HONG KONG 2004 - Financial and Monetary Affairs

Hong Kong has long served as an international financial centre for the Mainland, facilitating Mainland enterprises to access 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 have been 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 smooth and orderly development of renminbi (RMB) business facilitates cross-border tourist spending in Hong Kong and helps promote economic integration between Hong Kong and the Mainland. Further development of renminbi business is expected to increase the attractiveness of Hong Kong as an international financial centre.

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.

At end-December, AIs' external liabilities to financial institutions in the Mainland were $269.8 billion, while their claims on financial institutions in the Mainland were $226.2 billion. The amounts represented 15.5 per cent and 6.9 per cent, respectively, of AIs' total liabilities to and claims on banks outside Hong Kong.

Good progress was made during the year in further developing cross-boundary financial infrastructure between Hong Kong and the Mainland. These payment linkages helped meet the growing needs of cross-boundary financial intermediation brought about by increasing economic ties. The daily average turnover of these linkages (RTGS and cheque, Hong Kong dollar and US dollar) with Guangdong Province and Shenzhen increased to $850 million in the month of December 2004, compared with $26 million in January 1998, when only one-way HKD joint cheque clearing with Shenzhen was in operation.

In March 2004, the HKMA and the Guangzhou branch of the People's Bank of China (PBoC) introduced cross-boundary system linkages for making Hong Kong dollar and US dollar RTGS payments between banks in Hong Kong and Guangdong province. This arrangement was an extension of similar system linkages between Hong Kong and Shenzhen completed in 2003. With these linkages, payments in Hong Kong dollars and US dollars between banks in Hong Kong and Guangdong/Shenzhen can be made in a safer and more efficient manner. In 2004, the RTGS system linkages with Guangdong and Shenzhen handled 11 944 transactions, with a total equivalent value of over $113 billion.

Cross-boundary joint cheque clearing arrangements made another step forward in 2004. With the cooperation between the HKMA and Shenzhen sub-branch of PBoC, the existing joint cheque clearing facilities between Shenzhen and Hong Kong were extended to cover US dollar cheques in July 2004. This shortens the clearing time for US dollar cheques drawn on banks in Hong Kong and presented in Shenzhen, or vice versa. Two-way joint cheque clearing facilities of Hong Kong dollar cheques between Guangdong/Shenzhen and Hong Kong was fully implemented as early as June 2002. The extension to cover US dollar cheques in Shenzhen represented ongoing infrastructure development to meet growing needs of foreign currency settlement across the boundary. In 2004, around 315 000 cheques, with a value of $27 billion equivalent, were cleared through these joint clearing facilities.

Hong Kong has the highest concentration of fund management expertise in Asia, ex-Japan. In light of the potential of the fund management industry in China, Hong Kong-based fund managers are now actively seeking joint ventures with Mainland fund managers. Hong Kong managers have also embarked on ways to enable investors to capture investment opportunities in China. In 2004, the SFC authorised 12 retail funds that offered returns linked to the performance of the A-share market in China. These included an exchange traded fund that tracks the A-share market, funds that invest indirectly in A-shares via equity-linked investments issued by qualified foreign institutional investors, and guaranteed funds with their upside potential returns linked to the A-share market performance.

The Chief Executive announced on November 18, 2003 that, following the approval of the State Council, the PBoC agreed to provide clearing arrangements for personal RMB banking business in Hong Kong. Personal RMB business in Hong Kong was launched smoothly in early 2004. Banks in Hong Kong began to offer RMB deposit-taking, currency exchange, remittance and bank card services. At year-end, the outstanding RMB deposits in Hong Kong reached RMB 12 billion yuan. The use of RMB debit and credit cards by Mainland tourists in Hong Kong has grown steadily, with the cumulative total of credit/debit card spending and cash withdrawal amounting to $2.9 billion as at the end of 2004. The average transaction size of credit/debit card spending is about $3,000.

The launch of personal RMB business in Hong Kong has not only helped facilitate cross-boundary tourist spending and promote economic integration between Hong Kong and the Mainland, but also enhanced the competitiveness of the banks in Hong Kong and the attractiveness of Hong Kong as an international financial centre. The Government will continue to discuss with the relevant Mainland authorities further development of RMB business in Hong Kong.

Hong Kong as an International Capital Formation Centre and Platform for Global Investment 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 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, 304 Mainland enterprises were listed in Hong Kong. Significantly, most of the Mainland enterprises that had listed outside the Mainland chose to list on the SEHK. Mainland enterprises (H-shares, red-chips and minying enterprises) have raised $901 billion directly and indirectly through Hong Kong since inception, including $110.4 billion raised in 2004. In the past 11 years, the 10 largest IPOs on the SEHK have involved Mainland enterprises.

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.

