The Stock Exchange of Hong Kong

NEWS RELEASE

History is accelerating as it progresses. A hundred years ago, the pace of change was rapid by the standards of what preceded it, but by today's standards it appears sedate. I cannot imagine what it will be like a hundred years from now. It seems as if every week some new horizon appears which was not there the week before, and we are forced to develop a strategic response, forgetting the plans we made only a few months before.

The news that China is likely to join the WTO is one of those events which force us to re-write our assumptions. Today, I shall focus in particular on the implications, opportunities and challenges of this potentially momentous event as far as Hong Kong's financial market is concerned.

Over the past 20 years, Hong Kong's manufacturing sector has become comprehensively integrated with the economy of the Mainland, despite our separate currency and economic systems. It might be more correct to say that Hong Kong's manufacturing sector has largely migrated to the Mainland.

This integration has not occurred to anything like the same extent in the service sector, including particularly financial services. The main reason for this is that the service sector on the Mainland has been largely closed to foreign participation - and for this purpose Hong Kong is still foreign. Although we are now part of China, as a financial centre we are still offshore.

Manufacturing was easier to integrate because the market for the output of Hong Kong-run facilities on the Mainland was largely outside China. In services, the users are by definition domestic.

Some accounting firms based in Hong Kong have made some progress in penetrating the Mainland market. A limited number of banks have been allowed to operate in limited parts of the Mainland market, as have some insurance companies, and one or two joint venture investment banking operations have been set up.

However, Hong Kong securities companies have so far not been permitted to participate at all in the domestic market, though some Mainland securities companies have become quite active in Hong Kong. Nor has the fund management industry in China yet been opened up to foreign participation, despite the increasingly evident need for foreign expertise to develop this key aspect of the financial system.

In these days of global markets, and with Hong Kong being an open financial centre, it is difficult to draw a distinction between Hong Kong institutions and foreign institutions operating out of Hong Kong. So it is understandable that Hong Kong has not so far been treated any differently than US, Europe, Singapore or Japan, as far as financial market access to the Mainland is concerned.

What we now see with China's impending WTO accession, is a potentially sharp increase in the pace at which Mainland markets will open up to outside participation. Hong Kong is the natural place from which this process will be spearheaded.

We have here the largest concentration in Asia of international financial market expertise, with the possible exception of Tokyo. We have over 100 commercial banks, in addition to securities houses, fund management firms, insurance companies, and an array of supporting professional service providers such as world class legal and accounting firms and information technology providers.

The number of firms is only half the story. What really matters is the level of financial market technology. In the case of Hong Kong, the range and sophistication of financial market services and products matches the great global financial centres - New York and London. Indeed a large part of Hong Kong's critical mass as a financial centre is derived from the presence of leading North American and European financial institutions.

What is special about Hong Kong is that this concentration of financial market expertise co-exists with a large body of expertise and experience in doing business in China - of individuals who are familiar with the latest derivative products developed in Chicago, or the best on-line securities trading technology, and also with the language and business culture of the Mainland. There is no other centre which comes close to matching this natural competitive advantage.

As a result of WTO, the Mainland will experience industrial and commercial restructuring on a significantly increased scale. The key role that financial markets can play in aiding this process has only been properly recognised in the West in the last 10-15 years.

Corporate mergers, de-mergers, acquisitions, buy-outs, restructurings, spin-offs - all of these create economic efficiencies which financial markets are good at recognising, measuring and rewarding, -- create the necessary incentive to make restructuring happen voluntarily. Experienced investment bankers are plentiful in Hong Kong and are frequently the first to spot opportunities to create value through corporate restructuring.

Similarly, financial markets provide the incentive to encourage the growth of new enterprises, particularly innovative enterprises - which are frequently technology-based. Hong Kong's Growth Enterprise Market, GEM, is a good example of this. It is already playing host to several mainland technology enterprises. And markets like this encourage the development of the venture capital industry, which plays a key role in restructuring, and which is also strongly represented in Hong Kong. The advent of WTO brings a multiplier effect to the whole process.

As economic energy is released by competition and competitiveness, the demand for new capital to develop new businesses and invest in new technology is likely to increase. This is another factor which will permit Hong Kong to play to its strength. Already Hong Kong is the main centre through which Mainland enterprises access international capital.

Because of Hong Kong's sophisticated market infrastructure, including a mature regulatory regime, the cost of international capital raised through Hong Kong is likely to be lower than in Mainland markets. And the volumes which can be absorbed by the Hong Kong equity market are now very substantial. Part of the reason for this is that Hong Kong has established itself firmly as the principal place for trading the securities of mainland issuers in the secondary market. On the debt side, Hong Kong-based institutions have the dominant international distribution power and understanding of Mainland risk.

In indirect ways, China's accession to WTO should also lead to the integration of financial services between Hong Kong and the Mainland. A key ingredient permitting financial service industries to flourish is a trustworthy and objective legal framework. The relative immaturity of the Mainland legal system is an inhibiting factor in the development of some financial market activities. WTO will not transform this overnight, but it will stimulate the process. This will also create opportunities for Hong Kong-based service providers.

It is not all good news. There is still one factor which still acts as a major brake on the integration of Hong Kong and Mainland markets. This is the absence of convertibility of the Renminbi on capital account.

Before the Asian financial crisis, the Mainland appeared to be on course towards full convertibility around the year 2000. Clearly these thoughts were banished by the experiences of 1997-98, and with reason. From Hong Kong's point of view, that was perhaps one of the most serious casualties of the crisis. It is likely to be some time before Mainland authorities will again venture to expose themselves to the winds of global capital flows.

This factor, more than anything else, keeps Hong Kong at arm's length from Mainland markets. But in this context, too, China's accession to WTO is likely to act as an accelerator. I would hesitate to name a prospective date for full Renminbi convertibility. But I suggest that its arrival will be faster than it would have been without WTO. And it will come sooner than you think.

Because of time constraints, my remarks have been of a macro nature and have addressed only some of the ways new horizons will open up for Hong Kong-based financial service providers. I hope I have said enough to stimulate your thinking about the implications of China's WTO membership.

I think historians will look back on this as one of the more significant geo-political as well as economic events of the second half of the 20th century. And yet again Hong Kong has had the good fortune to BE the right place, IN the right place, AT the right time.

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