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27 May 2008 'NY-LON-KONG — Hong Kong as Asia's Financial Centre' Speech by Mr Vincent Cheng, Chairman The Hongkong and Shanghai Banking Corporation Limited HK-Japan & Japan-HK Business Co-operation Committees 30th Plenary Hong Kong A bit of trivia for you this morning. Currently, there are — I am told — more than half a million words in the English language. I say 'currently' because the English language is being constantly expanded. For example, the word 'Nylonkong' was added earlier this year by the folks over at Time magazine. A new word Time has coined to describe a network of three cities: New York, London and Hong Kong. Three cities which Time says drive today's global economy. I have been invited today to speak about this new word. In particular, about the city represented by the third syllable. Now, I don't know how many of you — in particular our guests from Japan — have read the Time piece about New York, London and Hong Kong. Just in case you didn't, I can tell you that the premiss of Time's cover story was summed up rather well in one single line: "spaced neatly around the globe, the three cities have created a financial network that has been able to lubricate the global economy." Indeed, the Time article went on to make several sweeping statements about Hong Kong. Sweeping statements that provide the perfect backdrop for a discussion about Hong Kong's role going forward. Statements that Hong Kong is perfectly positioned to become China's Wall Street. Statements which others seem to agree with. For example, in the latest Global Financial Centres Index issued by the City of London, Hong Kong "remains comfortably in third place." Behind only London and New York. Well ahead of Singapore and Zurich. Also statements like "a willing and able broker" which are backed up by trends in recent years. In fact, with Chinese companies now accounting for more than half of Hong Kong's total market cap, the reference to 'willing and able' might actually be an understatement. As the Time article also kindly pointed out, beyond offering Chinese companies an entrée to the outside world, Hong Kong is also rapidly becoming a centre of wealth management. This is aided by the fact that Hong Kong remains culturally and economically and physically close to China. As a result, Hong Kong's fund management business also continues to expand, with some US$800 billion under management in 2006. And while the funds under management in Hong Kong in 2007 are not yet confirmed, the total will likely exceeded US$1 trillion. Close to triple what they were 5 years ago. That said, the one statement in the Time article which stood out above all others was this one: the belief that Hong Kong must continually raise its game to be relevant to mainland China. They are right, we do. I would also submit that Hong Kong is indeed raising its game. Consider Islamic finance. As you may be aware, Hong Kong is in the process of developing its Islamic finance capabilities. Late last year, in fact, the first Islamic fund was launched in Hong Kong by Hang Seng Bank, a subsidiary of HSBC. Within a week it brought in US$20 million. Today, the Hang Seng China Islamic Index Fund has grown to some US$54 million. Amongst the skeptics, however, the perception is that Hong Kong will never play much of a role in Islamic finance. Partly because, they say, there are so many other centres — including Kuala Lumpur and Singapore in Asia — already engaged in Islamic finance. Partly because, they point out, there is a relatively small number of Muslims in Hong Kong. And partly because, they maintain, Hong Kong is coming to the table too late. Personally, I think such skeptics are missing the point. The reality is that a financial centre like Hong Kong is — in the most simplistic of terms — a place where those with capital come together with those needing capital. The reality is that right now there is a considerable amount of so-called 'petro-dollars' accumulating in the Middle East. And accordingly a considerable amount of interest in finding a place to invest such capital. A place where economic growth rates are high. A place like China. The ultimate reality is that Hong Kong's development of Islamic finance is simply a logical extension its role as a financial facilitator. In fact, with an estimated global value of some US$1 trillion, it would be rather difficult for any financial centre to ignore Islamic finance and still call itself 'international'. But I digress. Moving on. A second example of how Hong Kong is continuing to 'raise its game' relates to renminbi business. As you are aware, Hong Kong was the first and remains the only major international financial centre where companies can conduct their banking business in renminbi. Last year, Hong Kong also became the only place outside mainland China with a renminbi bond market. And as of last quarter, renminbi deposits in Hong Kong were approximately 58 billion. Up more than 70% in three months. A rise which is partly due to Hong Kong dollar deposits yielding almost 0% right now. And partly because fluctuations in the equity market have sent investors looking for alternative places to park their savings. But also because the renminbi is expected, by many, to continue to appreciate in the near term. Over the longer term, the renminbi will become a reserve currency internationally as China continues to re-emerge. Meanwhile, Hong Kong for its part will be the obvious and ideal free-market test ground for initiatives related to the eventual free and full convertibility of the RMB. Indeed, the degree of capital market mobility in mainland China remains a key factor in Hong Kong's future development in general. And in Hong Kong's role as an international financial centre in particular. There are, of course, other ways Hong Kong is raising its game. Maintaining its relevance. For example, Hong Kong continues to expand its role as a major channel for investment funds flowing into and out of China through the QFII and QDII programmes respectively. Just as an aside. As China continues to liberalise its capital market, the quota for both QDII and QFII will continue to expand. Recently the CSRS granted approval for China fund managers to establish subsidiaries in Hong Kong. These subsidiaries will be allowed to engage in asset management business under CEPA 4. All of which suggests that Hong Kong will continue to play a major role in China's fund management business. Hong Kong is also currently pushing for a triple-A credit rating. Proponents of the upgrade are arguing that Hong Kong's economy resembles other triple-A rated economies like Singapore. And that risks associated to China are diminishing as the health of the mainland's banking sector improves. Policy and supervision are also still being strengthened here. Everything from the introduction of a deposit protection scheme to implementation of Basel 2 to the creation of a positive credit data bank. But perhaps the single biggest driving factor pushing Hong Kong to continue to raise its game is all the other centres out there. Places like Shanghai and Singapore and yes Tokyo, who are also not resting on their banking laurels. On that note, I'd like to open the floor to questions or discussion about Hong Kong's role going forward. In the context of China. But also in a regional and global context. But before I do, perhaps I should adjust the backdrop slightly. And put up another new word that might end up being added to the English language sometime down the road . . . Hongnylon. Remember, you saw it hear first!
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