I am delighted to be joining you at your annual dinner this
evening. Since its foundation in 1960, the Federation of Hong Kong
Industries has seen enormous changes in the business landscape of
Hong Kong. In 1960 Hong Kong was reaching the end of its first
decade as a major centre of manufacturing. Today Hong Kong is the
centre of a much larger regional manufacturing base, with some 5
million manufacturing workers employed by Hong Kong companies in
Guangdong Province alone. The size and diversity of this
manufacturing base makes the work of your organisation even more
important and challenging. The Federation has risen to the
challenges with a growing focus on the Pearl River Delta and beyond
and a stress on communication and co-operation with counterparts
beyond Hong Kong, in Mainland China, in Asia and across the world.
As industrialists, you are in command of considerable resources,
and as producers of wealth and as investors you are some of the
main users of Hong Kong's financial infrastructure. My aim in this
speech is to tell you something about recent and future
developments in that infrastructure.
But first I should point out that "Two IFC" - the title of this
speech - does not stand for the magnificent new building in which
the HKMA offices are now housed. It stands for a Mach Two
International Financial Centre. It stands for a new vision of what
an international financial centre is like. It raises questions on
how the Hong Kong Special Administrative Region Government (HKSARG)
should go about discharging its responsibility under Article 109 of
the Basic Law in "the maintenance of the status of Hong Kong as an
international financial centre".
You may wonder why I refer to Mach Two in the description of an
international financial centre. Mach is defined in the New
Oxford Dictionary of English as "the ratio of the speed of a
body to the speed of sound in the surrounding medium". Mach Two is
generally used to mean twice the speed of sound. It is also used as
an image for a higher dimension. I think it is a suitable
description of the phenomenal, dimensional jump that we have been
seeing in global finance - and in the environment in which an
international financial centre has to function.
Financial liberalisation, and consequently the globalisation of
financial markets, has placed new demands on an international
financial centre. The information technology revolution means that
the speed at which international capital travels the globe, and its
volume, have increased tremendously, to the extent that the
traditional topography or the key attributes constituting an
international financial centre are no longer adequate. The
migration of financial sector activity into cyber space has begun,
whether we like it or not. When was the last time you went into a
bank? You can now conduct most banking transactions through the
Internet, while enjoying your vacation in Phuket or having a family
reunion in Whistler. Soon it will be the financial intermediaries,
or may be even the markets themselves, that will start to migrate
into cyber space. Indeed, the boundaries arising from geography and
time zones are breaking down for many activities, particularly
those of financial markets, under the influence of globalisation
and the revolution of information technology.
What then are the attributes of a Mach Two International
Financial Centre? And how does the HKSARG discharge its
responsibility specified clearly in Article 109 of the Basic Law?
These are challenging questions and the legal responsibility is an
onerous one. But before I attempt to answer these questions, I
think I should, in view of the increasing emphasis in Hong Kong on
accountability, first draw attention to where the functions and
responsibilities of this task rest.
You may not be aware of this, but the Chief Executive of the
HKSARG, on 27 June last year, issued a public statement concerning
the responsibilities of the Financial Secretary (FS) and the
Secretary for Financial Services and the Treasury (SFST).
Specifically in relation to the status of Hong Kong as an
international financial centre, the statement specifies that:
"FS shall be responsible for determining the policy objectives
at a macro level. SFST shall be responsible for formulating
specific policies to achieve such objectives and for overseeing
their implementation through the regulatory authorities and other
organisations as appropriate".
On the same day, the Financial Secretary made a public statement
concerning the macro policy objectives in relation to, among other
things, the maintenance of the status of Hong Kong as an
international financial centre. He said that:
"An international financial centre is a place where financial
institutions from many different jurisdictions come together to
carry out financial intermediation of an international dimension.
