In this first in a series of three articles on financial infrastructure, Joseph Yam explores how developing a cost-effective and efficient financial infrastructure helps to promote Hong Kong's role as an international financial centre.
Readers may be aware of my frequent references, in this column and elsewhere, to the financial infrastructure. I realise that this is not exactly a subject of general interest, even within the financial community. But it is of such great importance to Hong Kong that I feel I should draw special attention to it in the hope of attracting constructive comment on it. I hope therefore that readers, particularly those with an interest in monitoring what we do in the HKMA, will not be put off by this series of three Viewpoint Articles, beginning this week, on this somewhat technical subject.
We all know that Hong Kong aspires to develop its position as an international financial centre. Indeed, there is a requirement, spelt out in Article 109 of the Basic Law, that "the Government of the Hong Kong Special Administrative Region shall provide an appropriate economic and legal environment for the maintenance of the status of Hong Kong as an international financial centre". The Government of the Hong Kong SAR, of course, takes this responsibility seriously. So does the HKMA, as the government agency most closely involved in this field. Indeed, one of our main policy objectives is "to enhance the efficiency, integrity and development of the financial system, particularly payment and settlement arrangements."
In attempting to figure out how we can best discharge our responsibility, we first have to be clear about what constitutes an "international financial centre". I must confess I did have difficulty with this. The term "international financial centre" is not defined in the Basic Law. Nor are there internationally accepted criteria that can be relied on for guidance. We often refer to quantitative measures of, for example, the number of international banks present, or the size of the stock market in terms of market capitalisation, or the turnover in the foreign exchange market. While these measures are still being used, they are becoming less meaningful. Globalisation and the advance of information technology have been changing, and will continue to change, the way financial transactions are conducted. Increasingly, there is less of a need for physical presence to access a particular market, as the platforms for financial transactions take wing and migrate into cyberspace. So in addressing this matter we had to go back to basics. We took the view that, to facilitate growth and development in any economy, there is always the crucial need for savings to be channelled efficiently into investments, in other words, for money to be mobilised productively for the economy. This process is commonly described in the financial sector as "financial intermediation" where the needs of those who have money to save and those who require money to invest are matched through an intermediary channel. And there are three internationally recognised channels for financial intermediation, namely, banking, debt and equity. On this basis, we took the view that an international financial centre is where financial intermediation of an international dimension takes place. For Hong Kong to qualify for the label of international financial centre, these three channels of financial intermediation in Hong Kong should be a popular place both for foreign savings and for fund raising by foreign entities.
The more important question then is how to achieve, if we have not already done so, and how to maintain this popularity. Specifically, given what is spelt out in Article 109 of the Basic Law, there is the question of what the Government of the Hong Kong SAR should do to "provide an appropriate economic and legal environment for the maintenance of the status of Hong Kong as an international financial centre". Thankfully, we do not have to start from scratch in this task. Given that, by whatever measure, Hong Kong has for some time been recognised as an international financial centre, the existing economic and legal environment must have been more or less right. Our task appears to be just one of maintaining it.
But I seriously doubt if this is enough. Nothing is permanent. Given the keen competition from other financial centres in the region and the profound changes that we have been seeing in international finance, clearly we should always strive to do better. This is where the financial infrastructure comes in. In this technological age, time is of the essence, financial transactions are priced in terms of the finest of margins, and there is a much greater emphasis on risk management. I believe that those engaging in international financial intermediation activities will increasingly favour a financial infrastructure that is safe, cost-effective and efficient. This is where the competitive advantage of an international financial centre lies. Correspondingly, such a financial infrastructure has become a crucial part of that "appropriate economic and legal environment" mentioned in the Basic Law. The Government of the Hong Kong SAR has a responsibility to provide it. In the next two Viewpoint Articles I shall discuss how we should do this with reference to two important elements of the financial infrastructure: the platform for international financial intermediation and the settlement system.
Joseph Yam
24 May 2001
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More information on financial infrastructure can be found here.
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