue in its seminars on Friday.  It is bound to be an interesting session.

    In our banking sector, a series of reforms have been carried out in the past decade.  These include relaxing market entry criteria; establishing credit information sharing systems among banks, and introducing a deposit protection scheme.

    These have enhanced the safety and efficiency of the local banking system.

    We have also reduced risk by introducing an interbank payment system, which operates through the Real Time Gross Settlement System (RTGS).  The Hong Kong dollar RTGS System was established in 1996, and its settlement functions have been expanded by stages during the past decade.

    The US dollar RTGS system was introduced in 2000, followed by the Euro in 2003 and the Malaysian Ringgit last year. This allows foreign exchange transactions to be settled on a payment-versus-payment basis, eliminating any risk caused by a time gap.

    Furthermore, the RTGS system of Hong Kong and similar systems in selected cities on the Mainland have been linked to facilitate US dollar and Hong Kong dollar denominated transactions.

    Facilities have also been established with the Mainland authorities for the clearing of cheques used across the boundary. 

    This brings me to the next part of my talk.  In the next few minutes, I will discuss Hong Kong's role as China's global financial centre.

    Following our reunification 11 years ago, some people predicted that Hong Kong would be replaced by Shanghai or Beijing as our nation's financial capital.

    The issue was clarified by our national Government in its most recent economic blueprint, the 11th Five Year Plan released in 2006.  Here, the Central Government gave its full support to Hong Kong as China's global financial centre.

    This was significant because it was the first time Hong Kong had been included in the Five Year Plan.  It gave us a great deal of confidence in planning for the future.

    Our confirmed status as China's international financial centre is a responsibility we take seriously.  It is also an opportunity, which we are grasping with both hands.

    In response to the 11th Five Year Plan, we set up a task force which came up with a five-pronged strategy to achieve our goals.

    The first part of our strategy involves expanding the presence of our financial institutions in the Mainland.

    Our big advantage here is our unique free trade pact with the Mainland, the Closer Economic Partnership Arrangement, or CEPA for short.  CEPA offers companies enhanced market access to the Mainland.  It has some important implications for improving financial co-operation by increasing the flexibility for Hong Kong's financial services providers and professionals to conduct business in the Mainland.

    Although CEPA is an exclusive arrangement between Hong Kong and the Mainland, its rules are nationality neutral.  This allows foreign firms incorporated in Hong Kong to enjoy the same benefits as local enterprises.

    It's not only banks that benefit.  CEPA enables Hong Kong insurance companies to set up wholly-owned enterprises on the Mainland to provide services to the Mainland insurance companies.  I will talk a little more about CEPA later.

    The second part of our strategy involves Hong Kong playing a bigger role in the outward mobility of funds from the Mainland.  The bullish stock market across the boundary and the gradual liberalisation of the Mainland's capital account bode well for the future.

    We have made progress in expanding the Qualified Domestic Institutional Investor scheme or QDII.  The scheme allows qualified Mainland banks, securities and insurance companies to invest in Hong Kong and overseas.

    Over the years, Hong Kong has been one of the major financial markets for the Mainland entities to raise funds in various forms.  More than 240 Mainland enterprises are listed in Hong Kong with a total market capitalisation of some HK$8.6 trillion, which far exceeds the position ten years ago.  Then, at end-1997, just 98 Mainland enterprises were listed in Hong Kong with a total market cap of HK$522 billion.

    Thirdly, we are exploring the potential of offering Hong Kong financial instruments in the Mainland.

    A stronger link between markets in Hong Kong and the Mainland will increase the overall size, breadth and depth of the markets. However, the markets currently operate under different systems.  There may be a large price differential of shares in the same company issued in Hong Kong and on the Mainland.  These challenges are not insurmountable and the benefits would be greater market efficiency and stability.

    The fourth part of our strategy concerns money.  It is important to continue developing Renminbi transactions in Hong Kong, which were launched back in 2004.  There has been steady progress since then, and last June the first Renminbi bond was successfully launched here, making Hong Kong the only place outside the Mainland to operate a Renminbi bond market. So far, there have been three issues totalling 10 billion Yuan.  We expect more issues this year.

    We will continue to explore new types of Renminbi business in Hong Kong.  The development of these transactions outside the Mainland serves as a reliable testing platform for internationalisation of the Mainland currency.

    Last but not least, we are working to more closely align the infrastructure of the two financial systems.  One possible area is settlements.  Hong Kong has a world-class multi-currency settlement system, which could facilitate the Mainland in settling its foreign currency transactions.

    The Hong Kong Government is actively exploring these initiatives and opportunities with the Mainland authorities that will enhance the competitiveness of our financial markets.