The Government should seek to maintain and enhance Hong Kong's
status as a major international financial centre. Towards this end,
the Government should -
- maintain an appropriate economic and legal environment for an
open, fair and efficient market, including through ensuring that
Hong Kong's laws continue to provide a level playing field;
- further enhance the international competitiveness of Hong
Kong's financial services through promoting international financial
intermediation and attracting foreign savings to Hong Kong;
- develop payment, clearing and settlement systems to facilitate
the safe and efficient conduct of international and cross-border
financial services in Hong Kong; and
- strengthen corporate governance standards with a view to
fostering international confidence in our financial markets."
I think these macro policy objectives for the maintenance of the
status of Hong Kong as an international financial centre are very
appropriate. Indeed, it seems that they are so appropriate that
there has not been any difference of opinion expressed publicly
since their promulgation in June last year. It may be that this is
a reflection of a general lack of interest in the subject. I hope
not.
The Hong Kong Monetary Authority is one of the regulatory
authorities responsible for implementing the specific policies for
maintaining Hong Kong's status as an international financial
centre. You may have heard of an exchange of letters between the
Financial Secretary and the Monetary Authority, also in June last
year, which set out the division of functions and responsibilities
in monetary and financial affairs between the two. In the principal
letter, the Financial Secretary specifies that, in support of
policies to maintain the status of Hong Kong as an international
financial centre:
"The Monetary Authority, when discharging his responsibilities
for maintaining the stability and integrity of the monetary and
financial systems of Hong Kong, shall, in co-operation with other
relevant authorities and organisations, seek to promote:
- the development of payment, clearing and settlement systems to
facilitate the safe and efficient conduct of international and
cross-border financial activities in Hong Kong;
- confidence in Hong Kong's monetary and financial systems
through active participation in international financial and central
banking forums; and
- appropriate market development initiatives that help strengthen
the international competitiveness of Hong Kong's financial
services."
Against this somewhat bureaucratic but politically essential
background, let me now give you my views, for what they are worth,
on a Mach Two International Financial Centre.
As explained in the statement of the Financial Secretary last
June, an international financial centre is a place for carrying out
financial intermediation of an international dimension. This means,
I think, not only the channelling of foreign savings into Hong Kong
investments and Hong Kong savings into foreign investments. That
would be too narrow an interpretation. In any case, the Hong Kong
economy is small by international standard. Savings and
investments, in national accounting terms, amount merely to HK$400
billion a year, hardly a month's turnover in the stock exchange.
Financial intermediation of an international dimension is, I think,
meant to include also the channelling of savings from one foreign
jurisdiction into investments in another foreign jurisdiction, for
example, US savings into investments in the Mainland of China, or
vice versa, or German savings into Indonesian investments, and so
on. To aspire to be an international financial centre, we must
provide the platform whereby international financial intermediation
can be conducted in Hong Kong, and for a substantial volume of the
activity to be captured here. The question is: "How?"
We should not, of course, forget the traditional Mach One
answers. I am sure they are familiar to you all. They include:
- respect for the rule of law and independence of the
judiciary;
- a pool of skilled labour;
- a robust regulatory system with a light regulatory touch;
- a simple personal and corporate tax regime with a low tax
rate;
- a government that is responsive to financial sector
concerns;
- a stable and freely convertible currency;
- a clean and efficient government; and
- an attractive working and living environment.
All these Mach One attributes continue to be important. They lie
at the foundation of an international financial centre, and we must
all do our best to ensure their continuity, and to strengthen them
in the light of changing circumstances. But, as I said earlier, the
dimensional jump in global finance arising from the globalisation
of financial markets and the revolution of information technology
has made them inadequate on their own.
On the business side, we are now talking about, for example, the
provident fund managers in a foreign jurisdiction who have access
to up to the minute information on financial markets. They are
nimble in making portfolio reallocations among bank deposits, debt
and equity, hopping across the three different channels of
financial intermediation and looking for financial arrangements and
instruments that best suit their investment appetite. We are also
talking about the increasing number of high net worth international
citizens who carry portable computers, and who are quite capable of
managing their own finances and demanding direct access to
financial markets.
