A favourable geographical position, bridging 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; rule of law; a level playing field and a sound regulatory regime have all helped Hong Kong develop into both a leading international financial centre in the region and the premier capital formation centre for the Mainland. The absence of any restrictions on capital flows into and out of Hong Kong is another important strength.

Hong Kong's financial markets are characterised by a high degree of liquidity. They operate under effective and transparent regulation, which fully meets international standards. A highly educated workforce and ease of entry for professionals from outside Hong Kong further contribute to the development of financial markets in Hong Kong.

Hong Kong has a very strong presence of international financial institutions. Of the world's top 100 banks, 70 have operations in Hong Kong. As at December 2004, there were 121 foreign-owned licensed banks. Apart from these, some foreign institutions operate as restricted licence banks and deposit-taking companies through their subsidiaries, related companies or branches in Hong Kong. A further 85 foreign banks have local representative offices.

The interbank money market is well established. Wholesale deposits are traded actively among local authorised institutions (AIs), and between local and overseas institutions, with an average daily turnover of $165 billion in 2004.

Hong Kong also has a mature and active foreign exchange market, which forms an integral part of the global market. The link with overseas centres enables foreign exchange dealings to continue 24 hours a day with the rest of the world. The last triennial survey coordinated by the Bank for International Settlements (BIS) in April 2004 shows that the daily average foreign exchange turnover in Hong Kong is US$102 billion, which represents 4 per cent of the world's total transactions and makes Hong Kong the world's sixth largest foreign exchange market.

With a total market capitalisation of $6,695.9 billion as at year-end, the Hong Kong stock market ranked ninth in the world and second in Asia, following Japan¹. The daily turnover averaged $16 billion in 2004. At year-end, 1 096 public companies were listed on the Stock Exchange of Hong Kong Limited (SEHK), a wholly owned subsidiary of the Hong Kong Exchanges and Clearing Limited (HKEx). The 70 newly listed companies raised a total of $95.8 billion from initial public offerings. Besides new share issues, funds were also raised in the secondary market, with a total amount of $175.1 billion. Funds raised by Mainland enterprises² amounted to $110.4 billion, about 40 per cent of the total funds raised in the Hong Kong stock market during the year.

The stock market is an important fund-raising centre for Mainland enterprises. Of the 111 Mainland-incorporated enterprises listed outside the Mainland, 109 (H-shares) were quoted on the SEHK. As at end-2004, there were 304 Mainland enterprises listed on the SEHK. These Mainland enterprises include H-shares, red-chips and minying enterprises (non-H-shares Mainland Private enterprises). In 2004, about $75.4 billion was raised in new listings of Mainland enterprises in Hong Kong, accounting for 79 per cent of the total funds raised in initial public offerings (IPOs) on the SEHK. The market capitalisation of Mainland enterprises accounted for about 30 per cent of the total market capitalisation. In 2004, the total annual trading turnover of Mainland enterprises accounted for 49 per cent of the total annual equity turnover of the Hong Kong stock market. It is expected that Mainland issuers will continue to be a major growth driver of the securities market of Hong Kong in the future.

The average daily turnover of Hang Seng Index (HSI) Futures and Mini-HSI Futures traded on the Hong Kong Futures Exchange Limited (HKFE) increased from 27 588 contracts and 5 064 contracts in 2003 to 34 824 contracts and 5 902 contracts in 2004 respectively, representing increases of 26 per cent and 17 per cent. The average daily turnover of H-shares Index Futures rose by 1.2 times to 7 060 contracts in 2004 from 3 196 contracts in 2003. The average daily turnover of HSI Options and Mini-HSI Options decreased from 8 596 contracts and 130 contracts in 2003 to 8 215 contracts and 109 contracts respectively, representing drops of 4.4 per cent and 16 per cent. The daily turnover of H-shares Index Options, launched in June 2004, averaged 566 contracts. Apart from index futures and options, the HKFE also traded 36 stock futures contracts with an average daily turnover of 70 contracts in 2004. As regards stock options, contracts in respect of a total of 37 stocks were traded in the market by year-end. The average daily turnover of stock options was 22 720 contracts in 2004.

The Hong Kong fund management industry is characterised by its strong international flavour, in terms of the presence of both global fund managers and authorised funds. The Securities and Futures Commission (SFC) conducted a survey in 2004 on the fund management business in Hong Kong, which comprises assets management, advisory business and other private banking activities³. Survey results demonstrated that as at December 31, 2003, fund management business amounted to $2,947 billion (US$378 billion). Of this total, $2,317 billion (US$297 billion) was reported by 166 fund management companies and $630 billion (US$81 billion) was reported by 30 registered institutions⁴.

Hong Kong operates one of the most active physical gold markets in the world. Spot gold can be traded through two closely related yet independent markets in the city — the Chinese Gold and Silver Exchange Society and the Loco-London gold market.

The society, established in 1910, provides trading of both tael bars and kilo bars in Hong Kong dollars⁵. Prices closely follow those in the other major gold markets in London, Zurich and New York. Loco-London gold quotation is made in US dollars per troy ounce of gold.

Hong Kong continues to be one of the most open insurance centres in the world. Among the 180 authorised insurers at year-end, 89 were insurers from 21 overseas countries or the Mainland. Twelve of the world's top 20 insurers are authorised to carry out insurance business in Hong Kong either directly or through a group company. There are 22 professional reinsurers, including most of the top reinsurers in the world. Gross premium income in 2003 was $102 billion, approximately 8.3 per cent of Hong Kong's Gross Domestic Product (GDP).