Hong Kong As A World Financial Centre" Speech Given By H. C. Lee, Chairman Of The Stock Exchange Of Hong Kong, At Business And Professionals Federation Of Hong Kong, October 14, 1999

The emergence of Hong Kong as the most international of Asian financial centres over the past 20 years has been a remarkable story. But despite our past achievements, we are seeing that Hong Kong as a financial centre faces a much tougher competitive environment today than ever before; and, to maintain Hong Kong's leading position, we will need to address some broad issues which go beyond pure financial market infrastructure. Through the years, we have seen certain factors emerge as basic pre-requisites for the achievement of world status as a financial centre. I would like to highlight seven: Openness: which means a willingness to allow entry (and a level playing field) for all international participants, including investors, banks, securities houses, fund managers, insurers, lawyers, accountants, other market players; A well-developed communications infrastructure, including in technology, telecommunications and transport; A sound legal and institutional framework, with independent courts and an effective and user-friendly regulatory system; Availability and free flow of information relevant to investors; A substantial economic hinterland; A critical mass of sophisticated market practitioners supported by a well-educated local human resources base; A cost base which is proportional to the value being added by the relevant financial centre. Hong Kong scores quite well on most of these counts. However, other centres are closing the gap by deregulating and opening up their markets. And recently, we have seen ourselves become more vulnerable as: our cost base is high relative to other financial centres; the supply of skilled local human resources is still too limited; the quality of life in Hong Kong has deteriorated. This is a major factor in attracting financial market professionals. Moreover, we see that globalisation of financial markets is also bringing about consolidation among international financial centres, just as financial market activity tends to concentrate in the hands of a limited number of global firms. Today the truly global centres are New York and London. No centre in Asia has yet developed comparable scale, partly because Asian markets remain more fragmented. Hong Kong thus finds itself in an intermediate position - still competing with other Asian cities for dominance in this time zone and at the same time trying to prevent its global business from migrating to North America or Europe. Competition is being intensified by advances in technology, such as with the Internet. Electronic markets and electronic proof of ownership are superseding physical markets. Cross-border financial transactions (including securities trading) can now be carried out at a fraction of past costs (by new internet-based intermediaries). This development is posing a sharp challenge to all established market institutions. What can Hong Kong do, then, to preserve and continue to develop its position as a world financial centre in the face of these challenges? I would like to share four ideas: We need to expand the critical mass of financial market professionals in Hong Kong. One element in this effort is, of course, increasing the output from Hong Kong's educational and training establishments. But this is a long-term exercise. Attracting talented students from the Mainland China to HK-based financial service education centres can be another alternative. Moreover, key factor in maintaining status as a financial centre is preserving the attractiveness of Hong Kong as a place to live and work. This effort would include promoting the use of English, attacking the causes of pollution (as the Government is doing) and fostering a cosmopolitan, outward looking and free thinking culture, which has always been one of Hong Kong's main competitive advantages. We must also take steps to reduce the cost of employing financial services personnel, relative to other Asian financial centres. I know this can be a sensitive subject. Adjusting the currency peg is not an option at present. One must then address how to reduce salaries and cost of residential accommodations. New policy initiatives in this area are, I believe, vital to Hong Kong's long-term competitiveness. We need to develop strategy in forming relationships between Hong Kong and other centres within Asia and in Europe and North America. The global markets of the future may well see cross-border alliances which will play a large part in determining the flow of financial market business. Forming the right partnerships at an early stage in the process is a key factor in this development. Most important, Hong Kong and the Mainland China together need to take steps to permit much fuller use of Hong Kong's ace card - its hinterland. There has been much talk about Hong Kong as the Manhattan of China - or at least of Southern China. The reality is that Hong Kong is still an "offshore" financial centre as far as the Mainland China is concerned. But there are many potential synergies that can be further developed. One is in the area of derivative products, where the Mainland China has a clear need for larger and more efficient markets and where Hong Kong has all the necessary expertise, including risk management skills. Another area for creating synergies is participation by Hong Kong financial institutions in PRC domestic securities market, including, in particular, investment management. The Mainland China needs to develop its fund management industry and Hong Kong has the necessary expertise. Moreover, improved electronic links between Hong Kong and PRC stock exchanges would also help to pave the way for an eventual expansion of the investor base for both. If Hong Kong and the Mainland China can both commit themselves wholeheartedly to exploiting such synergies as these, and thus giving more substance to Hong Kong's claim to having a real financial market hinterland, then Hong Kong will have a greater chance of maintaining dominance as a global financial centre.