Abstract

Hong Kong SAR is a leading international financial center with a resilient and fundamentally strong network of financial institutions and markets. Its extensive and deepening links with the mainland, large banking sector, well-capitalized stock market, and active foreign exchange markets enable it to compete effectively with other regional financial centers. Hong Kong SAR’s strong legal framework, a world-class regulatory and supervisory apparatus, and leading-edge financial infrastructure are sources of stability that attract global investors and businesses. This section reviews these and other advantages that have allowed the financial system to successfully confront and overcome a number of shocks and crises over the years while meeting new challenges resulting from advances in information technology and rapidly changing financial practices.1

Hong Kong SAR is a leading international financial center with a resilient and fundamentally strong network of financial institutions and markets. Its extensive and deepening links with the mainland, large banking sector, well-capitalized stock market, and active foreign exchange markets enable it to compete effectively with other regional financial centers. Hong Kong SAR’s strong legal framework, a world-class regulatory and supervisory apparatus, and leading-edge financial infrastructure are sources of stability that attract global investors and businesses. This section reviews these and other advantages that have allowed the financial system to successfully confront and overcome a number of shocks and crises over the years while meeting new challenges resulting from advances in information technology and rapidly changing financial practices.1

An International Financial Center

As one of the most open economies in the Asia-Pacific region, Hong Kong SAR has developed into a leading international financial center whose outward investment orientation compares favorably with that of other centers (Table 7.1). This orientation is evident from Hong Kong SAR’s unusually large international investment positions; as a share of GDP, holdings of foreign assets and liabilities are several times larger than those of other existing or prospective regional financial centers (Table 7.2). Recent capital-account transactions among regional financial centers show that direct investment and bank flows (accounting for most of the “other investment flows” category) play a key role in directing capital into Hong Kong SAR.

Table 7.1.

Comparative Standing Among International Financial Centers, 20011

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Source: IMF, 2003, People’s Republic of China-Hong Kong Special Administrative Region: Financial System Stability Assessment (Washington).Note: OTC denotes over the counter.

Data are for the economies in which the respective international financial centers are located.

Main Board for Hong Kong SAR.

For Hong Kong SAR, Hong Kong dollar debt instruments other than Exchange Fund bills and notes.

Foreign assets refer to total external claims.

Foreign liabilities refer to total external liabilities.

Table 7.2.

Comparison of International Investment Positions Among Existing and Emerging Regional Financial Centers (RFCs), 2002

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Sources: CEIC Data Co., Ltd.; Bank of Korea; Australia Statistics Bureau; and Singapore Statistics Bureau.

Figures as of the end of 2001.

Most globally important financial institutions in the banking, insurance, and securities businesses maintain their regional headquarters or some other presence in Hong Kong SAR for managing funds and as a gateway for promoting financial products to domestic and regional investors, especially those on the mainland.2 Compared with regional financial centers, Hong Kong SAR’s banking system, stock market, and foreign exchange market rank third in the Asia-Pacific region when measured by total assets, market capitalization, and turnover. The growth of the banking sector and the deepening of liquidity in financial markets reflect the importance of a strategic geographic location, a liberal regime toward foreign bank and equity ownership, and an absence of controls on cross-border goods and financial flows for residents and nonresidents.

Financial Intermediation Mainly Through Banks

The financial sector is dominated by institutions that are active in banking and the securities business (Table 7.3). These large banking institutions are major participants in the interbank market, serve as market makers in important exchange-traded contracts and the over-the-counter (OTC) market, and are important agents in underwriting and placing debt securities. Compared with other international financial centers, the ratio of deposits to GDP of Hong Kong SAR’s banks is among the highest, which illustrates the importance of banks in channeling domestic savings into investments. Moreover, syndicated loan volume in Hong Kong SAR is the second largest in Asia, which is consistent with the view that intermediation is performed largely by banks rather than through direct issuance of market instruments. Although there are many banks, the banking system is highly concentrated and accounts for two-thirds of the financial system’s total assets.3 Reflecting the international character of Hong Kong SAR’s banking system, several of the largest are foreign banks that have large shares of the deposit base and the market for many bank products.

