31 May 2007
'Hong Kong as a fund-raising hub'
Remarks by Mr Vincent Cheng, Chairman
The Hongkong and Shanghai Banking Corporation Limited
29th Japan-Hong Kong & Hong Kong-Japan Business Co-operation Committees
Plenary Session, Tokyo

Good morning Ladies and Gentlemen. It has been said the shorter the speech, the greater the gratitude. With that in mind, I intend to give you a relatively brief overview of Hong Kong's role as a fund-raising hub. In other words, how the city measures up.

With its strategic geographical location, its excellent infrastructure and its well-regulated banking sector, Hong Kong has developed over several decades into a dynamic financial and investment hub. In fact, Hong Kong was recently ranked - in a report released by the City of London - as the third international financial centre after London and New York. And ahead of Singapore and Zurich. Such accolades are not surprising considering Hong Kong plays host to 138 licensed banks, 31 restricted licence banks and 33 deposit-taking companies. Also, some 70 of the world's top 100 banks maintain a presence in the city.

Of course, Hong Kong is not only attractive to banks. As others have already mentioned, the city also plays host to more than 3,800 regional headquarters and regional offices. Including to more than 700 Japanese companies. Hong Kong is also amongst the highest GDP per capita economies in the world and holds the world's eighth largest foreign exchange reserves - some US$ 137 billion.

The city is also the largest venture capital centre in Asia, 29 per cent of the total capital pool in the region. As of last count, there were more than 180 venture capital funds based in Hong Kong. And the capital under their management amounted to some US$40 billion.

Just as an aside, the total funds under management in Hong Kong were some US$580 billion in 2005. The totals for last year are not out yet, but Hong Kong's share likely exceeded US$700 billion. Hong Kong is also the second largest source of foreign direct investment in Asia. The latest statistics show total annual investment outflows from Hong Kong at close to HK$160 billion.

As you will be aware, Hong Kong has also recently overtaken New York to become the world's second biggest market for initial public offerings. Raising close to US$43 billion through IPOs in 2006 alone. Only London raised more. Hong Kong's stock market also remains the second largest in the region after Tokyo. Hong Kong remains one of the worlds most active and liquid securities markets in part because there of the absence of any capital controls. And in part because Hong Kong has no capital gains nor dividend income tax.

But perhaps the biggest reason for Hong Kong's current success is the role its plays as an important source of funding for companies in other parts of Asia, particularly mainland China. This role in respect to China is expected to continue to grow as the demand from the Mainland for fund raising as well as other sophisticated financial services continues to increase. Demand that is being fuelled by the continuous market liberalisation in China and also by mainland enterprises aspiring to go global.

As I am sure you are all aware, Hong Kong has in recent months arranged a number of very large IPOs for mainland enterprises. Included in this group are a number of mainland financial institutions like ICBC, Bank of China, China Construction Bank, Bank of Communications, and China Merchants Bank. At last count, the total capital raised in Hong Kong via IPOs for China-related companies over the last two years comes to some US$55 billion.

In fact, Mainland companies listed on the main board of the Hong Kong stock exchange now command a market cap of some US$800 billion - a 20-fold increase compared to 10 years ago. The perception of some is that Hong Kong will eventually see this stream of IPOs from China dry up. The reality is that many mainland enterprises will continue to need capital if they are to expand as planned - domestically and internationally - for many decades to come.

The second reality is that some 1,800 private enterprises are being set up in the Mainland daily. Given China's own financial markets are not yet fully developed, Hong Kong's capital markets are and will remain an attractive alternative for many small and medium-sized enterprises.

The third reality is that the Mainland's financial markets also - currently at least - lack the breadth and depth to support individual and institutional investors to manage their expanding wealth. Typically, China's huge US$2 trillion in household savings are being put in low-yield banking deposits. Similar sentiments apply to institutional investors like insurance companies, where one-third of the insurers' total assets are put in low-yield bank deposits.

That said, Hong Kong is not resting on its laurels. And it is most certainly not standing still. You may recall that I mentioned Hong Kong has retained its ranking as the second largest stock market in Asia. What I neglected to point out - and let me correct this oversight now - is that Hong Kong's market cap has in fact risen fourfold in the last 10 years. In comparison, over the same period the market caps of New York, Tokyo and London have risen roughly twofold.

That said, the single most significant development underway right now in Hong Kong - without a doubt - relates to the RMB. Hong Kong already has RMB deposits of some 25 billion. And the next stage is being set to allow an RMB retail bond market to be set up in the city. Hong Kong, of course, also remains a major channel for investment funds flowing into and out of China through the QFII and QDII programmes respectively.

What is clear is that the RMB will over time likely become a reserve currency internationally as China continues to grow. What is also clear - as Hong Kong's regulator-in-chief, Joseph Yam, noted in a speech here in Tokyo not long ago - is the fact that Hong Kong is the obvious and ideal free-market test ground for initiatives related to the eventual free and full convertibility of the RMB.

As my allotted time is almost up, in sum let me say that Hong Kong is - as I noted earlier - not sitting on it laurels. Rather the city continues to enhance its position - domestically, regionally, globally - as a financial centre and as a fund raising hub.

Indeed, Hong Kong numbers speak for themselves: one country, two systems, 10 years, hundreds of financial institutions, thousands of regional offices, millions in foreign investment, billions in capital raised. All in all, not bad for a city that some predicted would become an economic backwater after the 1st of July 1997. Not bad at all.