As a renowned international financial centre, Hong Kong possesses a superb financial infrastructure, modern financial facilities and a regulatory regime in line with international standards. Hong Kong is also one of the most prominent asset management centres in Asia. Most important is the pool of local and overseas financial services talents who possess ample knowledge, experience and exposure in the international market. Coupled with their rich experience in servicing Mainland enterprises, these professionals are well qualified to provide professional advice to the Mainland insurance industry on asset management, including risk management and diversification of investment.

In addition to providing quality professional advice and services to the Mainland insurance industry on asset management, Hong Kong's well-developed and liquid financial market could also serve as a desirable investment platform for the Mainland insurance industry. Hong Kong's financial market provides many products of high quality and liquidity, including securities, derivatives, warrants, bonds, unit trusts/mutual funds, securities funds, bond funds, index funds, guaranteed funds, hedge funds, currency funds, equity linked instruments and exchange traded funds. This array of products enables investors to choose the best investment portfolio on the basis of their preference with regard to risk and returns. More importantly, Mainland investors can use Hong Kong as their base for undertaking global investment to enhance investment returns and diversify risks, utilising a well-developed financial system, modern financial infrastructure and a pool of professional talent.

To further strengthen communication and enhance cooperation, the SFC has regular meetings with the China Securities Regulatory Commission (CSRC), the stock exchanges in Shanghai and Shenzhen, and HKEx to discuss issues of mutual interest.

Following the implementation of CEPA on January 1, 2004 (CEPA I) and the signing of the 'Supplementary Agreement to the Mainland and Hong Kong Closer Economic Partnership Arrangement' on October 27, 2004 (CEPA II), Hong Kong's financial services suppliers and professionals have enjoyed greater market access and flexibility for their operations in the Mainland. Implementation of CEPA has not only enhanced Hong Kong's attractiveness to market users, but also strengthened its competitiveness as an international financial centre and the premier capital formation centre for Mainland enterprises.

In the banking sector, more banks from Hong Kong are qualified to establish branches in the Mainland following the implementation of CEPA I, which substantially lowered the total asset requirement from US$20 billion to US$6 billion. By the end of 2004, four Hong Kong banks have taken advantage of the lower asset requirements to open branches in the Mainland. With these new entrants, the number of locally incorporated banks with a presence in the Mainland rose to 16. Together, they have established 54 branches and 28 representative offices as at the year-end. CEPA makes it possible for Hong Kong banks to make early preparation for conducting RMB business.

Under CEPA I, when applying to conduct RMB business, Mainland branches of Hong Kong banks are only required to have been operating in the Mainland for more than two years vis-à-vis three years for other foreign banks. More importantly, the relevant authorities will base their profitability 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. By the end of 2004, two Mainland branches of Hong Kong banks applied for such preferential treatment under CEPA I and were allowed to conduct RMB business in the Mainland.

The signing of CEPA II helped further expand the business scope of Hong Kong banks in the Mainland. Under CEPA II, Mainland branches of Hong Kong banks are allowed to act as agents for insurance products after obtaining approval from relevant authorities, with effect from November 1, 2004.

With their long-established financial relationship with the Mainland and their well-developed global financial expertise, Hong Kong banks should be able to further expand their scope of business in the Mainland and to help satisfy the financial needs of the Mainland market.

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. Hong Kong insurance companies also 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.

The Government signed a cooperation agreement with the CIRC in February 2004 to allow Hong Kong residents to enroll in Hong Kong to take the Mainland qualifying examinations for insurance intermediaries in Shenzhen. Both parties also agreed in principle to establish an examination centre in Hong Kong for conducting the examinations. Details of the arrangements will be promulgated in due course.

In the accounting sector, the Government 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 has been extended from six months to one year.

The Government also signed an agreement for the exemption of professional examination papers, in respect of the qualification programmes of the Hong Kong Institute of Certified Public Accountants (HKICPA) and the Chinese Institute of Certified Public Accountants, with the Mainland's Ministry of Finance in August 2004. CEPA II, to be effective from January 1, 2005, will provide for further liberalisation measures. These include allowing consultancy companies established by Hong Kong accountants to provide bookkeeping services in the Mainland; deeming the auditing experience acquired by Hong Kong accountants in Hong Kong as the same acquired in the Mainland for the application of a practising licence in the Mainland; and allowing eligible Hong Kong residents to take the relevant Mainland accountancy qualification examinations.

Following the mutual recognition of qualifications of practitioners by the CSRC and the SFC under CEPA I commitments, 169 Hong Kong candidates passed the first examination on Mainland securities laws and regulations held in March. A number of them applied for and were granted the Mainland securities industry qualification. Another five Hong Kong professionals passed the examination on Mainland futures laws and regulations held in June. They qualified to apply for the Mainland futures industry qualification from early July 2004. Under CEPA II, the Mainland has agreed to allow SFC licensees who satisfy the requirements of the CSRC to set up joint venture futures brokerage companies in the Mainland. The SFC is working with the Mainland authorities on the details.