On the risk management side, we are talking about investors who
are increasingly alert to risks and skilful in managing them. Apart
from the minority who play the currency markets, the majority of
them probably do not wish, for example, to incur the exchange rate
risk of a second currency on top of that of the currency of the
economy in which they are investing their savings. We are also
talking about the increasing number of sophisticated market
participants who are aware of the payment, clearing and settlement
risks of financial transactions. Receiving a cheque does not
necessarily mean finality of payment. Striking a deal in a bond
purchase does not necessarily mean that you have immediate title
over the bonds. You do not necessarily get your US dollars or
euros, when you buy them in Asian time zone out of Asian
currencies, at the same time as you part with your money. Many of
you probably still do not care. But increasingly you will when you
realise what can happen to your money in the few hours of time
difference in this age of information technology. I hope the
wake-up call will not take the form of a major IT scandal in
international finance.
But let me offer a little comfort by telling you that the Mach
Two International Financial Centre that I have in mind should go a
long way towards meeting the business and risk management needs
that I have just referred to. In fact, we have been quietly and
effectively putting together the building blocks, plumbing and
wiring to cater for those needs and enable Hong Kong to attain that
Mach Two status. I think we are some way ahead of others in this
effort, but quite a lot still needs to be done. And we need more
time, effort, support and understanding of the community,
particularly the financial community, parts of which may have a
vested interest in the maintenance of the status quo.
What then are the additional attributes that qualify a Mach One
International Financial Centre as a Mach Two? There are, as far as
I can identify, four such attributes.
The first attribute is the more obvious one and
this is the existence of financial intermediation channels that are
characterised by stability, integrity, diversity and efficiency. I
believe our financial intermediation channels of banking, equity
and debt, and their derivatives, already enjoy these
characteristics. For many years after the series of banking crises
in the eighties, the banking system has been serving as a reliable
conduit for absorbing domestic as well as international savings,
and channelling them to those who borrow funds. Greater
competition, particularly after interest rate liberalisation, has
increased efficiency and benefited borrowers. The many mortgagers
of Hong Kong, for example, are now enjoying a mortgage interest
rate, relative to prime, that is four percentage points less than
six years ago. And greater depositor protection is on the way with
the planned introduction of deposit insurance. The sharing of
commercial as well as consumer credit information also helps those
with good credit standing to have ready access to funds, and at
favourable interest rates. As banking supervisor we attach great
importance to promoting "the general stability and effective
working of the banking system" - a requirement that is clearly
stated in the preamble of the Banking Ordinance. We take this
responsibility seriously and have been able to work with the banks
to ensure that confidence in this traditional and essential
financial intermediation channel remains high, even against most
unfavourable circumstances, such as those of the past few
years.
Similar progress has been made in the regulation of the equity
market by the Securities and Futures Commission. Long gone are the
days when the equity market was run by, and primarily for, the
financial intermediaries rather than as a channel for financial
intermediation. Long gone are the days when the market can be
closed for days and this important financial intermediation channel
brutally disrupted because the financial intermediaries got into
difficulties. There is greater realisation now of the role of the
stock exchange as a secondary market that provides the bedrock for
the primary IPO market, which channels savings into investments to
promote economic growth and development. There is now much greater
appreciation that this public interest is of importance that
overrides the private interest of financial intermediaries.
Improvements seen in that market in the past decade have gone way
beyond the governance of the market place to greater market
transparency, which has enabled it to meet the best international
standards.
But in the diversity of financial intermediation channels, Hong
Kong is still behind because the flow of funds through the debt
channel remains, relatively speaking, small. This is
notwithstanding our considerable efforts since 1990 to bring debt
issues to the market, principally in the form of Exchange Fund
paper, which now has an outstanding amount of HK$120 billion. We
have also established a reliable benchmark yield curve for Hong
Kong dollar debt of up to ten-year maturity to assist private
sector issuers in their pricing and built an efficient, paperless
debt clearing system for the market as a whole. Perhaps a long
period of low and sometimes negative real interest rates in the
nineties was a disincentive for debt issues by the private sector.
