Improved IPO payment arrangements at both wholesale and retail levels will strengthen Hong Kong's role in channelling foreign savings into Mainland investments.
As the Hang Seng Index posts gains and there is higher turnover in the stock market, Initial Public Offerings (IPO) of shares are likely to increase. This is to be welcomed, particularly when the IPOs are arranged for Hong Kong companies as well as Mainland companies. Not only is the stock market, which provides the secondary market liquidity necessary to support the IPOs, serving the financial intermediation needs of Hong Kong, it is also doing so increasingly and meaningfully for the Mainland. There are probably more IPOs of Mainland companies in terms of funds raised in Hong Kong than on the Mainland now, and I am glad that our financial system is playing this important role of channelling foreign savings into Mainland investments. I hope also that, in time, a way will be found for the financial system of Hong Kong to serve the Mainland in other areas as well, in particular, in channelling domestic savings of the Mainland into foreign and Mainland investments. The safety, integrity, diversity and efficiency of financial intermediation on the Mainland are very important for sustaining economic growth and development there. Hong Kong's financial system has much to offer in this respect. Restrictions and controls on the Mainland are for the time being limiting the extent that Hong Kong can contribute to the economic prosperity of the Mainland. But the benefits of financial liberalisation are clear and we can look forward to greater appreciation and use of Hong Kong's strength.
As IPO activities, big and small, pick up, there is an obvious need on the part of the financial institutions organising them to ensure that things go smoothly. Large amounts, large numbers of retail investors, and high degrees of over-subscription may be involved. Those operating the relevant components of the financial infrastructure of Hong Kong will need to anticipate the sharp increase in the flow of money associated with these activities. At the wholesale level, where large amounts of interbank payments are involved, the Real Time Gross Settlement system should have no difficulty in coping with, as long as timely and correct payment instructions are given. Often, however, because of the difficulty in predicting the level of over-subscription, the re-cycling of funds between the receiving banks and the banks of the investors is a potential source of problems. To pre-empt these from occurring, the receiving banks and the investors' banks should of course make flexible arrangements between themselves prior to the event and should closely monitor the flows on the crucial days. These may involve temporary increases in interbank credit lines. As banking supervisor, we do not necessarily have a view on this, other than emphasising the need as always for the relevant risks to be properly managed, in this case through properly structuring the temporary arrangements ahead of time and in a manner that is consistent with the HKMA's guidelines.
At the retail level, where there are many more people and many more transactions involved, the demands that will be put on the relevant payment mechanisms, in particular, on the receipt and the clearing of cheques, can be substantial. If it is the intention to continue to use cheques for this purpose, banks will need to devote adequate resources for this demanding task and make satisfactory and convenient arrangements for their customers. It may be that alternative mechanisms for organising IPOs and alternative means of payments should be explored, and I think justified, in order to improve overall efficiency and minimise possible disruptions. The financial infrastructure is there to cope with the financial traffic flows safely and efficiently, and, as the authority now with responsibility for overseeing the proper functioning of payment systems in Hong Kong, the HKMA will do its best to ensure that this is the case.
There is of course at the moment much liquidity in the banking system. It should therefore not be difficult for receiving banks to organise the recycling of funds without causing undue tightness in the interbank market and volatility in short-term interest rates. In the unlikely event of hiccups at this wholesale money market level, we stand ready to provide temporary liquidity, as all central banks do in unusual circumstances.
Joseph Yam
2 December 2004
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