Hong Kong as an International Financial Centre

Hong Kong's favourable geographical position, bridging the time gap
between North America and Europe, its strong links with China and other
economies in South-East Asia and excellent communications with the rest
of the world have helped Hong Kong to develop into an important
international financial centre. The absence of any restrictions on capital
flows into and out of Hong Kong is another important factor.

Hong Kong's financial markets are characterised by a generally high
degree of liquidity and operate under effective and transparent regulations
which meet international standards. The educated work force and the ease
of entry for professional expatriate staff further contribute to the
development of financial markets in Hong Kong.

Hong Kong has a very strong presence of international financial
institutions. At the end of the year, there were 164 foreign-owned banks.
Of the world's top 100 banks in terms of monetary assets, 81 have
operations in Hong Kong. In addition, 164 subsidiaries or related
companies of foreign banks operate as restricted licence banks and
deposit-taking companies, and 159 banks have representative offices.

The interbank money market is equally well established. Wholesale
deposits are traded actively among local authorised institutions, and
between local and overseas institutions, with an average daily turnover of
$183 billion in 1997. The interbank money market is mainly for short-term
money, with maturities ranging from overnight to 12 months, for both
Hong Kong dollars and foreign currencies.

The traditional lenders of Hong Kong dollars are mostly the locally
incorporated banks, while the major borrowers are foreign banks without
a strong Hong Kong dollar deposit base. At the end of the year, the Hong
Kong interbank market accounted for 18 per cent of the Hong Kong dollar
liabilities of the banking sector.

Hong Kong also has a mature and active foreign exchange market, which
forms an integral part of the global market. The link with other overseas
centres enables foreign exchange dealing to continue 24 hours a day
around the world. The latest survey co-ordinated by the BIS shows the
daily average foreign exchange turnover in Hong Kong in April 1995 was
US$91 billion, which represented 6 per cent of the world total and the
fifth-largest in the world.

Hong Kong's derivatives market is among Asia's largest, reflecting the
increased sophistication of its financial markets. Currency derivatives
contracts (including forwards, currency swaps, options and futures)
registered an average daily turnover of US$56 billion in April 1995 and the
outstanding contracts amounted to US$970 billion. Interest rate
derivatives recorded a turnover of US$18 billion per day and the
outstanding contracts US$666 billion. Derivatives on stocks and
commodities are less frequently used, with the outstanding amount at
US$8 billion.

The local stock market was on a generally upward trend in the beginning
of the year but was hard hit by the Asian currency crisis from August.
For the first seven months of the year, the bullish Hang Seng Index rose
gradually from 13 451 to its record intraday high of 16 820 on August 7.
However, as the regional economies deteriorated and the Hong Kong-US
dollar peg was under attack, the Hang Seng Index plunged to 10 723 at
the end of the year. Despite severe volatility and uncertainty, Hong Kong's
market has weathered the financial turmoil strongly and confidently.
During the period, the operation of both the local stock futures markets
has remained orderly and efficient. It is also fair to say that it fares
strongly vis-a-vis other regional markets in terms of the impact of the
challenge on the market taking into account the fact that the peg with
US dollars has basically remained intact. Average daily turnover in the
local stock market was $15.5 billion in 1997, which was a remarkable
growth compared with the $5.67 billion seen in 1996.

At the end of the year, 658 public companies were listed on the Stock
Exchange of Hong Kong Ltd. (SEHK). With a total market capitalisation
of $3,202.6 billion, the Hong Kong stock market ranked eighth in the
world and second in Asia. The 82 newly-listed companies raised a total of
$81.7 billion. Besides new share issues, funds were tapped through rights
issues ($16.5 billion) and private placements ($78.2 billion).

As regards stock options, contracts in respect of 15 other stocks had
been launched by the end of the year. During the year, the futures
exchange also traded in three currency futures and 15 stock futures
contracts.

Hang Seng Index Options and Hang Seng Index Futures remained actively
traded. Average daily turnover for index options increased from 4 393
contracts in 1996 to 4 683 in 1997. Index futures trading averaged 26 313
contracts a day in 1997, compared with 18 699 a day in 1996.

Hong Kong has an active gold market, in which the main participants are
banks, major international bullion houses and gold trading companies. It is
commonly known as the Loco-London gold market, with process quoted
in US dollars per troy ounce of gold of 99.95 per cent fineness and with
delivery in London. Trading in this market has expanded in recent years.
The price of Loco-London gold moved between US$283 and US$362 in
1997. The price of gold dropped from US$367.30 per troy ounce at the
end of 1996 to US$288.60 per troy ounce at the end of the year.

The Chinese Gold and Silver Exchange Society operates one of the largest
gold bullion markets in the world. Gold traded through the society is of 99
per cent fineness, weighted in taels (one tael equals approximately 1.2 troy
ounces) and quoted in Hong Kong dollars. Prices closely follow those in
the other major gold markets in London, Zurich and New York. The price
of gold at the Chinese Gold and Silver Exchange Society exhibited
movement similar to that of Loco-London gold. At the end of the year,
gold cost $2,670 per tael compared with $3,409 at the end of 1996.
Turnover on the exchange totalled 16.4 million taels in 1997.

The number of authorised unit trusts and mutual funds increased to 1 473
at the year's end, from 1 311 a year earlier.

The Hong Kong insurance industry also has a strong international
presence. Among the 215 authorised insurers at the end of 1997, 114
were overseas insurers from 27 countries or the Mainland, while 13 of
the world's top 20 insurers are authorised to carry on insurance business
in Hong Kong either directly or through a group company. Professional
reinsurers number 22, which includes most of the top reinsurers in the
world. Latest statistics show that gross premium income in 1996 reached
$46.4 billion, representing about 3.8 per cent of Hong Kong's GDP.

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