Assessing Hong Kong as an International Financial Centre

Abstract

By the end of the 20th century, Hong Kong had emerged as one of the world's major international financial centres. Today, while finance remains central to Hong Kong's future, it is facing unprecedented challenges, in China, in the region and globally. In the context of China, the continuing process of economic reform and financial development raises many opportunities but at the same time brings into question Hong Kong's traditional role as the primary intermediary between China and the global financial system. At the same time, the global and European financial crises have raised fundamental questions about finance, exchange rate systems, the global position of China, and the future role of the renminbi, including Hong Kong's role therein. Reflecting the centrality of finance to Hong Kong, Article 109 of the Hong Kong Basic Law, ascribes the Hong Kong Government an obligation "to provide an appropriate economic and legal environment for the maintenance of the status of Hong Kong as an international financial centre." However, Hong Kong has yet to take a comprehensive approach to this obligation or to consider its strategic and practical implications. While the creation of the Hong Kong Financial Services Development Council (FSDC) is a very important step, more remains to be done. There is no question that Hong Kong has developed impressively and is performing very well as an international financial centre. This is clear and well established and is thus not the central theme of this report. Rather, this report seeks to consider areas where Hong Kong could do better. Thus, the central theme of this report focuses on the need for a more strategic approach to Hong Kong’s future as a financial centre, based on an analysis of academic and policy research and current expectations of best regulatory and commercial practice. This report is the first of a major research project on "Enhancing Hong Kong’s Future as a Leading International Financial Centre", funded by the Hong Kong Research Grants Council Theme-based Research Scheme. Throughout this report (and in the two others which will follow in 2015 and 2017) our analysis seeks to answer one specific question: What policies and legislative/regulatory changes will maximise the long-run, risk-adjusted value of financial activities to Hong Kong, given that other international financial centre policymakers react strategically to such policies? In addressing this issue, the report provides 21 recommendations focusing on five major areas: The first grouping addresses methods to help improve the way the public contributes to financial sector policymaking. The second group proposes ways that the directing minds of Hong Kong’s financial and commercial organisations can participate more actively in ensuring Hong Kong’s regulators adopt policies which actually improve Hong Kong’s competitiveness among international financial centres (rather than just copy international "best practice"). The third grouping looks at ways to broaden cooperation with China. The fourth grouping looks at ways to diversify Hong Kong’s financial sector to access opportunities beyond those presented by the Mainland. The final grouping of recommendations discusses ways of improving the way Hong Kong’s regulators work to help maximise the risk-adjusted returns to the financial sector as a whole.