Indeed, the significantly positive real interest rates of the past
few years and low nominal interest rates seem to have made a
difference in both the number of and the amount involved in debt
issues brought to the market. We need to sustain our efforts in the
development of the debt market. The diversity of financial
intermediation channels is not only an important attribute of an
international financial centre: it is also essential to the
maintenance of financial stability. Diversity reduces dependence on
a particular financial intermediation channel, which in turn
reduces the risk of systemic problems that seriously disrupt the
normal conduct of economic activities in the event of a crisis in
that channel.
The second attribute that makes a Mach Two
International Financial Centre is the existence of a platform for
financial transactions to be conducted in the major foreign
currencies as well as in the domestic currency. Foreign savings,
particularly those with institutionalised management, tend to have
a small appetite, if any, in the assumption of currency risks in
seeking investment opportunities overseas. Hedging currency risks,
when exposed to a relatively minor currency like the Hong Kong
dollar, notwithstanding the exchange rate stability it has
demonstrated over the past twenty years, can be expensive, to the
extent of undermining the attraction of those investment
opportunities. Currency hedging is even more difficult for
investments in a jurisdiction with a non-convertible currency. I
believe foreign investors' interests in the many financial products
available in Hong Kong, not least those allowing participation in
the rapid development in the Mainland, may be considerably enhanced
if there is a choice in currency denomination for those products.
This would also reduce the large capital flows into and out of our
currency, which we get for example whenever there is a large IPO,
and strengthen currency stability.
Furthermore, from when New York goes to bed and before London
wakes up the next day, there are quite a few working hours in which
activity in the markets for financial instruments denominated in
the US dollar and the euro traditionally goes into a lull. But
financial globalisation will increasingly demand 24-hour markets,
not only those with over-the-counter trading but also those with a
physical market place in the form, for example, of a stock
exchange. Jurisdictions in our time zone collectively are a net
lender to those in the other two time zones, and much of such
lending takes the form of holdings of foreign assets denominated in
the two large currencies. About 60% of the world's foreign currency
reserves are held by jurisdictions in this time zone. Some of us
would obviously welcome, and may even demand, the facility for
managing our foreign assets in our time zone, not just to avoid
having to stay up late, but also to avoid unnecessary delays to the
execution of investment decisions. Events do occur in our time zone
that move financial markets denominated in the US dollar and the
euro.
Whether it is to facilitate the management of currency risks by
investors, or our management of currency stability, or to complete
the 24-hour trading loop for global financial instruments, there is
a growing need for a liquid platform in our time zone for
conducting financial transactions in foreign currencies. However,
it has not been easy to acquire this particular attribute of a Mach
Two International Financial Centre. The difficulty lies in the
understandable resistance against any intrusion into the
proprietary rights over the market place of individual
jurisdictions. The origins of, and the justifications for,
financial markets are invariably domestic in nature. While markets
have become global, market structures have remained largely
domestic. There are not a lot of incentives for the largest markets
to go global in terms of crossing time zones and denominating
products also in foreign currencies. The hitherto high degree of
domestic orientation of those markets means that they can afford
such an attitude, but the high savings rate of Asia and its rapid
accumulation of foreign reserves will force a change in that
orientation, if this has not already taken place. Last year the net
purchase of US Treasuries by ten Asian economies amounted to
US$193.2 billion: this is almost 60% of the net increase in the
supply of such paper. So far, there has been some progress in the
form of the global harmonisation of standards and "strategic"
linkages between equity markets in different jurisdictions, and
Hong Kong has been at the forefront of these developments. We
remain alert to further opportunities.
The platform for the conduct of financial transactions in
foreign currencies has to be supported by robust payment, clearing
and settlement systems. This is the third
attribute of a Mach Two International Financial Centre.
