Hong Kong as an international financial center

Linked Exchange Rate in Hong Kong

History

100 % backup

Linked with USD

Have two exchange system: a. Linked Exchange Rate b. Market Exchange Rate

Linked Exchange Rate: Fixed 1 USD= 7.8 HKD Issue Bank & Foreign Exchange Fund

Market Exchange Rate: Demand / Supply Exchange Branch, Bank Low floating rate

Linked Exchange Rate

Why Hong Kong choose Linked Exchange Rate System

USD ( High Liquidity, High Credibility , High Circulation)

Financial Crisis (1983)--- Political Factor

High Stability (Hong Kong was a Colony)

Mainly focusing on service industry ( Less affection from unfavorable balance of trade)

Price of Land is very High

Maintain the regulation of financial system

Automatic Stabilizer

① Sell HKD ( Large amount)② Supply of HKD↑ Interest Rate ↓③ HKMA Buy HKD back④ USD Supply ↑⑤ Interest Rate of HKD↑ (even higher then USD)

Demand of HKD ↑ Exchange Rate ↑

Cannot reflect the economic performance

Monetary policy become very inelastic

Less Competitive1. Balance of payment 2. Re-export3. Logistic

Exchange Rate will ceaselessly drop until it reach EQ

Average inflation rate : 1983-1986

Hong Kong 7.79%

USA 3.35%

Space of HKD to be appreciated was very large

Financial Crisis (1998)

Countries among Asia region depreciate their currency to adapt the economic down turn

Highly affect Hong Kong re-export industry

1999 ‘s gross export volume dropped 12.7%, reaching 13979 billions

Competition from Singapore

Another financial centre in the same region

Operate in the same market segmentBeing geographically close to each

otherBelonging to the same time zone

• HK and Singapore have been rivals for the title of the second largest financial centre in the Asia-Pacific region (the largest is Tokyo)

• Singapore’s long term objective:To replace HK after 1997 as the

second largest IFC in the region

Similarities between HK and Singapore

• Both are free ports• Both are small open economies• Both have a background of British

rule• Both use the English legal system• Both use the English languagethe challenge from Singapore is

much more immediate and direct

HK vs Singapore

• The Monetary Authority of Singapore( MAS) was established in 1971

• Abolition of the interest rate cartel among banks was completed in 1975

• The Hong Kong Monetary Authority (HKMA) was established in 1993

• Only recently in HK

HK vs Singapore• Singapore’s second

board, SESDAQ, was established in 1987

• MAS launched the revamped government securities market in 1987 as one of the measures to develop a domestic bond market

• More than a decade of HK’s GEM

• HK started its Exchange Fund bills programme in 1990

HK vs Singapore

• HK’s exchange may be switching to longer trading hours and lower brokerage fees

• Singapore implemented these long ago• Their propaganda emphasize the same thing

-time zone advantage

-excellent infrastructure

-political stability

-a strong and stable currency

• Facing the challenge from Singapore,• However, HK keeps its competitive

power • Can be proved by three released reports

1. Economic Freedom of the World: 2005 Annual Report

2. The 2005 Index of Economic Freedom

3. The Capital Access Index 2005

Economic Freedom of the World: 2005 Annual Report

• HK has consecutively retained its top ranking in the Economic Freedom of the World for 9 years

• Scoring 8.7 out of 10• Closely followed by Singapore’s 8.5• New Zealand, Switzerland and the US tied for th

ird with ratings of 8.2 • HK was also voted the best area of freedom to t

rade internationally and regulation of credit, labour and business and second in size of government

The 2005 Index of Economic Freedom

• HK has consecutively ranked the world’s freest economy, scoring 1.35

• again ,the second is Singapore, scoring 1.6

• The Luxembourg ranked the third, scoring 1.63

The Capital Access Index 2005• The Top 10 markets (with 2004 ranking): • 1. United Kingdom (3)

2. Hong Kong (1)3. Singapore (2)4. United States (6)5. Sweden (4)6. Denmark (9)7. Australia (7)8. Norway (13)9. Finland (5)10. (tie) Canada (10)10. (tie) Ireland (11)

It seems that HK is still leading Singapore at the moment

CAUTION:

Singapore may follow HK closely enough to overtake HK someday !

Prospects

Enchancing our Position as an IFC

1. Hong Kong ranked 1st in Asia and 3rd in the world last year in terms of capital raised,

• with total Initial Public Offering (IPO) and post-IPO equity funds reaching some $265 billion,

• out-performing the London and Tokyo Stock Exchanges.

2. 2004

• a total of 304 Mainland enterprises

compare with 2003

22%

Over ¼ of the total no of listed companies

30% of total stock market capitalisation

half of our total market turnover

3. Market capitalisation also hit a new high of about $6,650 billion, nearly 50 % above the pre-reunification level

4. > 70 % of their trading is conducted in Hong Kong .

Reinforcing our Renminbi Business 1. 1st place outside the Mainland to conduc

t personal Renminbi (RMB) business, including

• deposit-taking,• currency exchange,• remittances • credit cards total of 38 Hong Kong retail banks

first three services

Three strategic directions will be indicated :

• exploring the diversification of the RMB assets and liabilities of Hong Kong banks; particularly on the liability side, diversification to non-residents and non-individuals of deposits now restricted to resident individuals.

Three strategic directions will be indicated :

• exploring the provision of appropriate RMB banking services for trade and other current account transactions between Hong Kong and the Mainland.

Three strategic directions will be indicated :

• exploring the feasibility of establishing a RMB debt issuance mechanism in Hong Kong.

Promoting the Bond Market

e.g. 5 tunnels and 1 bridges.

• a $6 billion securitisation bond was issued

the largest-ever securitisation bond offering in Hong Kong

1st made available to retail investors.

e.g. In July last year, the Government launched its $20 billion global bond offering.

• This was the largest multi-tranche offering from the region, available to both retail and institutional investors.

• the largest subscription and issue amounts for a retail bond.