I would like to thank the Hong Kong Association of Banks for
inviting me to Hong Kong to meet with you and to attend this dinner
function. Although this is my first visit to Hong Kong since taking
up my post in the central bank, we follow closely the economic
developments of Hong Kong. All of you have contributed to the
prosperity of Hong Kong. I greatly appreciate the wisdom and the
spirit of the people of Hong Kong. They are industrious and always
striving for the better. Hong Kong's success is partly attributable
to the characteristics of its people. We have good reasons to
believe that through our joint efforts, Hong Kong will have an even
better future.
I would like to take this opportunity to give a brief
description of the current situation of the economic and financial
reforms in the Mainland as well as the basic principles and
policies towards the financial relationship between China and Hong
Kong after 1997. In addition, I would also say something on the
co-operation and joint development between the financial sectors of
China and Hong Kong.
Mainland China's economy is experiencing stable
development
First of all, I would like to talk about the financial and
economic conditions of China which is a hot topic for discussion
among professionals from the Hong Kong financial sector. This is
because Hong Kong's future is closely linked with the economic and
financial developments of China.
China's economy began to pick up in 1992 with a dynamic national
economy. However, there was also hyper-inflation. During the latter
half of 1993, the Chinese Government began to adopt an
appropriately tight monetary policy. The adoption of this policy
means firstly, price increase should be kept at a level lower than
the rate of economic growth. Secondly, the growth of money supply
should be slightly above the sum of the rate of economic growth and
the target rate of price increase. Thirdly, indirect monetary
instruments should be used more frequently for relating money
supply so that the economy will not be too volatile. Our efforts in
the past three years are beginning to pay off. We have successfully
curb inflation by making macro-economic adjustment.
Firstly, the growth of money supply has slowed down. It is
expected that the total money supply at the end of this year will
be 26% higher than the previous year. This growth rate is 3.7%
lower than the average annual growth rate during the period under
the "Eighth Five-Year Plan".
Secondly, price increase has slackened noticeably. During the
period from January to October, retail price has risen by 6.4% as
compared to the same period last year. It is expected that the
growth rate for the whole year will be around 6.5%.
Thirdly, the economy continues to grow at a relatively high
rate. During the period from January to September, the GDP rose by
9.6%. It is anticipated that the annual growth rate will exceed
9.5%.
Fourthly, our foreign reserves continue to grow. As at the end
of October, our foreign reserves reached US$98.8 billion. We are
certain that our reserves will exceed US$100 billion by the end of
the year. Trade surplus is estimated to be over US$100 billion this
year. There is also US$40 billion of foreign direct investment. The
supply of foreign exchange exceeds demand and the exchange rate of
the Renminbi remains stable. Moreover, the Renminbi has become
fully convertible in the current account. Our experiences prove
that we are right in adopting an appropriately tight financial and
economic policy. Our ability in performing macro economic
operations has improved greatly and our achievements are recognised
internationally.
Despite the foregoing, several major problems remain to be
solved. The percentage of financial revenues in GDP is still
lowering. The asset quality of banks still need to be improved. The
basic elements of the agricultural sector remain relatively weak
and it is unlikely to have any improvement in the operational
efficiency of state-owned enterprises in the short run.
In view of the current economic situation, focus of the economic
and financial reforms in the coming year will be placed on
promoting reform of the economic system and changing the mode of
economic growth. We will continue to adopt an appropriately tight
financial and monetary policy. Further efforts will be made to
adjust the economic structure so as to foster new areas of economic
growth. In order to ensure steady growth of the national economy,
efforts will also be made to develop domestic as well as overseas
markets. Based on the above considerations, it is desirable that
next year's target annual GNP growth rate should be set at 8-9%
while the retail price increase to be contained at a level below
6%. In order to achieve these targets, the People's Bank of China
is prepared to:
- Control money supply. Our preliminary proposal is to contain
the increase of next year's total money supply (M2) within the
range of 23% to 25%.
- Adjust the credit structure. The total amount of loans to the
agricultural sector will be increased. Economic integration and the
setting up of conglomerates will be encouraged. Efforts will also
be made to promote the development and sale of residential
property.
- Monetary operations. Employ more frequently monetary policy
instruments such as interest rate policy, reserve requirement and
open market operations to regulate money supply.
- Deepen financial reforms. Reforms of state banks should be
stepped up. New commercial banks will be set up. The policy of
transforming rural credit co-operatives into co-operative financial
institutions will be maintained. Direct financing will be developed
in a prudent way with better management. In addition, the financial
sector will continue to open up.
- Risk management. Continue the rationalisation of financial
order and prevent and eliminate financial risks.
It is envisaged that China's economy and society will continue
to develop steadily in the coming years and objectives embodied in
the "Ninth Five-Year Plan" can be achieved. China will enter the
21st Century with a dynamic economy and society.