Table 7.3.

Structure of Financial System, 1997–2002

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Source: IMF, 2003, People’s Republic of China—Hong Kong Special Administrative Region: Financial System Stability Assessment (Washington).

Dealers who also have adviser licenses are included here and eliminated from the adviser category.

Leveraged foreign exchange traders are not required to report total assets in their monthly financial returns. Total liquid assets are shown as a proxy for total assets.

Finance, hire-purchase, and leasing companies; comprehensive data on them are not available, however.

Number of listed companies and market capitalization of Hong Kong SAR cash market (Main Board) in billion U.S. dollars.

In recent years, bank lending has been shrinking, and total assets have declined by 27 percent since 1997. In addition to the effects of industry consolidation, offshore banking activities have declined as euro-yen loans have diminished because of changes in Japanese tax treatment of such loans. Although bank profits and liquidity have historically been high by international standards, the recent global slowdown has reduced domestic lending and increased pressure on industry profits.4 Increasingly, competition and advances in technology have spurred banks, even the smaller ones, to enter the securities and insurance businesses.

Peer assessments by bank regulators and supervisors have noted that the banking system remains sound and well run despite the strains it has been under recently (see Box 7.1). Factors supporting the well-run banking sector include (1) high capital-adequacy ratios; (2) strong supervisory and regulatory practices; (3) a low level of classified loans; (4) small direct exchange rate risk, reflecting small open positions in foreign exchange; and (5) a track record of resilience to external shocks. Stress tests suggest that the banking system would generally be able to withstand a combination of further declines in property prices, increases in classified loans, and changes in interest rates that are comparable to those that occurred during the turbulent 1997–98 period.

Looking forward, the main challenges to the banking industry and regulatory and supervisory policy are likely to emerge from (1) the global changes in financial practices that are reshaping the financial sector through industry mergers and acquisitions, and cross-market links from new financial products; and (2) increased economic integration with the mainland of China, which will boost cross-border trade and investment flows, encourage Hong Kong SAR banks to open new branches and subsidiaries on the mainland, and require harmonization of regulatory and supervisory policies and practices with the mainland.5

More immediate challenges and risks stem from the global and domestic weakening in economic activity since 2000. Bank lending has been noticeably reduced, as have bank profits, notwithstanding industry efforts to expand the array of bank products and services. In particular, the decline in property prices has increased the number and value of mortgages that exceed the value of the underlying property, creating negative equity. Recent estimates by the Hong Kong Monetary Authority (HKMA) place about a quarter of residential mortgages in a deep negative-equity position (where the mortgage exceeds the property value by 50 percent or more). In this respect, large global banks are often seen as sources of stability for the system, while small banks may be more exposed to such domestic sources of risk and could be a source of reputation risk to the banking system.

Findings of Financial Sector Assessment Program

Overall, the assessment confirms that the Hong Kong SAR financial system is robust and fundamentally sound. Hong Kong SAR’s financial system has shown resilience in the midst of recent international financial crises and during the domestic cyclical downturn. Although some improvements in financial sector supervision and regulatory governance arrangements are recommended, no immediate issues of systemic instability are apparent.

Financial markets are well developed, liquid, and efficient. The banking system, in particular, is well capitalized and profitable. Weak demand for corporate loans and declining interest rate margins on mortgage loans, however, are driving banks, even smaller ones, to expand into investment banking, securities brokerage, insurance brokerage, and asset-management services. Linkages of the banking sector with the capital markets and insurance sectors are growing, motivating enhanced supervisory coordination among regulators of the banking, insurance, and securities industries. This also highlights the need to strengthen legislation related to regulatory and insolvency procedures for financial conglomerates. The recently established Mandatory Provident Fund will help to develop the local capital market but faces structural challenges stemming from its low current returns and a projected income-replacement rate that is within international norms but depends on maintaining the present contribution rates, long service in the system, and nonwithdrawal of funds upon separation.

