Financial Secretary, Mr Donald Tsang,
at the Breakfast Briefing for Private Sector Participants
at 1997 WBG/IMF Annual Meetings

Saturday, September 20, 1997

"Hong Kong : At the Centre of International Finance and Business"


Good morning, ladies and gentlemen,

First of all, I would like to thank the Trade Development Council for organising this briefing. It is my honour to speak to the most distinguished financiers coming from all over the world this morning.

Just a few months ago, the IMF classified Hong Kong as an "advanced economy". This was a vote of recognition of Hong Kong's economic performance. Now, the World Bank and IMF are holding their Annual Meetings in the Hong Kong Special Administrative Region (HKSAR) within 90 days of the resumption of Chinese sovereignty. This is a vote of confidence in the HKSAR, trusting that Hong Kong's prosperity will continue under the "one country, two systems" concept, or I should say the "one country, two systems" principle as the concept has been realised and is being practised. This principle emphasises the importance of maintaining Hong Kong's capitalist system. The legal instrument of implementing this principle is the Basic Law, our mini-constitution, which stipulates that Hong Kong will enjoy a high degree of autonomy in all our affairs other than foreign affairs and national defence.

Financial Autonomy

In financial and monetary terms, this means that within one country, there are two currencies, two monetary systems and two monetary authorities. Under the Basic Law, the SAR Government has full autonomy in formulating its own monetary and financial policies. We will continue to safeguard free flow of capital. The Hong Kong dollar remains the only legal tender in Hong Kong as before. In performing its central bank functions, the Hong Kong Monetary Authority is fully independent from its counterpart in the Mainland - the People's Bank of China. The US dollar link is still being maintained. The stronghold for maintaining the link is the combined assets of the Exchange Fund and the Land Fund totalling US$81 billion as at the end of July 1997. This link has contributed significantly to the monetary stability of Hong Kong for 14 years since its inception in 1983 and will continue to do so.

Market Performance after the Reunification

Before the reunification, there were sceptics who cast doubt on whether the guarantees enshrined in the Basic Law would be honoured at all. Facts have dispelled such scepticism. Business is as usual here. The strong feeling of stability and enthusiasm is palpable everywhere you go in Hong Kong. This explains why investors have still strongly favoured Hong Kong after 1 July 1997. Let us look at the stock market. Turnover at the Hong Kong Stock Exchange has increased substantially since the beginning of this year. The average daily turnover since 1 July has been US$2.5 billion per day, which is about 50% higher than the average for the first six months. We saw some adjustments in major international and Asian securities markets at the end of August and in early September. Being an international financial centre with an entirely open regime, Hong Kong was no exception. However, the market has functioned in an orderly way, thanks to the much improved trading and settlement systems and the pre-emptive measures taken by the Securities and Futures Commission, the Stock Exchange, the Futures Exchange and the Clearing Houses. Haphazard turbulence has not shaken our strong fundamentals at all. I am confident that the liquidity, the transparency and sound regulation will continue to be the underlying strengths of Hong Kong's market.

At the same time, we are also committed to further developing our market to meet different investors' needs. A couple of months ago, we began trading regional derivative warrants and convertible bonds on the Hong Kong Stock Exchange. Through linking up the Stock Exchange of Hong Kong with the Philadelphia Exchange and the Hong Kong Futures Exchange with the New York Mercantile Exchange, we have also enabled trading on their currency options and commodities futures contracts respectively in Hong Kong during Asian business hours. More recently, we have introduced two red-chip index futures to the market. I am sure you all know that red-chips refer to Hong Kong or overseas-incorporated companies with a significant shareholding by Mainland Chinese entities and usually with the majority of their assets in Mainland China. In less than a week's time, we will be putting the Hong Kong Interbank Offer Rate futures contracts for trading on the Automatic Trading System of the Hong Kong Futures Exchange. All of these are indications of our commitment to maintain and enhance Hong Kong's competitiveness and our readiness to answer the market needs.