    In addition to the five-pronged strategy, Hong Kong has great potential as a window for the Mainland financial institutions to develop business overseas.  As at end-May this year, 16 authorised institutions in Hong Kong - including 12 licensed banks - were owned by Mainland interests.

    They have a total market share of over 16 per cent by total assets and 21 per cent by total deposits.  The market share of Mainland banks in Hong Kong is expected to increase further as they are enhancing business developments in Hong Kong by means of both organic growth and acquisition.

    Allow me now to expand on the role of CEPA.

    The Arrangement covers a wide range of industries, but one good example of how it works is in the banking sector.  As of January 1 this year, the asset threshold for banks acquiring a shareholding in a Mainland bank has been lowered to US$6 billion.  Business operation requirements have also been eased so that more banks can take advantage of the arrangement.

    So called "green lanes" have also been set up to fast-track applications from Hong Kong banks wishing to expand into Guangdong Province, as well as to other areas in the central western and northeastern parts of China.

    More banks from Hong Kong are developing business in the Mainland.  This trend has been fostered since 2007 as China opens up the domestic financial services sector to foreign institutions under the World Trade Organisation commitment.  Currently, 14 banks incorporated in Hong Kong have established business operations in China.  Six of them are allowed to conduct full-scope retail banking business across the boundary through their locally incorporated subsidiary banks.

    Looking ahead, there is much room for Hong Kong to foster its dual status as an international financial centre and as China's number one city for global finance.

    Leveraging on our geographical location and sound regulatory environment, a dedicated commodities exchange is expected to be up and running here early next year.  There are three commodities exchanges in the Mainland, but they are not open to overseas investors.  The Hong Kong Mercantile Exchange will help ensure that oil prices better reflect the supply and demand in the Mainland and help traders hedge their price risks more efficiently.

    We are also making progress in establishing a platform for Islamic finance business in Hong Kong.  In this regard, the market infrastructure, legal and regulatory framework, tax regime and other supplementary policies are under review.

    There is much work to do but the early signs are promising.

    Last November, a major local bank launched the first Islamic fund here.  In six months, the fund grew more than 10-fold and the fund exceeded US$54 million by end-April.

    Khazanah Nasional Berhad, the investment holding arm of the Malaysian Government, issued an exchangeable Islamic bond or sukuk of US$550 million in the Hong Kong Stock Exchange in March this year.  It was the first sukuk offering exposure to China's growth through the Mainland equities listed on the local stock market.  There was a good response from Middle Eastern investors and the sukuk was over-subscribed by 10 times.

    The amount of sukuk issuance has quadrupled since 2004, an illustration of the exceptional growth of Islamic finance in recent years. There is a high level of international interest in these sukuks mainly from European and Middle Eastern investors, but also from Asian investors.

    Earlier this year, our Securities and Futures Commission signed a Memorandum of Understanding with the Dubai Financial Services Authority to enhance our co-operation on promoting and developing our respective Islamic capital market segments.

    We will continue to strengthen co-operation with international organisations and foreign Government authorities.  This will help us to monitor financial market development and innovation, as well as combat financial crimes and terrorist financing.

    Finally, I will say a few words on nurturing talent.  We need to attract the best and brightest individuals to the banking industry in Hong Kong.  At the same time, there is demand for training and educational opportunities for bankers to raise standards and encourage career development.

    Since its establishment in 1963 the Hong Kong Institute of Bankers has played a leading role in keeping local professionals up-to-date with the latest trends.

    Through its work, the Institute has raised the quality of our banking community and prepared individuals for the challenges in the industry.

    In recent years there has been greater collaboration in education between the banking sectors in Hong Kong and in the Mainland.  The mutual recognition of professional qualifications under CEPA has helped to strengthen this collaboration.

    For Hong Kong to continue playing its dual role as an international financial centre and as China's global financial centre effectively, we must ensure the necessary talent is in place.

    Ladies and Gentlemen, I hope I have been able to give you a snapshot about the changing roles of Hong Kong, as both an international centre and as the Chinese nation's number one city for global finance.

    By way of a recap.  The "One Country, Two Systems' formula for our reunification with the Mainland has helped to ensure political, legal and economic stability in our city.

    Cross-boundary initiatives, such as CEPA, highlight the closer integration between the two financial systems in Hong Kong and the Mainland, and promote further co-operation within our country.

    At the same time, the Hong Kong Special Administrative Region Government is committed to maintaining a business-friendly environment for local companies, as well as for our international partners.

    On the fast track to Asia, there is plenty of competition.  We will continue to strengthen our position as an international financial centre with the full support of our national Government.  And, we will continue to connect China to the rest of the financial world.

    One city with two ever-changing roles to play.

    I wish you all an enjoyable and fruitful Summer School.

    Thank you.

Ends/Wednesday, July 16, 2008
Issued at HKT 10:39

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