The assessment finds that the necessary regulatory infrastructure is in place to support the efficient functioning of financial markets. Nevertheless, governance of the securities settlement system (SSS) would benefit from greater stakeholder participation. As with the SSS for securities transfer, the payment system would also benefit from approval of pending legislation to ensure finality of settlements in funds transfer. In the area of corporate governance, fostering wider shareholder participation would help ensure equitable treatment of minority shareholders, especially in view of the concentrated ownership structures. The report by the Expert Group to Review the Operation of the Securities and Futures Market Regulatory Structure, released in March 2003, has made a number of recommendations to strengthen the regulatory structure. The government broadly considers the recommendations to be appropriate and is currently reviewing them. It is also reviewing the feasibility of transferring the listing function from Hong Kong Exchanges and Clearing to the Securities and Futures Commission (SFC). Prompt approval of these proposed changes would clarify regulatory roles and strengthen enforcement in, and oversight of, the equities market. The accounting and auditing professions and practices are adequate to support a market-based financial system; emphasis should be placed on improved corporate-disclosure requirements and enhanced disciplinary procedures in cases of professional misconduct.

The supervisory framework in Hong Kong SAR, which is well developed by international standards, is evolving rapidly from a regulatory compliance focus toward addressing prudential and market-conduct issues, and comprehensively assessing financial intermediaries’ risk-management capabilities and contingency plans. Coordinated supervisory contingency planning, stress testing, and the use of early-warning indicators are welcome recent developments. The SFC and the Hong Kong Monetary Authority (HKMA) have developed effective information-sharing arrangements, including with foreign regulators and offshore centers. Oversight and regulation of the life insurance sector has been strengthened but may still pose some risks related to excessive supervisory reliance on actuaries and self-regulatory organizations. Data collection could be further improved to enable better assessment of market risk and profitability of the life-insurance sector.

The assessment recommends further strengthening of regulatory governance arrangements dealing with systemic and financial stability issues. Cross-sector and system-wide regulatory responsibilities can be better clarified and made public; the monitoring of factors affecting financial stability can be strengthened; and the collection of data on a system-wide basis can be improved. The transparency of institutional and policy frameworks for financial and systemic stability could be further enhanced by publishing the terms of reference of the high-level Council of Financial Regulators and by formalizing accountability and disclosure procedures in dealings between the Chief Executive of Hong Kong SAR and the Financial Secretary.

Hong Kong SAR has largely put in place a framework for anti-money laundering and combating the financing of terrorism that is in accordance with the Financial Action Task Force (FATF) recommendations. The banking, securities, and insurance authorities have issued guidelines on the prevention of money laundering since enactment of anti-money laundering legislation in 1989, and these have undergone a number of subsequent revisions. Recently, the authorities have issued for industry consultation proposed supplements aimed primarily at updating existing guidelines to reflect legislative changes and/or to conform with international standards set out by the Basel Committee on Banking Supervision and with certain recommendations currently under review by the FATF.

Financial Markets

Hong Kong SAR has the full range of financial markets: equity, debt, interbank, foreign exchange, and derivatives.

  • The most important market for intermediation is the stock market, which has operated efficiently and has long provided a low-cost source of funds for listed companies. The Hong Kong SAR stock market’s capitalization compares with that of Switzerland and accounts for more than 80 percent of the capital raised abroad by mainland companies. Funds raised in H-share and red-chip markets amounted to US$92.3 billion, more than 50 percent of the total funds raised in the Hong Kong SAR market during the last decade.6

  • The size of the Hong Kong dollar debt market is small relative to the capitalization of the equities market, and, when measured relative to GDP, is about half the size of the debt market in Singapore (Table 7.4). The efficient intermediation by banks and the equities market has lowered the cost of capital from these sources to the point that domestic corporations have little need to raise funds through debt offerings. More recently, the low-interest-rate environment and high liquidity in bank balance sheets have prompted overseas borrowers, statutory bodies, and government-owned corporations to increase debt issuance.

