Yam Proposes Action Plan To Protect Hong Kong's 'Hub' Status

by Mary Swire, for LawAndTax-News.com, Hong Kong

24 March 2006

Speaking this week at the first day of the Pan-Pearl River Delta Financial Services Forum, Hong Kong Monetary Authority Chief Executive, Joseph Yam proposed a five-pronged financial-development strategy to maintain Hong Kong's status as an international financial centre.

With the vast opportunities the Mainland offers, Mr Yam said Hong Kong financial institutions should go across the boundary and expand the scope of services they offer there, such as retail banking.

He went on to add that the presence of Hong Kong financial institutions on the Mainland would allow transfer of technical know-how and provide enterprises and households with a greater choice with regard to financial instruments and services.

Hong Kong should also serve as a gateway for Mainland funds to be invested overseas, he stressed, adding that as Mainland investors are more familiar with the markets in Hong Kong than markets elsewhere, consideration could be given first for them to invest primarily in equity and debt instruments issued in Hong Kong by Mainland enterprises.

This would meet the objective of ensuring orderly outflows from the Mainland, he stated, while satisfying the financing needs of Mainland enterprises listed in Hong Kong. It would also open up an effective financial intermediation channel in Hong Kong between Mainland investors and Mainland fund-raisers.

To facilitate Mainland residents' investments in enterprises listed in Hong Kong, Mr Yam proposed making financial instruments in Hong Kong - particularly those issued by Mainland enterprises - available for sale on the Mainland, when relevant Mainland regulations permit.

He explained that there could be specific ways to implement this proposal, but in all cases, it will be necessary to introduce an arbitrage mechanism to equalise the prices of the same shares in the two markets.

Because the renminbi is the currency Mainland investors and fund raisers use, it would be necessary for Hong Kong to enhance the capability of its financial systems to handle renminbi-denominated transactions to meet better the Mainland's financial intermediation needs.

He went on to suggest that further expansion of renminbi business would not only raise Hong Kong's status as an international financial centre, but also provide a testing ground for the gradual move towards the renminbi's full convertibility.

Financial-infrastructure linkages between Hong Kong and the Mainland should be strengthened, Mr Yam stressed. There are already several cross-border linkages in clearing, settlement and custodian systems, and he revealed that further expansion of linkages - including the central clearing systems for bonds and equities - is also under study.

Mr Yam warned against complacency, arguing that to maintain its status as an international financial centre, Hong Kong must move with the times or risk being marginalised as financial reform on the Mainland gathers pace and financial markets become increasingly globalised.

Financial co-operation between Hong Kong and the Mainland, if pursued along this five-pronged strategy, would make financial intermediation on the Mainland more efficient, while meeting the requirement of Article 109 of the Basic Law on the maintenance of the status of Hong Kong as an international financial centre, he concluded.

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