Financial Links between Hong Kong and the Mainland

Hong Kong provides Mainland enterprises with an efficient access to international capital through its banking, equity and debt markets. Nevertheless, the cross-boundary capital flows have by no means been one-way. Hong Kong's banks have maintained a strong presence in the Mainland. The financial links between Hong Kong and the Mainland will be further strengthened with China's accession to the World Trade Organisation (WTO), which will over time generate increasing demand for a wide range of financial support services for increasing trade and investment flows between the Mainland and the rest of the world. The arrangements for banks in Hong Kong to conduct renminbi (RMB) business signify an important step forward for the development of the banking sector and open a new channel for the flow of renminbi funds between Hong Kong and the Mainland through the banking system.

Cross-boundary funds were flowing steadily among financial institutions in both places. 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 are subsequently channelled back to Hong Kong through the inter-bank market.

AIs' external liabilities to and claims on financial institutions in the Mainland at end-December were $226.6 billion and $157.1 billion, respectively. The amounts represented 15 per cent and 5.8 per cent, respectively, of AIs' total liabilities to and claims on banks outside Hong Kong.

Many banks from Hong Kong have established a strong presence among businesses in the Mainland. A total of 15 locally incorporated banks have established 46 branches and 29 representative offices there by year-end. Hong Kong's banks, with their long-established financial links with the Mainland and their well-developed global financial expertise, should be able to further expand their scope of business in the Mainland as well as to help Mainland entities to reach out following China's accession to the WTO.

The joint clearing facility for Hong Kong dollar cheques, agreed between the HKMA and the Guangzhou Branch of the People's Bank of China (PBoC), was introduced in September 2000 to expedite the processing of Hong Kong dollar cheques issued by banks in Hong Kong and presented in Guangdong. This was the second agreement of its kind: a similar cheque clearing facility was established between Hong Kong and Shenzhen in January 1998. In September 2001, an agreement was reached for the cross-boundary joint clearing facility for Hong Kong dollar cheques, drawn upon banks in Hong Kong and presented in Guangdong (including Shenzhen), to be extended to cover cashier's orders and demand drafts.

In June 2002, the joint cheque clearing facility was further extended to clear Hong Kong dollar cheques drawn on banks in Guangdong, including Shenzhen, and presented in Hong Kong. Under this arrangement, the time required for clearing is reduced to two working days. In 2003, about 250 000 cheques totalling $22 billion were cleared through the two-way joint clearing facilities. Furthermore, in order to expedite cross-boundary payments between Hong Kong and Shenzhen, Hong Kong dollar and US dollar RTGS links between Hong Kong and Shenzhen to enable banks on both sides to make Hong Kong dollar and US dollar RTGS payments were implemented on December 12, 2002 and November 17, 2003 respectively.

The Chief Executive announced on November 18, 2003 that, following approval from the State Council, the PBoC had agreed to provide clearing arrangements for personal RMB business in Hong Kong. The scope of such RMB business includes deposit-taking, exchange, remittances and RMB cards. This arrangement will help promote economic integration between Hong Kong and the Mainland, and facilitate cross-border tourist spending. In addition to meeting the demands of the market and the public, the Hong Kong banking sector will also be able to develop new areas of business. This will enhance the competitiveness of the banks in Hong Kong and the attractiveness of Hong Kong as an international financial centre.

Portfolio investment in the form of 'China funds' is popular. By year-end, 79 China or Greater China equity funds4 had been authorised by the SFC and they invested in Hong Kong companies, H-shares, red-chips listed on the Hong Kong Stock Exchange, B-shares listed on the Shanghai and Shenzhen Stock Exchanges, Taiwanese companies listed on the Taiwan Stock Exchange, or other Greater China related securities listed in overseas markets.

Hong Kong as an International Capital Formation Centre for the Mainland

The Government is committed to making full use of the favourable conditions of the Hong Kong market, including higher liquidity, a robust legal system, efficient information flow, availability of professional expertise, and closer proximity to the Mainland market to provide better services to Mainland enterprises seeking listing in an international financial centre.

The rapidly expanding Mainland market represents a massive opportunity. The presence of Mainland issuers has increased both the breadth and depth of Hong Kong's securities and futures markets. Hong Kong's equity market has evolved from one highly concentrated in properties and finance businesses into a market with a great diversity of constituent stocks and a wide range of products.