  • Since Hong Kong SAR is a bank-dominated international financial center, its interbank market provides an important source of liquidity from which international banks without deposit bases can obtain funding. Wholesale deposits are traded actively among local banks (in domestic currency), and between local and overseas institutions (usually in U.S. dollars). Interbank assets have declined by 23 percent in 2002–2003, mainly because of a reallocation away from interbank placements and toward market securities.

  • Foreign exchange market trading has been active, with daily turnover equivalent to 41 percent of annual GDP, which compares with 35 percent in the United Kingdom. The latest triennial survey coordinated by the Bank for International Settlements (BIS) shows the daily average foreign exchange turnover in April 2001 to be US$66.8 billion, which represents 4 percent of the world’s total transactions and makes Hong Kong SAR the world’s seventh-largest foreign exchange market.

  • Hong Kong SAR’s derivatives market is among Asia’s largest. Foreign exchange-related derivatives form the bulk of the trade in the derivatives market, although other forms of OTC instruments are also prevalent.

Response of Hong Kong SAR Government to Recommendations of Financial Sector Assessment Program (FSAP)

Although the FSAP for Hong Kong SAR found the financial system to be robust and fundamentally sound, some improvements in financial sector supervision and regulatory governance arrangements were recommended. This box outlines actions taken to date by the Hong Kong SAR government in response to those recommendations. (FSAP recommendations appear in boldface italics; the authorities’ actions appear in regular type.)

Further strengthen regulatory governance arrangements and improve the transparency of institutional and policy frameworks. The terms of reference of the Council of Financial Regulators and the Financial Stability Committee were published in late June 2003. At the same time, the responsibilities delegated to top finance officials, including the Financial Secretary and Secretary for Financial Services and the Treasury, were clarified, with policy formation and execution responsibilities clearly separated. A formal statement of monetary policy aims was also released, which made explicit that the operating mandate of the Hong Kong Monetary Authority (HKMA) is to maintain exchange rate stability. See http://www.info.gov.hk/fstb/fsb/report/index.htm.

Enhance cross-industry supervisory coordination. In September 2003, the HKMA and Office of the Commissioner of Insurance (OCI) signed a memorandum of understanding (MOU) outlining their respective responsibilities for regulating banks’ insurance business. Under the MOU, the HKMA is responsible for the daily regulation of banks’ insurance business. In cases of complaints of malpractice, the two regulators will share investigative work and take disciplinary action as needed.

Strengthen cross-border information-sharing mechanisms and regulatory arrangements, in particular with the mainland of China. The HKMA signed an MOU with the China Banking Regulatory Commission (CBRC) in late August 2003 to strengthen supervision of banks operating on both sides of the border. The MOU calls for the HKMA and the CBRC to share supervisory information on banks operating on the mainland and in Hong Kong SAR and to ensure that parent banks will exercise “adequate and effective” control over the operations of their cross-border branches and subsidiaries. The two regulators will also meet twice a year.

Improve corporate governance by fostering shareholder participation, ensuring equitable treatment of minority shareholders, improving the frequency and quality of reporting, and enhancing board oversight. The Standing Committee on Company Law Reform issued a consultation paper in June 2003 on the proposal to amend the Companies Ordinance to make it easier for investors to seek compensation for unfair connected transactions involving major shareholders. Other proposals in the consultation paper include adding statutory backing to listing rules, forcing companies to rotate their lead auditor partner every five years, and specifying the remuneration of individual directors. The consultation ended in September 2003.

Establish an independent legal basis for the OCI in order to bring Hong Kong SAR into line with international practice and improve oversight of the insurance industry. The Hong Kong SAR government finished its consultation at the end of June 2003 on the proposal to turn the OCI into a self-funded independent regulatory body. Opinion and views collected from the consultation are being examined by the Financial Services and Treasury Bureau.

Note: This box was prepared by Paul Gruenwald and Ida Liu.
Table 7.4.

