Increasing Financial Links Between Hong Kong
and the Mainland

Hong Kong has been serving as the Mainland's primary channel for
international fund-raising but the cross-border capital flows have by no
means been one-way. Direct investment and inter-bank fund flows in both
directions have grown rapidly. Hong Kong banks have also stepped up
their business activities in the Mainland.

Hong Kong has facilitated the Mainland's overseas fund-raising activities
via our equity and debt markets. At the end of 1997, 39 Chinese
state-owned enterprises were listed in Hong Kong through the issuance of
H-shares, raising a total of more than $58.9 billion.

Cross-border fund flows among financial institutions have also grown
rapidly. Over the years, the Mainland has accumulated a substantial
amount of funds in Hong Kong dollars from trading activities and inward
investment. These funds are placed with financial institutions in the
Mainland and subsequently channelled back to Hong Kong through the
inter-bank market.

Since 1980, external liabilities of authorised institutions in Hong Kong to
financial institutions in the Mainland have grown at an average rate of over
37 per cent per annum to $290 billion by December 1997. Over the same
period, claims on financial institutions in the Mainland by authorised
institutions in Hong Kong registered an annual growth of about 24.5 per
cent to $338 billion.

Many banks from Hong Kong have expanded their businesses in the
Mainland. A total of 18 locally incorporated banks had established 34
branches and 31 representative offices there at the end of 1997.

Portfolio investment in the form of 'China funds' has also become
increasingly popular. By the end of 1997, 28 such funds, amounting to
some US$1.3 billion, had been authorised by the SFC investing in
B-shares listed on the Shanghai and Shenzhen stock exchanges as well as
H-shares listed in Hong Kong.

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