HONG KONG 2005

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. Hong Kong's banks have also maintained a strong presence on 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 the 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-boundary tourist spending in Hong Kong and helps promote economic integration between Hong Kong and the Mainland. Further development of renminbi business is expected to enhance the capability of Hong Kong's financial system to handle renminbi transactions, which is an important step in strengthening the status of Hong Kong as an international financial centre.

There has been a steady flow of cross-boundary funds 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 on the Mainland and are subsequently channelled back to Hong Kong through the inter-bank market.

By the end of the year, AIs' external liabilities to financial institutions in the Mainland amounted to $328.1 billion, while their claims on financial institutions in the Mainland totalled $267.4 billion. The amounts represented 20.2 per cent and 8.3 per cent, respectively, of AIs' total liabilities to and claims on banks outside Hong Kong.

The use of cross-boundary links with Guangdong Province and Shenzhen rose considerably in 2005, reflecting increasing economic integration between the Mainland and Hong Kong. The daily average turnover of cross-boundary links (RTGS and cheques in Hong Kong dollars and US dollars) increased by 30 per cent to the equivalent of about $790 million in 2005.

In light of the potential of the fund management industry in the Mainland, Hong Kong-based fund managers, who are recognised for their knowledge and experience in asset management, 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 the Mainland. At year-end, there were 11 SFC authorised funds that offered returns linked to the performance of the A-share market on the Mainland. These included an ETF 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.

Since its launch in early 2004, renminbi business in Hong Kong has developed in a steady and orderly manner and it expanded further in 2005. By the end of the year, the outstanding renminbi deposits in Hong Kong had reached RMB22.6 billion. The use of renminbi 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 $9.4 billion at year-end. The average transaction size of credit/debit card spending was about $3,000.

In October 2005, the Chief Executive announced in his Policy Address that the Central Government had agreed in principle to the expansion of renminbi business in Hong Kong. The details of the expansion were announced subsequently. In December, the definition of designated merchants was widened, and designated merchants were allowed to open renminbi deposit accounts in addition to conducting one-way exchange of their renminbi receipts into Hong Kong dollars. Limits for exchange and remittance of renminbi by individuals were relaxed and the cap on credit limits for renminbi cards issued by participating banks was removed.

Hong Kong's fundamental strengths, including high market liquidity, a robust regulatory system, efficient information flow, a rich pool of financial professionals and proximity to the Mainland market, mean that it is well placed to provide excellent services to Mainland enterprises seeking listing in an international financial centre.

The rapidly expanding Mainland market provides abundant opportunities. 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 with a high concentration of property and finance businesses into a market with a great diversity of constituent stocks and a wide range of products.

Hong Kong has developed into the premier international fund-raising centre for Mainland enterprises. At year-end, 335 Mainland enterprises were listed in Hong Kong, raising a total of $1,097 billion since 1993. Most of the Mainland enterprises listed outside the Mainland chose to list on the SEHK. The 10 largest IPOs of all enterprises listed on the SEHK were all from the Mainland.

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

Hong Kong, with its financial facilities, experts and first-rate regulatory regime, already has all the right ingredients to develop its asset management business even further. The Mainland authorities take steps to allow outside investment. For instance, the authorities have allowed qualified Mainland insurance companies to invest part of their foreign exchange insurance funds in capital markets outside the Mainland. Hong Kong professionals are well qualified to provide professional advice and services to the Mainland investors on asset management, including risk management and diversification of investment.

In addition, Hong Kong's well-developed and liquid financial market could also serve as a desirable investment platform for the Mainland. Hong Kong's financial market provides many products of high quality and liquidity, including securities, derivatives, warrants, bonds, equity linked instruments and various types of unit trusts and mutual 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.

The Government and concerned regulatory authorities will continue to actively promote the links and cooperation between Hong Kong and the Mainland on financial services. The SFC has regular meetings with the China Securities Regulatory Commission, the stock exchanges in Shanghai and Shenzhen, and HKEx to discuss issues of mutual interest.

Under the Closer Economic Partnership Arrangement (CEPA), Hong Kong's financial services suppliers and professionals can enjoy greater market access and flexibility for their operations on 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. Further progress was made with the signing of CEPA III in 2005.

The Mainland's further liberalisation measures in the financial services sector under CEPA III were signed in October 2005 in Hong Kong to be effective from January 1, 2006. Under CEPA III, qualified securities and futures companies on the Mainland are allowed to set up subsidiaries in Hong Kong. CEPA III complements the earlier commitment by the Mainland under CEPA II to allow Hong Kong futures intermediaries to enter the Mainland futures market. The move will help broaden the intermediary base of Hong Kong and increase employment opportunities for local financial professionals. The SFC continued to work with the China Securities Regulatory Commission on the implementation details of the commitment.

CEPA III gives more flexibility to Mainland branches of Hong Kong banks to meet the requirement on the level of operating funds for offering renminbi and foreign currency businesses to local customers. With the minimum level of operating funds being assessed on an aggregate basis, the minimum requirement for each individual Mainland branch has been relaxed to RMB300 million, on the condition that the average level of operating funds of all Mainland branches of the bank concerned is no less than RMB400 million.

Meanwhile, banks from Hong Kong continued to take advantage of CEPA I and CEPA II during the year. By the end of 2005, five Hong Kong banks had taken advantage of the lower asset requirement to open branches in the Mainland. With these new entrants, the number of locally incorporated banks with a presence on the Mainland rose to 16. Together, they had established 69 branches and 29 representative offices by the end of the year. Two Hong Kong banks with a total of five branches were allowed to conduct renminbi business while seven banks with a total of 45 branches were allowed to act as agents to sell insurance products.

CEPA also provides special advantages for the insurance sector. Hong Kong has taken a great step forward with the raising of 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 work in relevant insurance services after they have obtained the Mainland's insurance qualifications and they are employed or appointed by a Mainland insurance institution.

In the accounting sector, under CEPA I, Hong Kong accountants who have already qualified as Chinese Certified Public Accountants (Chinese CPAs) and practised on the Mainland (including partnership) are treated on a par with Chinese CPAs in respect of the requirement for annual residency on the Mainland. The Hong Kong Institute of Certified Public Accountants (HKICPA) and the Chinese Institute of Certified Public Accountants have implemented an agreement signed by the Government and the Mainland's Ministry of Finance in August 2004 regarding the exemption of professional examination papers of the two institutes' qualification programmes.

Following implementation of CEPA II on January 1, 2005, consultancy companies established by Hong Kong accountants are allowed to provide bookkeeping services on the Mainland. In addition the auditing experience acquired by Hong Kong accountants in Hong Kong is deemed as the same as that acquired on the Mainland for the application of a practising licence on the Mainland, and eligible Hong Kong residents are allowed to take the relevant Mainland accountancy qualification examinations.

CEPA III, to be effective from January 1, 2006, will provide further liberalisation measures. Under CEPA III, the validity period of the Hong Kong accounting firms' 'Temporary Business Permit' to conduct business on a temporary basis on the Mainland will be extended from one to two years.

In September, the Secretary for Financial Services and the Treasury led a delegation of more than 70 representatives from Hong Kong's financial services sector on a visit to Fujian Province. It was the first financial services delegation under the Pan-Pearl River Delta (Pan-PRD) Regional Co-operation Framework and included leading figures in the banking sector, venture capital investment funds, chambers of commerce, the securities industry and accounting and legal professions. The visit has enabled Hong Kong's financial services sector and entrepreneurs to have a better idea of the latest development and investment opportunities in Fujian, and enhanced understanding of Fujian enterprises about Hong Kong's strengths as an international financial centre.