A favourable geographical position, bridging the time gap between North America and Europe; strong links with the Mainland and other economies in Southeast Asia and excellent communications with the rest of the world; the 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 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 regulations, which are in line with international standards. A highly educated workforce and ease of entry for professionals from outside Hong Kong also contribute to the development of its financial markets.

International financial institutions maintain a strong presence in the city. Of the world's top 100 banks, 69 have operations in Hong Kong. At the end of 2006, there were 181 foreign-owned authorised institutions, which included 127 licensed banks, 31 restricted licence banks and 23 deposit-taking companies. A further 84 foreign banks have established local representative offices in Hong Kong.

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 $298 billion in 2006.

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 dealing to continue 24 hours a day with the rest of the world. The last triennial survey coordinated by the Bank for International Settlements 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 about $13,338 billion at year-end, the Hong Kong stock market ranked sixth in the world and second in Asia, following Japan¹. The daily turnover averaged $33.9 billion in 2006. At year-end, 1 173 public companies were listed on the Stock Exchange of Hong Kong (SEHK). The 62 newly listed companies raised $333.9 billion from initial public offerings (IPOs). Hong Kong ranked second worldwide in terms of IPO funds raised, overtaking New York. Besides new share issues, $190.7 billion were raised on the secondary market. The REIT market continued to develop and the aggregate market capitalisation reached $53 billion at year-end.

The Hong Kong stock market is an important fund-raising platform for Mainland enterprises. Of the 143 Mainland-incorporated enterprises listed outside the Mainland, 141 were listed on the SEHK. At year-end, there were 367 Mainland enterprises listed on the SEHK. In 2006, equity funds raised by Mainland enterprises² amounted to $384.9 billion, which was 73 per cent of the total equity funds raised through the SEHK during the year. About $304.2 billion were raised in new listings of Mainland enterprises in Hong Kong, accounting for 91 per cent of the total equity funds raised in IPOs on the SEHK. The listing of the Industrial and Commercial Bank of China, which was the world's largest IPO, raised $124.9 billion in Hong Kong. The market capitalisation of Mainland enterprises accounted for 50 per cent of the SEHK's total market capitalisation at year-end. In 2006, the total annual trading turnover of Mainland enterprises accounted for 60 per cent of the total annual equity turnover of the Hong Kong stock market. It is expected that Mainland issuers will continue to be major growth drivers of the stock market in the future.

The Hong Kong asset management industry is characterised by its strong international flavour, in terms of the presence of both global fund managers and the different domiciles of authorised funds. According to the Fund Management Activities Survey 2005 conducted by the Securities and Futures Commission (SFC), which covered fund management activities of SFC licensed corporations that engage in asset management and fund advisory businesses and banks which engage in asset management and other private banking activities (collectively referred to as 'registered institutions'), the combined fund management business of licensed corporations and registered institutions amounted to $4,526 billion at end-2005, up 25 per cent from $3,618 billion in 2004. SFC licensed corporations accounted for 77 per cent or $3,495 billion of the combined fund management business, and the rest was reported by registered institutions.

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 bars³. Prices closely follow those in the other major gold markets in London, Zurich and New York.

Hong Kong continues to be one of the most open insurance centres in the world. Among the 181 authorised insurers at year-end, 90 were from 21 overseas countries or the Mainland. Thirteen of the world's top 20 insurers are authorised to carry on insurance business in Hong Kong either directly or through a group company. There are 21 professional reinsurers, including most of the top reinsurers in the world. Gross premium income in 2005 was $137 billion.

The Hong Kong Monetary Authority (HKMA) worked with relevant government bureaux to foster a better understanding of Hong Kong's economic and financial strengths among international credit rating agencies. The efforts made contributed to a number of rating upgrades in 2006, putting Hong Kong in the AA category by all major international rating agencies — the highest rating that has ever been assigned to Hong Kong. The rating and outlook upgrades reflected international recognition of Hong Kong's strong economic fundamentals as well as improved public finances and growth prospects.