The revolution in information technology has sped up the
transmission of information tremendously. This also means a much
higher speed in the movement of international capital and much
higher settlement risks for financial transactions. Fortunately,
information technology can also be applied to the prudent
management of settlement risks. The question is whether the
authorities responsible for the financial infrastructure are
adequately tuned in. When you are living comfortably at home, you
seldom notice the importance of the proper functioning of the
plumbing, electricity and gas systems, until a failure occurs. A
failure in the financial infrastructure can be quite damaging to
the integrity of and confidence in the financial system, and if
this occurs in an international financial centre the implications
can be quite serious.
In this age of information technology, the payment, clearing and
settlement systems, particularly of an international financial
centre, should be structured in a manner that minimises the risks
of failure in the settlement of financial transactions. Let me make
four brief points about the nuts and bolts of these systems.
First, these systems should be designed to achieve
real time gross settlement (RTGS) at least for large financial
transactions, delivery versus payment (DVP) for the trading of
financial instruments and payment versus payment (PVP) for foreign
exchange transactions. Secondly, we have already
made significant progress in building such a financial
infrastructure. We are clearly ahead of other financial centres in
this, with operating RTGS systems for the US dollar, the euro and
of course our domestic currency the Hong Kong dollar, and these
systems are all linked up to provide PVP. Thirdly,
we intend, as the next step and as you might have guessed, to
include the renminbi in this infrastructure as soon as
circumstances permit, a move that will cement our position as the
international financial centre of China. Our experience in building
these systems puts us in a strong position to do so. We need a
lead-time of only six to nine months to include an additional
currency in our payment infrastructure. Fourthly,
I urge all of you as significant users of financial services to use
these systems and manage the settlement risks of your financial
transactions. Your bankers should be able to help you to obtain the
comfort of getting what you have bought at the same time as you
paid for it.
The fourth attribute of a Mach Two
International Financial Centre is the availability of
multidimensional and direct access to all that I have talked about
just now - the channels of financial intermediation, the platforms
for the conduct of financial transactions and the payment and
settlement systems. Direct access to financial services should be
available at the wholesale and retail levels, to financial
intermediaries and principals, including issuers and investors,
regardless of geographical boundaries. There is increasing demand
for greater convenience and more direct access, given that modern
information technology is quite capable of accommodating such
demands. The market place for finance no longer requires a physical
location. The need for financial intermediaries is also decreasing.
Technology also promises finer bid-ask spreads for your trades;
lower transaction, settlement and custodian costs; and instant
access to your computerised account holding your deposits, debt
securities and stocks of various currency denominations. Even as a
borrower, you should, on the basis of your established credit
rating and your credit history that are available to banks, be able
to get onto your computer screen competitive offers for money. This
is not too far-fetched. We are almost there for residential
mortgages, except for the need to access a multiple of bank
web-sites rather than a single one.
There is, understandably, some resistance against progress in
this direction. It is natural, for example, that the intermediaries
would resist disintermediation, even though it promises greater
efficiency in the intermediation of funds to the benefit of the
economy. Institutional rigidities, whether or not arising from the
passage of time or from technological innovation, are always
difficult to resolve to the satisfaction of the affected parties,
particularly when some are enshrined in legislation. So the
achievement of multidimensional access to financial services is
likely to take a little more time than the achievement of the other
three attributes of a Mach Two International Financial Centre. One
helpful initiative may be to develop greater appreciation of the
public interest among all concerned. But I am confident that market
forces will assist in promoting the necessary changes, with or
without the involvement of Government or the supervisory
authorities.
Ladies and Gentlemen, I hope this conducted tour of Two IFC has
not been too boring to you. My aim has been to offer some views on
how Hong Kong is developing as an IFC and what we need to do to
maintain the edge that we undoubtedly have in our financial
infrastructure. As users of that infrastructure, you will probably
have views and perspectives of your own, and I would be most happy
to discuss these and answer questions. Thank you.
Hong Kong Monetary Authority
2 March 2004