Hong Kong as China's international financial centre

The introduction of red-chip securities products in the Hong Kong markets heralds an even closer economic relationship between the Mainland and Hong Kong. Hong Kong has become the most important capital-raising centre for Mainland Chinese enterprises. As at the end of August 1997, there were 34 Chinese state-owned enterprises listed in Hong Kong, having raised about US$7 billion through our market. More such listings are in the pipeline. Financial transactions between the Mainland and Hong Kong have grown substantially. At end-March 1997, external claims by Hong Kong's authorised institutions on Mainland banks and non-banking entities amounted to US$38 billion and US$9 billion respectively. Their corresponding external liabilities to banks and non-bank customers in the Mainland amounted to US$36 billion and US$2 billion.

The economic outlook for the Mainland remains favourable. Indeed, a recent World Bank report on global economic prospects has named Mainland China among the "Big Five" - the new engine house for world growth over the next quarter century. Most analysts put the forecast real GDP growth rate for 1997 at around 9-11%. Over the medium term, the economy is targeted to grow by an average of about 8% per annum in the period up to 2000. Against this favourable background, we expect Hong Kong's role as China's international financial centre will grow in parallel. For Hong Kong is not just privileged by the natural linkage with Mainland China, it also has the best concentration of infrastructure and human resources in the world to serve the Mainland's huge funding needs. We have already mapped out plans to maintain this position in the 21st century.

First, we will encourage the development of new financial products in the markets. In the debt market, the soon-to-be-introduced Mandatory Provident Fund scheme will create huge demand for quality debt instruments. The newly founded Mortgage Corporation intends to start its first purchase of mortgages to build up its portfolio in the last quarter of 1997, with a view to securitising mortgage soon after. On the stock market, I have earlier mentioned red-chip securities products. Even without a crystal ball, I can envisage that more red-chip-related derivatives will flourish. Moreover, we will continue to examine the feasibility of trading Depository Receipts on the Hong Kong Stock Exchange and the setting up of a Second Board for growing small and medium size enterprises. Our efforts in the exploration and development of new products to respond to market needs will continue.

Second, we will gear up efforts to upgrade the infrastructure in the financial services sector to meet future needs. On the banking front, we introduced a Real Time Gross Settlement System for our interbank payment system to reduce the settlement risk last year. Our plan is to link up Hong Kong's local payment system with that of the Mainland to provide a Payment versus Payment facility for exchange transactions between the Hong Kong dollar and Renminbi. For the stock market, the Exchange has expanded the capacity of the computer system so that it can deal with a daily turnover of US$6.5 billion and eventually US$13 billion. For the debt market, we plan to establish bilateral linkages with the domestic central depositories in the region to facilitate cross border trading and investment in debt securities. We are also looking at the linkage and integration of the various settlement and clearing systems. Equipped with such sophisticated infrastructure, Hong Kong is in the best position to function as China's international financial centre.

Third, we recognise the importance of human resources. With a service sector accounting for over 80% of the GDP, we have been adapting our education system to the service-based economy. The future focus will be on information technology. We aim to strengthen students' computer knowledge at all levels. That is why the Chief Executive and I were especially interested in visiting institutes in this field during his recent visit to Singapore and mine to Australia. Another area of emphasis is language skills. Our aims are to raise the students' language proficiency in both English and Chinese and enable them to command Putonghua which is the main language of our trade with the Mainland. In the years ahead we will strive to ensure an ample supply of skilled workers and professionals for the financial sector through training and research.

Conclusion

As a concluding remark, I wish to say that this grand event means a lot to the people of Hong Kong. The World Bank and IMF hold their annual meetings outside Washington only once in every three years. The event has not only brought the top officials of the World Bank and IMF and distinguished guests like yourselves to Hong Kong. It has also drawn the world's attention to how Hong Kong has been doing since 1 July 1997. You and other participants of the meetings and seminars will have the chance to bear witness to our way of life in Hong Kong uninterrupted across July 1. Perhaps, the single difference that you can sense is the removal of the air of uncertainty and impossible vitality of the city. With the rapid economic development and reform in the Mainland, Hong Kong strides ahead at the same pace and serves as China's foremost international financial centre in the next millennium.

Thank you.