A "complementary, mutually assisting and interactive" relationship between the financial systems of Hong Kong and the Mainland fulfils the “concept of scientific development”.
Let me continue the discussion of applying the "concept of scientific development"（科學發展觀）to the financial development of China. First of all I have to admit my lack of understanding of the "deep layers"（深層次）of meaning of the concept. I said last week that any scientific-development strategy involves setting out the objectives and the mechanisms for achieving them. So if the "concept of scientific development" is to be applied to financial development in China, we need to address these two aspects.
The overriding objective of financial development is, of course, achieving effective financial intermediation that promotes economic growth and development. The well-being of the people is served when the financial system provides them with investment choices for their hard-earned savings that suit their appetites for risk and return, and when those in need of funds to finance their economic activities can acquire them through a variety of means that price those funds in accordance with the risk profiles of the fund raisers. However, this important objective of effective financial intermediation is often forgotten. The principal objective of the financial intermediaries is to pursue profits, and one way of doing so is to embrace financial innovation, which helps improve financial efficiency, but might also store up troubles that ultimately increase the costs of financial intermediation when financial instability sets in. Sometimes the authorities are to be blamed as well. They may pursue financial-development initiatives simply because other jurisdictions have done so and, as a result, qualified for the label of international financial centre. Often financial derivative products are enthusiastically introduced, to facilitate hedging or risk management, or simply because others are doing it, at the expense of giving adequate attention to developing the basic channels for effectively mobilising savings in the economy to those in need of funds.
So we should always bear in mind the objective of effective financial intermediation and not be distracted by the creative manoeuvres of the many interested parties in this attractive business, in which large sums of money are mobilised and a tiny fraction of a deal can mean a fortune for the individuals involved. Learning from the experience of the developed markets, we should also be alert to the possibility of distortions creeping into the incentive system in the financial sector, risking erosion of prudential standards and undermining financial stability. It is also important to bear in mind the possible conflict between the public interest in achieving effective financial intermediation (with investors getting a fair rate of return for their money and borrowers obtaining funds at a fair cost) and the private interests of the financial intermediaries. When conflicts occur, the public interest should always prevail. Although "finance is the nucleus of a modern economy"（金融是現代經濟的核心）, its role is to serve the modern economy, not the other way round. Financial development should not take place for its own sake.
Bearing in mind this overriding objective of finance, the second aspect in the scientific approach to financial development is the design of an effective mechanism for achieving the objective. Here I have to point out the very special characteristic of China that has no precedent elsewhere; that there are two different financial systems under the "one country, two systems" principle（一國兩制）, and both are available to serve the financial needs of the country. The mechanism for achieving effective financial intermediation in China must involve exploiting the relative strengths of the two financial systems, addressing their relative weaknesses and maximising the synergies between them. The lack of precedents elsewhere is no excuse for neglecting the unique opportunities for achieving effective financial intermediation. Perhaps there is a need for "liberalisation of thought"（解放思想）by all concerned. But I am glad that the Premier has, in the National Finance Working Meeting of 2007, defined a "complementary, mutually assisting and interactive（互助、互補和互動）relationship" for the two financial systems. For the good of the country and very much in accordance with the "concept of scientific development", the details of the relationship between the two financial systems should be worked out expeditiously.
Joseph Yam
19 June 2008
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