Letter to Hong Kong
by Dr The Hon David Li Kwok-po, G.B.S., J.P.
Convenor, the Focus Group on Financial Services
21 January 2007

The start of the new year is an opportune time to review the achievements of the past 12 months, and to set new goals for the year ahead.

The year 2006 ended with the Hang Seng Index reaching 20,000 points for the first time. The “H-share Index”, which tracks the performance of the Hong Kong listed H-shares of Mainland enterprises, increased by more than ninety percent. The rise underlines the market’s optimism and confidence in the economic development of Hong Kong and the Mainland.

Indeed, China is becoming a key engine of global economic growth. The rapid development of the Mainland economy presents immense opportunities for our financial services industry. Today, Mainland enterprises represent some 50% of the total market capitalization of our stock market. The top ten IPOs listed on our Exchange all came from the Mainland.

While enjoying the fruits of success, we must not lose sight of the opportunities and challenges facing us. Maintaining a competitive edge for Hong Kong’s economy in the fast-changing twenty-first century is crucial.

As the Chinese saying goes: Not to advance is to lag behind.

In September last year, the Chief Executive convened the Economic Summit on China’s 11th Five Year Plan. The Summit provided a platform for the Government, business, professional, labour and academic sectors to review the relevance of the plan for Hong Kong.

As part of this exercise, I was invited by the Chief Executive to convene a Focus Group on Financial Services. Our brief was simple: Be bold!

We were asked to suggest a development strategy for Hong Kong’s financial sector that would outline how our financial services industry could both contribute to and benefit from the goals of the 11th Five-Year Plan.

Our Focus Group adopted two complementary approaches: a macro, strategic perspective; and a micro, market-specific perspective. In order to carry forward the latter, we set up three sub-groups: a Sub-group on the Securities Market led by the Honourable Ronald Arculli, a Sub-group on Foreign Exchange and Commodities Futures led by Mr. Gary He (Guangbei), and a Sub-group on Insurance, Reinsurance and Asset Management led by Dr. Edmund Tse (Sze-wing).

Over the past few months, the sub-groups have discussed a wide range of issues under their purviews, and consulted widely. Their recommendations were further discussed at the Focus Group level. We presented a final report to the Chief Executive earlier this week. We highlighted that Hong Kong can and should contribute in a more meaningful way to the economic development and financial reform of our country.

We proposed that Hong Kong should strive to establish itself as an international financial centre of global significance within China. This policy direction is not only important for Hong Kong’s own economic development. It is strategically important for China’s long-term development as well.

The window of opportunity to establish Hong Kong as an international financial centre of global significance will not remain open forever. If we do not act now, inertia will set in, and the business will gravitate to established financial centres overseas.

Although we have had some success in attracting initial public offerings to our Stock Exchange in recent years, market capitalization and turnover are still relatively modest by global standards. Furthermore, we are far behind other financial centres as a bond trading centre; as a currency futures centre; as a commodities futures centre; and more.

We believe that Hong Kong has the infrastructure, the transparent legal and regulatory environment, and the market depth to contribute in these areas for the benefit of the entire Mainland economy.

By establishing Hong Kong as an international financial centre of global significance within China, we will help to complement the development of other financial centres on the Mainland. Different financial centres can play their own roles based on their respective comparative advantages.

If given the green light, Hong Kong could immediately contribute to the Mainland’s financial reform and development in the following ways.

First, our established financial platform – in other words, our banking sector and our equity markets – can help raise the efficiency of financial intermediation on the Mainland.

Second, Hong Kong can facilitate the two-way cross-boundary fund flows of the Mainland, which, in turn, will help address increasing concern about the external imbalances in the economy.

Third, Hong Kong can serve as a testing ground for the Renminbi to become fully convertible.

Altogether, our Focus Group made some 80 specific recommendations.

We proposed that existing restrictions on the activity of Hong Kong financial institutions on the Mainland be reduced, and that Hong Kong financial products be approved to circulate on the Mainland. This would provide more local currency investment opportunities for Mainland residents, improving returns and providing greater financial security.

A complimentary proposal concerned the so-called “free walk” of foreign exchange holdings. We proposed that restrictions be removed on the transfer of foreign currency held by local residents for investment in and through Hong Kong. This would again provide more investment opportunities for Mainland residents.

We proposed a series of measures to broaden and deepen our securities market. We should strengthen high level liaison with Mainland regulators and exchanges. We should also take steps to make it easier for overseas issuers to list in Hong Kong. Efforts should be made to establish a more flexible regulatory and operational infrastructure for local, Mainland and overseas financial intermediaries and investors.

On the development of a Renminbi futures and options market, we proposed to consolidate Hong Kong’s lead in offshore Renminbi, and to expand the range of non-deliverable Renminbi products. As the Mainland’s foreign exchange controls are relaxed in the years ahead, we should make every effort to promote an active Renminbi futures market here.

China is one of the world’s largest consumers and suppliers of commodities and precious metals. There is increasing need for an efficient price discovery mechanism within our time zone. As a first step, we proposed that an independent consultancy study be commissioned with a view to making concrete proposals for developing a commodities futures market in Hong Kong.

Our Focus Group considers that an effective insurance market and an asset management sector are essential for efficient risk management, financial intermediation, and wealth preservation. In this regard, we proposed further liaison with the Mainland to expand the role of Hong Kong’s insurance institutions.

We also proposed that Hong Kong promote itself as a centre for international captive insurance; that we expand the opportunities for Hong Kong residents to become Mainland insurance practitioners; and that we foster the further development of the asset management industry.

Deng Xiao-ping once said, “Financial services are the core of the modern economy.”

Developing Hong Kong as an international financial centre of global significance will not only enhance China’s status and competitiveness in the world, but will also help Hong Kong grow and prosper.

Let us work together to bring Hong Kong and our country to greater heights.

Thank you.