Hong Kong 2006 - 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. 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, 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 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 2006, AIs' external liabilities to financial institutions on the Mainland amounted to $292.4 billion, while their claims on financial institutions on the Mainland totalled $287.4 billion. The amounts represented 16.0 per cent and 7.4 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 2006, reflecting increasing economic integration between the Mainland and Hong Kong. The daily average turnover of cross-boundary links (RTGS in Hong Kong dollars and US dollars; cheques in Hong Kong dollars, US dollars and renminbi) increased by 30 per cent to the equivalent of over $1 billion in 2006.

In light of the potential of the fund management industry on the Mainland, Hong Kong-based fund managers, who are recognised for their knowledge and experience in asset management, have successfully established joint-ventures with Mainland fund managers. Hong Kong managers have also embarked on ways to enable investors to capture investment opportunities on the Mainland. At year-end, there were 14 SFC authorised funds with significant exposure to the A-share market on the Mainland. These included the first equity fund that directly invests in A-shares via the fund manager's own QFII quota and 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 year-end, the outstanding renminbi deposits in Hong Kong had reached RMB 22.7 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 $21.7 billion at year-end. The average transaction size of credit/debit card spending was about $2,700.

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, 367 Mainland enterprises were listed in Hong Kong, raising a total of $1,471.3 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. In April, the Mainland authorities announced measures to allow investment in overseas financial markets by Mainland companies and individuals through qualified institutional investors covering commercial banks, securities firms and insurance institutions. The new measures, commonly referred to as the Qualified Domestic Institutional Investors (QDII) Scheme, would strengthen the role of Hong Kong as an international financial centre which serves as a platform for Mainland funds to invest in international markets. Hong Kong's financial market provides many products of high quality and liquidity, enabling Mainland investors to use Hong Kong as their base for undertaking global investment to enhance investment returns and diversify risks.

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.

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. The China Securities Regulatory Commission has already granted approval to a few Mainland securities and futures brokers to set up subsidiaries in Hong Kong. Some of the subsidiaries of these Mainland-approved brokers have applied to be licensed to carry out regulated activities in Hong Kong.

Meanwhile, banks from Hong Kong continued to take advantage of CEPA during the year. By the end of 2006, five Hong Kong banks had taken advantage of the lower asset requirement to open branches on 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 102 branches and 24 representative offices by the end of the year. Three Hong Kong banks with a total of six branches were allowed to conduct renminbi business while seven banks with a total of 68 branches were allowed to act as agents to sell insurance products.

CEPA also provides special advantages for Hong Kong insurers by raising their maximum allowed equity participation in a Mainland insurance company to 24.9 per cent, compared with 20 per cent for other foreign insurers. Hong Kong insurers also have greater opportunities to enter the Mainland market through the formation of groups, while Hong Kong residents may engage in relevant insurance professions after they have obtained the requisite Mainland qualifications and they are employed or appointed by a Mainland insurance institution.

In the accounting sector, 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. Other liberalisation measures are also in force to facilitate Hong Kong accountants and accounting firms in establishing their business presence on the Mainland. For example, under CEPA III, which took effect from January 1, 2006, the validity period of Hong Kong accounting firms' Mainland 'Provisional Licence for the Performance of Audit-related Services' is extended from one to two years.

Economic Summit on 'China's 11th Five-Year Plan and the Development of Hong Kong'

The Economic Summit on 'China's 11th Five-Year Plan and the Development of Hong Kong' was convened in September 2006 to provide a platform for the Government, the industrial and business, professional, labour and academic sectors to discuss how Hong Kong should respond to the challenges and opportunities arising from the 11th Five-Year Plan and to come up with a set of strategic proposals.

Four Focus Groups were set up under the Economic Summit. The Focus Group on Financial Services was formed to discuss the financial development strategy for Hong Kong in response to the 11th Five-Year Plan, with an aim to enhance the status of Hong Kong as an international financial centre. In this connection, three sub-groups have been set up to study (a) further development of Hong Kong's local securities market, (b) further development of Hong Kong's foreign exchange, futures and commodities trading and (c) further development of the insurance and reinsurance industries in Hong Kong and the Mainland, and measures to strengthen Hong Kong's position as an international asset management centre.

The Focus Group on Professional Services, Information & Technology and Tourism conducted an in-depth examination of the specific issues raised at the Economic Summit, including how Hong Kong should strive to attain a leading position globally in professional services. The Sub-group on Professional Services recommended a number of strategic proposals with respect to the accountancy profession, aiming at maintaining Hong Kong's influence in the international professional arena and enhancing cooperation and exchange between the accountancy professions on the Mainland and in Hong Kong. The Administration and the HKICPA will proactively follow up.

On March 23, the Government organised the Pan-Pearl River Delta (Pan-PRD) Financial Services Forum to enable leaders and entrepreneurs from the Pan-PRD Region to gain a better understanding of Hong Kong's financing and investment services, and encourage them to use Hong Kong as the capital formation and investment platform. More than 600 officials from the Pan-PRD Region and the Central Government agencies, entrepreneurs and key players in the financial services sector came to Hong Kong to attend the forum.

In September, the Secretary for Financial Services and the Treasury led a delegation of more than 100 representatives from Hong Kong's financial services sector to Hunan to showcase Hong Kong's strengths and enhance cooperation in the area of financial services. Participants in the delegation included leading figures from the banking sector, securities and insurance industries, venture capital investment and private equity funds, accounting and legal professions, and representatives of the financial regulators. The visit has led to the conclusion of three cooperation agreements between financial services organisations in Hunan and Hong Kong.