Relative Importance of Different Financing Channels in Selected Asian Economies, 2001

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Source: Hong Kong Monetary Authority, Quarterly Bulletin, March 2003.Notes: (1) Bank loans are domestic credit extended to the private sector. All bank loan data, except for Taiwan Province of China, are reported in Line 32 of the IMF’s International Financial Statistics. (2) All outstanding bond data are as of the end of 2001, except for Japan (end of March 2001); Indonesia, Malaysia, and the United Kingdom (end of 2000); and the Philippines (end of 1999). Data refer to local currency-denominated bonds. (3) Bond data for Hong Kong SAR, the Republic of Korea, Taiwan Province of China, the United States, the United Kingdom, and Japan are from central banks. The data for Indonesia, Malaysia, and the Philippines are from the International Finance Corporation (IFC) Bond Database. The data for Thailand are from the Thai Bond Dealing Center. The data for Singapore are estimated based on the Monetary Authority of Singapore and Thomson Financial Data. (4) Public sector refers to government bodies and quasi-government entities. (5) Private sector refers to nonpublic sector and includes financial institutions, corporations, and overseas institutions.

Taking advantage of the broad array of market instruments and funds from domestic and overseas investors, the fund-management industry in Hong Kong SAR has emphasized its international characteristics, both in terms of the presence of global fund managers and of authorized funds.7 The growth of the Mandatory Provident Fund, the recently instituted retirement-saving vehicle, is expected to boost further the funds available for professional management and increase the demand for fixed-income and other market instruments.

The well-supervised securities markets face regulatory and supervisory challenges from global financial trends that could increase cross-market risks. As is occurring in other international financial centers, banks have been increasingly participating in securities market activities. Updated legislation (especially the Securities and Futures Ordinance) and increased cooperation and coordination between the Securities and Futures Commission and the HKMA should go a long way toward ensuring adequate surveillance and a level playing field for banks and brokers. As global investors have been demanding ever-higher standards of accounting disclosure and corporate governance, the Hong Kong SAR government has stepped up its commitment to improving standards and practices in these areas, especially as Hong Kong SAR-based financial institutions conduct more investment banking activities with the mainland, where such standards remain below global standards in some respects.8 Many observers anticipate that global investors, through their Hong Kong-based partners, will pressure mainland firms to improve their corporate accounting and governance practices.

Hub Linking Mainland with Rest of World

Hong Kong SAR has been the most important source of international funds for the mainland through a wide spectrum of external channels, including foreign direct investment (FDI), equity financing, debt issuance, and bank lending.

  • Cumulative FDI from Hong Kong SAR to the mainland was estimated at about US$205 billion in 2002, or about 46 percent of China’s total FDI.9 Although the share of FDI flows from Hong Kong SAR has decreased recently, it still accounted for 34 percent of total FDI flows to the mainland in 2002 (Table 7.5);

  • All but two of the 75 Chinese state-owned enterprises listed abroad at the end of 2002 were listed in Hong Kong SAR, where they had raised a cumulative sum of US$18.2 billion (Table 7.6).10 In 2000, China-related companies (both red chips and H-shares) raised a record US$44 billion on the Hong Kong SAR market;

  • China has raised more than US$4 billion in the Hong Kong SAR bond market (out of US$14 billion placed outside the mainland) over the last 10 years. Four mainland sovereign bonds were issued in Hong Kong SAR, and five mainland issues of nongovernment bonds were listed on the Hong Kong SAR exchange at the end of 2002;

  • The stock of Hong Kong SAR banks’ direct lending to mainland entities totaled some HK$408 billion (US$52 billion) in 1997, or about 60 percent of total foreign bank lending to the mainland (Table 7.7).11 Lending to the mainland by Hong Kong SAR banks has since declined, largely because of poor loan repayments;

  • Hong Kong SAR banks have been active in arranging syndicated loans and floating-rate notes for use on the mainland. At the peak in 1997, syndicated loans to the mainland arranged by Hong Kong SAR banks totaled US$6.1 billion (Table 7.8).12

Table 7.5.