Hong Kong has established itself as the most important international fund-raising centre for Mainland enterprises. At year-end, about 260 Mainland enterprises were listed in Hong Kong. Significantly, 92 out of the 93 Mainland-incorporated enterprises which had listed outside the Mainland (H-shares) have chosen to list on the SEHK. These 92 enterprises had raised a total of more than $195.3 billion directly and indirectly through Hong Kong as at end-2003, including $48.3 billion raised in 2003.

In 2003, the three largest IPOs on the SEHK all concerned Mainland issuers. These three IPOs alone already accounted for 62 per cent of funds raised in the whole year. In particular, the China Life Insurance Company Limited was reported to be the largest IPO in the world in 2003 and was the third largest in Hong Kong's history.

Apart from the equity market, Mainland enterprises raise capital in Hong Kong through issuance of bonds, project financing and loan syndication. Mainland enterprises also have easy access in Hong Kong to investment banking services such as mergers and acquisitions, and consultancy on restructuring.

In a bid to further strengthen communication and enhance cooperation, the SFC had regular meetings with the China Securities Regulatory Commission (CSRC), the two exchanges in Shanghai and Shenzhen, and the HKEx to discuss issues of mutual interest.

Mainland and Hong Kong Closer Economic Partnership Arrangement (CEPA)

The signing of the main parts of CEPA and its Annexes, in June and September 2003 respectively, has offered greater market access and flexibility for Hong Kong's financial services suppliers and professionals in the Mainland. It is envisaged that the coming into operation of CEPA on January 1, 2004 will not only enhance Hong Kong's attractiveness to market users, but also strengthen its competitiveness as an international financial centre and the premier capital formation centre for Mainland enterprises.

In the banking sector, the substantial lowering of the total asset requirement from US$20 billion to US$6 billion would enable seven additional Hong Kong banks to set up branches in the Mainland. This makes it possible for Hong Kong banks to set up branches in the Mainland as early as 2004 to become acquainted with the Mainland market and to make early preparation for conducting renminbi business.

Under CEPA, when applying for conducting renminbi business, Mainland branches of Hong Kong banks are only required to demonstrate profitability for two consecutive years vis- à -vis three years for other foreign banks. More importantly, in conducting profitability assessment the relevant authorities will base their assessment on the overall profitability of all branches of the Hong Kong bank in the Mainland vis- à -vis the profitability of individual branches for a foreign bank.

CEPA also provides special advantages for the insurance sector. Hong Kong has taken a great step forward by raising the maximum allowed equity participation by Hong Kong insurers in a Mainland insurance company to 24.9 per cent, compared with 10 per cent for other foreign insurers. Besides, Hong Kong insurance companies would have greater opportunities to enter the Mainland insurance market through the formation of groups. CEPA also allows Hong Kong residents to engage in the relevant insurance services after obtaining the Mainland's insurance qualifications and being employed or appointed by a Mainland insurance institution.

In the accounting sector, the Government has welcomed the arrangements that Hong Kong accountants, who have already qualified as Chinese Certified Public Accountants (CPAs) and practised in the Mainland (including partnership), are treated on a par with Chinese CPAs in respect of the requirement for annual residency in the Mainland. The validity period of the 'Temporary Auditing Business Permit' applied by Hong Kong accounting firms to conduct temporary auditing services in the Mainland is also extended from six months to one year.

With respect to the securities industry, as provided under CEPA, the HKEx set up a representative office in Beijing in November 2003. Moreover, the CSRC and the SFC reached a consensus on the implementation of the CEPA provision on simplification of procedures for Hong Kong professionals applying for the Mainland securities and futures industry qualifications, and signed the 'Mainland/Hong Kong CEPA-Arrangements relating to Qualifications of Securities and Futures Industry Practitioners' in December 2003. The Arrangements also apply to Mainland professionals who want to obtain the Hong Kong qualifications.

Under the Arrangements, Hong Kong professionals having passed the examination on relevant Mainland laws and regulations may be granted industry qualifications by the Mainland's Securities Association of China or China Futures Association; while Mainland professionals may be deemed by the SFC as having satisfied the requirements for industry qualifications in Hong Kong. Subject to satisfying other requirements, these professionals may practice in the Mainland or be licensed in Hong Kong.