Basic principles and policies governing the financial
relationship between Mainland China and Hong Kong after 1997
As China and Hong Kong have different currencies and financial
systems, people from Hong Kong as well as the international
community are very much concerned with how the principle of "One
country, two systems" can be implemented as regards financial
issues. It is because the implementation of this principle has
direct bearings on the prosperity and stability of Hong Kong as
well as the status of Hong Kong as an international financial
centre.
"The Basic Law of the Hong Kong Special Administrative Region of
the People's Republic of China" lays down specific provisions
relating to Hong Kong's status as an international financial
centre, its monetary and financial policies, the status of the Hong
Kong dollar and the issuing arrangements, capital flow and the role
of the Exchange Fund. Our national leaders have reiterated in
different occasions that the People's Bank of China which is the
central bank of the People's Republic of China should insist on
implementing the "Basic Law" and the principle of "One country, two
systems". We should also protect the financial relationship between
Hong Kong and the Mainland which can be summarised as "one country,
two currencies, two monetary systems and two monetary authorities"
within a sovereign state and deal with issues relating to this
relationship in an appropriate manner.
At the IMF/World Bank Annual Meetings which was held in late
September this year, I stated in my speech our principles governing
the financial relationship between the Mainland and Hong Kong. Mr
Chen Yuan, the Deputy Governor of the People's Bank of China also
presented these principles in a systematic manner at the Bank of
England seminar which was held in September this year. Both the
People's Bank of China and the Hong Kong Monetary Authority (HKMA)
have been offered membership in the Bank of International
Settlements. This is a clear demonstration of the above principles
and shows that the mutually independent financial relationship
between the Mainland and Hong Kong are widely accepted by
international financial organisations.
Now, I am going to give an outline of the main issues relating
to the financial relationship between the Mainland and Hong Kong
after 1997.
Hong Kong will continue to maintain its own system of currency
issuance and management after 1997. The Hong Kong dollar and the
Renminbi will circulate as legal tender in Hong Kong and the
Mainland respectively. Hong Kong's existing note-issuing
arrangements will remain unchanged. Moreover, China supports Hong
Kong's commitment to the maintenance of the linked exchange rate
system.
It follows from the two mutually independent monetary systems of
the Mainland and Hong Kong that the two monetary authorities, i.e.
the People's Bank of China and the HKMA will also be mutually
independent. The HKMA will be accountable solely to the Hong Kong
Government. The People's Bank of China will not take the place of
the HKMA and will not set up any office in Hong Kong. The People's
Bank of China will strengthen further its present sound
co-operation with the HKMA. The HKMA has made great contributions
to the stability of the local currency and the supervision of
financial institutions. Such efforts by the HKMA help promote the
prosperity and smooth transition of Hong Kong.
The Hong Kong Government will continue to supervise local
financial institutions. The supervision swill continue to be
undertaken in accordance with Hong Kong's laws and international
rules and practices. Mainland financial institutions in Hong Kong
shall not enjoy any privileges. They shall be regulated by the
relevant supervisory authorities in Hong Kong.
The Exchange Fund of Hong Kong shall be managed and controlled
by the Hong Kong Government. The financial revenues of the Hong
Kong Special Administrative Region shall be used exclusively for
its own purposes and the Chinese Government shall not levy taxes in
Hong Kong. Moreover, China will not draw on or resort to Hong
Kong's Exchange Fund or other assets in any way and for any
reason.
All financial businesses between the Mainland and Hong Kong will
be conducted in accordance with the rules and practices of
international financial activities. Claims and liabilities between
institutions from the Mainland and those from Hong Kong will
continue to be regarded as external claims and liabilities. When
participating in the Hong Kong market, Chinese entities will have
equal treatment as other international and local market
participants.
Apart from the above, it is also important for Hong Kong as an
international financial centre to continue to develop its
international monetary relations and participate in the activities
of international and regional financial institutions. There are
therefore provisions in the Joint Declaration and the Basic Law
that Hong Kong may, on its own, maintain and develop financial
relations with other countries, regions and relevant international
organisations after 1997. The 1997 World Bank/IMF Annual Meetings
will be held in Hong Kong just a few months after China resumes the
exercise of sovereignty over Hong Kong. This is a magnificent
financial event and I am confident that it will be successful.
The strengthening of financial co-operation and the promotion
of economic prosperity and stability between the Mainland and Hong
Kong
Mainland China and Hong Kong have close financial links with
each other. Since the implementation of financial reforms and the
open-door policy, such links have been strengthened further. It is
necessary to further enhance such a mutually beneficial
relationship between the two places.
First of all, the Mainland and Hong Kong should work together
for the prosperity, stability and smooth transition of Hong Kong.