China’s Utilized Foreign Direct Investment (FDI), by Sources:

(In millions of U.S. dollars)

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Source: Hong Kong Monetary Authority.

Offshore centers include the Virgin Islands, the Cayman Islands, Bermuda, and Samoa.

Table 7.6.

Hong Kong SAR H-Shares: Listings and Funds Raised

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Source: Hong Kong SAR authorities.
Table 7.7.

Banking Relations Between Hong Kong SAR and Mainland China:

(In billions of Hong Kong dollars)

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Source: Hong Kong Monetary Authority.Notes: HK$ denotes Hong Kong dollars; F.C. denotes foreign currency.
Table 7.8.

Volume of Syndicated Loans and Floating-Rate Notes Arranged by Banks in Hong Kong SAR for Use in Mainland China

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Source: Thomson Financial.

China has become more integrated financially with the global economy, in tandem with its rising trade integration following its accession to the World Trade Organization (WTO) in November 2001. However, changes in China’s financial sector since then have raised questions about whether Hong Kong SAR’s role as a financial hub linking the mainland and the rest of the world would be eroded.

Restrictions by the government of Taiwan Province of China on Taiwanese direct investment on the mainland were relaxed in October 2002, which removed the need for the long-standing practice of routing Taiwanese investment to the mainland through a third party, notably Hong Kong SAR. Indeed, since July 2002, direct remittances have been permitted between mainland banks and those in Taiwan Province of China, which has reduced the intermediary role of Hong Kong SAR banks. However, Taiwanese enterprises have been using Hong Kong SAR as a funds-management center to support their manufacturing activities in the Pearl River delta, owing to Hong Kong SAR’s proximity. Among these Taiwanese enterprises, 79 percent indicated that they would continue to do this even when direct economic links across the Taiwan Strait are eventually established.13

At the same time, China’s accession to the WTO has allowed foreign banks to benefit from permission to conduct foreign-currency transactions with all types of clients, including mainland individuals and enterprises. As the second-largest foreign banking group on the mainland, Hong Kong banks will likely be the main beneficiary from the relaxation of such rules. It is expected that 10 to 20 percent of all renminbi deposits (totaling more than 10 trillion yuan) will be shifted from local to foreign banks because of the latter’s better reputation, level of services, and perceived soundness. Moreover, the signing of the Closer Economic Partnership Arrangement in June 2003 between China and Hong Kong SAR reduced the asset requirement for opening branch offices to US$6 billion from US$20 billion, which would allow more of Hong Kong SAR’s smaller banks to participate in the mainland banking market.

To boost the professionalism of investors in the mainland securities markets, qualified foreign institutional investors (QFIIs) were given access to mainland equity and debt markets in November 2002.14 Participation is open to foreign funds management, insurance, securities, and banking institutions and is explicitly aimed at more established players. The QFIIs are not likely to pose a significant threat to Hong Kong SAR’s status as China’s preferred offshore direct financing center in the near term. With the relatively uneven quality of accounting and disclosure practices among mainland-listed companies, their high valuations and restrictive holding-period requirements are likely to limit foreign investor interest and resource commitments. Even as the QFII program becomes established, portfolio investment is likely to remain limited in the absence of liberalization of capital flows, and to be placed through the mainland companies listed on the Hong Kong SAR and other foreign stock exchanges.

Furthermore, the potential implementation of the qualified domestic institutional investors (QDIIs) scheme by China is expected to bring mutual benefits to the financial markets of Hong Kong SAR and the mainland. This scheme was proposed by the Hong Kong SAR government in 2001 and remains under active consideration by the mainland authorities. It would allow qualified mainland institutional investors to purchase foreign securities, including in Hong Kong SAR. If implemented, the QDIIs scheme will widen the investor base of Hong Kong SAR financial markets and attract more high-quality mainland companies to list in Hong Kong SAR, thereby strengthening Hong Kong SAR’s status as an international financial center.

