We all have aspirations - to sprint 100 metres in less than 10 seconds, to score straight As in the HKCEE, to get a first-class honours degree in university, to lower our golf handicap to single digits, to own a house, to be a billionaire or to be healthy. Some of these aspirations are more achievable than others; many are mere dreams to occupy the idle mind. Achievable or not, life would be so boring and meaningless without them. We have to be imaginative and explore our boundaries. But we also have to be realistic about our limitations.

Hong Kong aspires to be an international centre of quite a lot of things. Some of these aspirations are enshrined in law and included in development plans. In the market-oriented global environment, for Hong Kong to be an international centre invariably requires the international market in whatever tradable goods we are talking about to be located in Hong Kong. For Hong Kong to qualify as an international financial centre, for example, the minimum requirement is for the key international financial markets to be located here. Since finance basically involves financial intermediation, or the meeting of investors and fund raisers, we qualify as an international financial centre if investors and fund raisers from outside Hong Kong (including those from the Mainland) use the financial intermediation channels in Hong Kong.

There are important conditions for an international market in something - a commodity (spot or future) or a type of service - to be located in or re-located to a particular place. I think two of these conditions are of crucial importance. First is the existence of a cost-effective, efficient and safe market infrastructure. By this I would include the trading platform, involving the intermediaries such as the brokers and market-makers, and the payment, settlement, clearing and custodian arrangements. Second is the willingness of those supplying and demanding the tradable commodity or service and its derivatives to use the market. This in turn depends on a host of factors, and among these the liquidity of the market and its ability to perform the function of price discovery efficiently are important.

So if we aspire to be an international centre of something and attempt to establish the relevant international market in Hong Kong, we have to work on these conditions. The market infrastructure is not difficult to build, particularly the hardware side of it, given the advances in information technology in recent years. And since infrastructure items are, more often than not, public goods, the funding for them should also not be a problem because it can justifiably come from the public sector if it is not forthcoming from the private sector.

The willingness of market participants to use the market in Hong Kong is a more difficult issue. This is particularly so when there are already established international markets elsewhere. For example, why should a textile manufacturer, who needs to lock-in a particular price for his cotton (and therefore his production costs) by buying it for future delivery, not go to the established cotton futures market in the US? Not that we have a cotton futures market in Hong Kong anyway. But there are less stark examples that perhaps we can work on. The foreign exchange market, for example, is fairly active in Hong Kong. There is adequate liquidity to cope with large orders and our supporting infrastructure is arguably the best in the world, particularly in managing settlement or “Herstatt” risks. Furthermore, there should be considerable demand and supply arising from economic or trading activities in our time zone. After all, the bulk of the foreign reserves of the world are held by economies in this region.

The distribution of global activity - economic, trade, finance and commodity - relative to the location of its originator is definitely shifting to our time zone. I would not be surprised if the majority of certain global financial activities now originated  in a few jurisdictions in this region. Perhaps there is a case for the location of the relevant international markets to be shifted to this time zone as well, since trading activities and liquidity gravitate towards where the underlying demand and supply and the associated information originate. This would reduce the need for market participants to stay up late at offices, leaving their family members waiting at home.

The Mainland is becoming a very significant player in international financial markets. It is a firm policy of China to support the development of financial services in Hong Kong and maintain its status as an international financial centre. This is clearly laid down in the eleventh five-year plan. Perhaps a good way of implementing this policy would be for the Mainland’s international financial activities to make greater use of Hong Kong before going to other jurisdictions in other time zones. Of course, this should be done on market-based principles, and without compromising cost-effectiveness.

Joseph Yam
28 September 2006

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