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One country, two financial systems Making greater use of Hong Kong’s financial system would be in both Hong Kong's and the Mainland's interest. "One country, two systems" is often cited in the context of preserving the capitalist system and way of life of Hong Kong. Article 5 of the Basic Law specifies that "the socialist system and policies shall not be practised in the Hong Kong Special Administrative Region, and the previous capitalist system and way of life shall remain unchanged for 50 years." The phrase is also commonly quoted in discussions concerning the governance of the Hong Kong Special Administrative Region, which has been authorised, through Article 2 of the Basic Law, by the National People's Congress "to exercise a high degree of autonomy and enjoy executive, legislative and independent judicial power". Our experience of the functioning of the capitalist system and way of life in Hong Kong, and of Hong Kong's autonomy since the resumption of the exercise of sovereignty over Hong Kong by China clearly indicates that the principle of "one country, two systems" has worked very well for Hong Kong. The fact that Hong Kong has persistently been ranked as the freest economy in the world is very good confirmation of this. I know that some have expressed doubt about whether the degree of autonomy enjoyed by Hong Kong is high enough, but as far as I can tell from my experience of the working of the monetary and financial systems of Hong Kong, the degree of autonomy enjoyed by the Hong Kong Special Administrative Region Government is actually higher than that enjoyed by the Hong Kong Government before 1 July 1997. Those familiar with the "Letters Patent" and "Royal Instructions" will know that before 1997 the Governor of Hong Kong was required to obtain instructions from the Principal Secretaries of State before, for example, assenting to any law "affecting the Currency of the Colony" or "establishing any Banking Association". These and other requirements necessitated close consultation with Whitehall, effected normally through incoming and outgoing telegrams coloured yellow and blue respectively. There were many of these telegrams flying around, although such consultation did not prevent the Government from taking actions that were in the best interest of Hong Kong on matters concerning the monetary and financial systems. But there have been no telegrams or other forms of communication from Beijing that I am aware of after 1 July 1997, since the Basic Law contains no requirements similar to those in the Letters Patent and Royal Instructions. But there is another aspect of "one country, two systems" that requires close attention from all concerned: the relationship between the two different systems in specific areas or sectors of the two economies. Although the authorities for operating the two systems (for example, for determining financial policies) are independent of each other and there has never been any doubt about this, there has not been a lot of attention to or discussion about the relationship between the two systems. There is nothing in the Basic Law that throws light on what this relationship should be, for example, on how the two financial systems should interact, co-operate and complement each other in the common interest of the two systems and in the overall interest of the country. One can argue that this can be left to the market. But an important condition for relying on the free market is that the market should be allowed to work freely, at least within the country. This clearly is not the case, given the differences between the two financial systems, in terms of, for example, market access by financial intermediaries and the degree of freedom of mobility of funds. I am sure the controls in either financial system are there for good reasons. This makes it even more important for the authorities to develop a relationship between the two financial systems that works in the best interest of the country. From the admittedly narrow perspective of Hong Kong, we see a financial system on the Mainland that mobilises domestic savings predominantly through the banking system, with such a low rate of return that it is necessary for people to save more and spend less, despite the savings rate already being in excess of 40% of GDP. We see a financial system that is not as efficient as it could be in allocating funds based on the credit-worthiness of the fund raisers. We see, as I am sure the Mainland authorities also see, a great need to develop a market-oriented financial system to improve financial intermediation – something that is important for sustaining growth and economic development. We also see a strong case for making better and more extensive use of Hong Kong's financial system. I believe this is an important element in the relationship between the two financial systems.
Joseph Yam
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