Increasing cross-border activities are expected to present new challenges to financial market regulators and supervisors. Increasing integration with the mainland implies that Hong Kong SAR-based banks and securities firms would increasingly expand into the mainland, and vice versa. A major regulatory challenge will be to harmonize the laws, rules, and practices pertaining to banks and securities firms operating in Hong Kong SAR and on the mainland. Otherwise, regulatory arbitrage could lead to increasing risks and potential instability. Supervisory monitoring of Hong Kong SAR banks’ risk taking will be made more difficult by the sometimes highly complex ownership and organizational structures of borrowing companies, which have links to both Hong Kong SAR and the mainland. Financial institutions and supervisors would therefore require increased transparency and disclosure to fully assess the legal and financial status of borrowers and other counterparties.

On balance, accelerated reforms and the opening up of China’s financial sector should increase Hong Kong SAR’s value as a financial hub and intermediary. Hong Kong SAR’s advantages as an established international financial center would continue to attract foreign investors. To be sure, some large financial institutions may have relocated part of their back-office supporting activities, such as data processing and accounting services, to the mainland to take advantage of the lower costs and growing pool of skilled labor. Such shifts may result in some pressure on employment in Hong Kong SAR in the near future, but could also give added impetus to the ongoing structural change that is moving Hong Kong SAR toward an economy of high-value-added services.

1

This chapter draws from material in the Hong Kong SAR Year-book 2001 and the IMF’s Financial System Stability Assessment report for Hong Kong SAR (International Monetary Fund, 2003).

2

At the end of 2001, there were 133 foreign-owned banks in Hong Kong SAR, of which 76 were among the world’s top 100 banks in terms of total assets.

3

As a result of this concentration, interest margins are high by developed-country standards, which has contributed to the sector’s track record of high returns on assets and equity.

4

Domestic bank lending declined by 15 percent between 1997 and 2002 as bank holdings of securities and other investments almost doubled.

5

The steps taken by the Hong Kong SAR authorities to improve the supervisory and regulatory frameworks in response to the recommendations of the Financial Sector Assessment Program carried out by the IMF staff are described in Box 7.2.

6

H-shares are shares of mainland-incorporated companies listed in Hong Kong SAR, while the red chips are shares of Hong Kong SAR-incorporated companies with controlling stakes held by state-owned organizations of provincial/municipal authorities on the mainland.

7

Total assets under management by portfolio managers were HK$1.49 trillion (US$190.4 billion) at the end of 2002.

8

Some proposed enhancements to Hong Kong SAR’s regulatory governance (including clarifying the regulatory roles of the three-tier capital-market regulatory system and improving delisting practices), however, have not been proceeding as quickly as had been expected, resulting in recent calls for further rounds of consultation.

9

Some of the FDI may be accounted for by “round tripping” of funds from the mainland to take advantage of the preferential treatment of foreign investors in China.

10

A number of these are dual listings (also in New York).

11

Hong Kong SAR banks’ direct exposure to the mainland is relatively small, amounting to around 2 percent of total assets of the banking sector, although their indirect exposure is likely to be higher, since a portion of loans booked for use in Hong Kong SAR is used by the borrowers for their mainland operations.

12

There are two principal reasons for the dramatic decline since 1997 of syndicated loans to the mainland arranged by banks in Hong Kong SAR. First, Hong Kong SAR banks have tightened their lending requirements to mainland companies since the failure of the Chinese state investment firm Guangdong International Trust and Investment Corporation in 1998. Second, with low interest rates and high levels of liquidity on the mainland in recent years, mainland companies have had less incentive to borrow from banks in Hong Kong SAR.

13

This figure is from a survey done by the Hong Kong Trade Development Council in mid-2002.

14

Investors would have access to all domestic-currency assets listed on domestic exchanges, including equities, government bonds, and commercial bonds and paper.

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Note: For information on the titles and availability of Occasional Papers not listed, please consult the IMF’s Publications Catalog or contact IMF Publications Services.