A favourable geographical position, which bridges the time gap between North America and Europe, strong links with the Mainland and other economies in South-East Asia and excellent communications with the rest of the world, the high respect for the rule of law, a level playing field as well as a sound regulatory regime have helped Hong Kong 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 high degree of liquidity. They operate under effective and transparent regulations, which meet international standards. A highly educated workforce and ease of entry for professional staff from outside Hong Kong further contribute to the development of financial markets in Hong Kong. To further enhance its human resources, an Advisory Committee on Human Resources Development in the Financial Services Sector was established on June 1. It is an ongoing mechanism to encourage better communication among all relevant organisations and individuals and to match the demand for and supply of human resources development programmes in the financial services sector in pursuit of the longer term benefits of the sector.

Hong Kong has a very strong presence of international financial institutions. At the end of 2000, there were 138 foreign-owned banks. Of the world's top 100 banks, 79 had operations in Hong Kong, while 76 subsidiaries or related companies of foreign banks operated as restricted licence banks and deposit-taking companies. A further 118 foreign banks had local representative offices.

The interbank money market is well established. Wholesale deposits are traded actively among local authorised institutions, and between local and overseas institutions, with an average daily turnover of $192.6 billion in 2000. The interbank money market is mainly for short-term money, with maturities ranging mostly 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. The major borrowers are foreign banks without a strong Hong Kong dollar deposit base. At the end of December, the Hong Kong interbank money market accounted for 12 per cent of the gross 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 triennial survey co-ordinated by the BIS shows the daily average foreign exchange turnover in Hong Kong in April 1998 to be US$78.6 billion, which represents 4 per cent of the world's total transactions and makes Hong Kong the world's seventh largest foreign exchange market.

Hong Kong's derivatives market is among Asia's largest, reflecting the increased sophistication of its financial markets. Currency derivatives contracts (including currency swaps, options and other over-the-counter derivatives) registered an average daily turnover of US$1.4 billion in April 1998, compared with US$0.7 billion in April 1995, according to the BIS. In addition, foreign exchange forward transactions (including outright forwards and foreign exchange swaps) amounted to US$47.6 billion per day in April 1998, or 3.9 per cent of the world total. Interest rate derivatives recorded an average daily turnover of US$2.4 billion in April 1998, compared with US$3.5 billion in April 1995.

With a total market capitalisation of $4,862 billion, the Hong Kong stock market ranked 10th in the world and second in Asia. The average daily turnover in the local stock market increased 59 per cent to $12.3 billion in 2000, compared to $7.8 billion in 1999. The average daily value of stocks sold short was $313 million in 2000, representing a rise of 21 per cent from that of 1999. At the end of the year, 790 public companies were listed on the Stock Exchange of Hong Kong Ltd (SEHK), a wholly owned subsidiary of Hong Kong Exchanges and Clearing Limited (HKEx). The 90 (including 47 on the Growth Enterprise Market) newly listed companies raised a total of $132 billion of capital. Besides new share issues, funds were also raised in the secondary market with a total amount of $331 billion. Funds raised in H-shares and red-chips markets amounted to $334 billion, accounting for 74 per cent of the total funds raised in Hong Kong market during the year.

As regards stock options, contracts in respect of a total of 18 stocks were traded in the market by the end of the year. The average daily turnover of stock options contracts was 16 958 in 2000, representing an increase of 91 per cent over that of 1999.

During the year, the average daily turnover of Hang Seng Index Futures traded at the Hong Kong Futures Exchange (HKFE) decreased from 20 779 contracts in 1999 to 16 288 contracts in 2000, representing a decline of 22 per cent. The turnover of Hang Seng Index Options also decreased to 2 202 contracts a day in 2000, compared with 2 890 in 1999, representing a decrease of 24 per cent. The futures exchange also traded in four currency futures and 18 stock futures contracts.

Hong Kong has two active gold markets, in which the main participants are banks, major international and local bullion houses and gold trading companies. One is commonly known as the Loco-London gold market, with process quoted in US dollars per troy ounce of gold of 99.99 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$264 and US$315, and closed at US$273 in 2000, which was comparable to US$287.5 in 1999.

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 $2,537 per tael, compared with $2,692 at the end of 1999. Turnover on the exchange totalled 5.68 million taels in 2000.

The Hong Kong fund industry is characterised by its strong international flavour, both in terms of the presence of global fund managers and authorised funds. In a survey conducted by the commission in 2000, 150 intermediaries registered with the Securities and Futures Commission and exempt persons declared their primary business as portfolio management. About 85 per cent of these companies are subsidiaries or affiliates of international groups. The survey showed that total assets under management by these companies amounted to HK$3.5 trillion¹ (US$450 billion) at the end of 1999.

The number of authorised unit trusts and mutual funds increased to 1 860 at the end of 2000, compared with 1 583 a year earlier. The Tracker Fund of Hong Kong (TraHK), which was offered in October 1999 and contains a portfolio of Hang Seng Index (HSI) constituent stocks, was well received by the market. The market capitalisation of the TraHK amounted to $28.6 billion by the end of 2000.

The Hong Kong insurance industry also has a strong international presence. Among the 205 authorised insurers at the end of 2000, 105 were insurers from 24 overseas countries or the Mainland while 12 of the world's top 20 insurers were authorised to carry on insurance business in Hong Kong either directly or through a group company. Professional reinsurers numbered 28, including most of the top reinsurers in the world. Latest statistics show that gross premium income in 1999 was about $58 billion, representing about 4.7 per cent of Hong Kong's GDP.