China's commitment to the implementation of the "One country, two
systems" principle is increasingly accepted and appreciated by the
people of Hong Kong and the international community. Worries and
doubts about the future of Hong Kong which emerged in the early
1980's have largely been subsided. We are pleased to note that the
financial situation in Hong Kong is heading towards a smooth
transition. We are confident that Hong Kong will enjoy financial
stability before and after 1997. Even though there may be some
fluctuations in Hong Kong's financial market, we believe that the
HKMA is fully capable of handling these situations satisfactorily.
If necessary, the People's Bank of China will, at the request of
the HKMA and in accordance with the Basic Law and market practices,
offer support to the HKMA. Financial stability in Hong Kong before
and after 1997 is not only essential to the prosperity of Hong Kong
and China but also to the financial stability in the Asia Pacific
Region. We are confident that the international financial
community, including the central banks in the Asia Pacific Region,
will be actively involved in the efforts to maintain Hong Kong's
financial stability.
Secondly, the two places should work closely together to
maintain and enhance Hong Kong's status as an international
financial centre. Hong Kong has some unique competitive advantages
in being an international financial centre in a number of aspects
such as opportunities, geographic location and people. I have made
it clear to the international financial community in many occasions
that after China's resumption of sovereignty over Hong Kong, the
status of Hong Kong as an international financial centre will not
be undermined but rather, it will be further strengthened. This is
because the many unique advantaged which Hong Kong enjoys now will
continue to exist after 1997. There is also the Basic Law which
guarantees that Hong Kong will remain unchanged. More importantly,
with the sustained, rapid and healthy growth of the economy in
China - the vast hinterland on the back of Hong Kong, numerous
opportunities will be created for Hong Kong's financial sector. All
these are favourable conditions for the maintenance and
strengthening of Hong Kong's status as an international financial
centre. Economic developments in the Mainland have given rise to
strong demand for funds and Hong Kong will continue to be our major
funding centre. We will strengthen our coordination and
co-operation with Hong Kong in areas such as the development of
markets and infrastructures in response to the needs of the
financial developments in both places. I have met with many central
bankers and major international bankers and they all agreed that
Hong Kong should be able to maintain its status as an international
financial centre as regards the future relationship between Hong
Kong and Shanghai, I think as a national economic centre,
Shanghai's financial status will become increasingly important.
However, it will not be possible for Shanghai to become an
international financial centre in the longer term and it will not
replace Hong Kong.
Thirdly, the Mainland and Hong Kong should co-operate fully with
each other so as to promote prosperity and stability. Since the
implementation of economic reforms and the open-door policy,
financial co-operation between the two places has been strengthened
which in turn, helps to develop economic and trading ties. At
present, China and Hong Kong are each other's major investment and
trading partner. As at the end of 1995, Hong Kong's total
cumulative investment in China reached US$78.6 billion, accounting
for 58% of total foreign investment in China. In 1995, 90% of the
syndicated loans to China was arranged in Hong Kong and 90% of the
Chinese companies listed on overseas stock markets have their
primary listing in Hong Kong. The volume of import and export trade
between the two places amounted to US$44.6 billion last year,
accounting for 15.9% of China's total external trade. If Hong
Kong's entrepot trade which came from China is also taken into
account, the figure reached US$124.1 billion, accounting for 34.1%
of Hong Kong's total external trade in that year. The number of
mainland financial institutions in Hong Kong is on the rise and
vice versa. These institutions are going to provide a whole range
of financial services which are conducive to the continuous and
stable development of the economic relationship between the two
places.
China will further open up its financial markets. This includes
the opening up of more districts, the gradual relaxation of the
Renminbi business and the gradual introduction of the investment
banking mechanism. The Hong Kong financial sector will directly
benefit from these moves since they will offer numerous business
opportunities. In the course of stepping up our pace of financial
reforms, we have to keep on learning from the advanced
international management experiences and to provide training to
outstanding personnel. We hope that the financial community in Hong
Kong will provide us with assistance and support in these
areas.
Before ending my speech, I would like to point out that the Hong
Kong Association of Banks has contributed a lot in assisting the
HKMA to ensure the financial stability of Hong Kong. I hope all of
you will continue to give your support to the HKMA and play a more
active role in promoting economic and financial developments in
Hong Kong and its smooth transition. I would also like to announce
that an association of Mainland banks will be formed this year. I
hope that the two banking associations will strengthen their
exchanges and co-operation and work together for a more prosperous
future.
A delegation from the Hong Kong Association of Banks will visit
Beijing in a few days. I would like to welcome the delegation on
behalf of the People's Bank of China. I will meet with some of you
again on that occasion. We can further exchange views on the
strengthening of co-operation between the banking sectors on the
Mainland and in Hong Kong.
Thank you.
