Hong Kong

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                                         Cover story




          Hong Kong
                                   at the crossroads?
                                    The most senior banker
                                    in the SAR talks to
                                    Donald Gasper and Ajay Shamdasani




[ 20 ] A Plus   +   January 2007
“H
                ong Kong has the potential     first, headed by the Hon. Ronald Arculli,    and also to assist us in entering the
                to become one of the           chairman of the HKEx, has been              bigger mainland market,” he says.
                leading financial centres       examining listing rules on the Hong              While still believing that
in the world, but we won’t get there by        Kong Stock Exchange and how the             government intervention should be
following a strict laissez-faire play-book,”   scope of the exchange can be enlarged       kept to the minimum, Li points out
says Dr. the Hon. Sir David Li, chairman       to improve the listing environment. The     that many policy issues affecting
of the Bank of East Asia (BEA).                second, directed by Gary He, deputy         Hong Kong’s interaction with the
     A member of the Executive and             chair and chief executive of the Bank of    mainland can only be dealt with on a
the Legislative Councils of Hong               China, was charged with looking into        government-to-government level.
Kong, Sir David was invited recently           developments in trading the yuan and             Whether the issue is expansion of
by HKSAR Chief Executive Donald                the market need for commodity futures       yuan business, cross-boundary transport
Tsang to convene the focus group on            trading in Hong Kong, including the         or market access for Hong Kong films,
financial services for China’s 11th five-        potential for a yuan futures market. The    the city depends on the government
year plan and the development of Hong          third group, led by Dr. Edmond Tse,         pursuing and promoting Hong Kong’s
Kong. The group has just made some             deputy chair of the AIG Group, has          best interests to a far greater degree than
recommendations to the chief executive         been investigating how Hong Kong can        it did in the past, he argues.
on how Hong Kong can maintain its              better serve the needs of the insurance
competitive edge.                              and reinsurance industries, both on the     CEPA
     Despite his busy schedule (he was         mainland and internationally. Li says       It’s no surprise that Sir David is a
travelling to Japan, then, 48 hours later,     that the group will suggest regulatory      steadfast supporter of the closer
heading to chair a board meeting in            changes to promote Hong Kong as a           economic partnership arrangement
Singapore before flying to Germany to           fund management centre.                     (CEPA) as an example of the positive
give the prestigious 7th annual Haniel                                                     leadership the Hong Kong government
lecture – the first Asian to deliver the        Positive non-interventionism                should give.
address), Li was happy to speak to             Li says the group’s thinking is based            Local financial services providers,
A Plus about the thinking behind the           on the new relationship between             accountants and lawyers are keen to
group’s recommendations. (“I do read           Hong Kong and the mainland since            establish themselves on the mainland,
your magazine,” he told us. Sir David is       the change of sovereignty. (He was          he says, and “all want to be able
a member of the Hong Kong Institute            vice chairman of the Basic Law              to practise on an equal basis with
of CPAs.)                                      drafting committee which laid the           mainland professionals.”
                                               groundwork for the new special                   As a result of CEPA, which lowers
Focus group                                    administrative region.)                     capital requirements for SAR banks to
                                                                                                                                                        PHOTOGRAPHS BY BRIAN CHING




Li lauds the chief executive for                   On government intervention              conduct business on the mainland, six
initiating focus groups to study               in the marketplace, Li backs the            Hong Kong banks are now operating
opportunities arising from the                 recent statement of Tsang that              there. “If the government had not
mainland’s latest five-year plan.               “non-interventionism” is no longer          intervened to introduce CEPA, a lot of
    The focus group on financial                appropriate: “We want the government        banks in Hong Kong would not have
services, which Li chairs, consists of         to provide a level playing field, to make    been able to go to the mainland,” the
three work groups, he explains. The            certain that the market is free and open,   BEA chairman says.



                                                                                                                     January 2007   +   A Plus [ 21 ]
                                                  Cover story




     BEA in China
     In accordance with China’s commitments
     to the WTO, on 11 December the
     mainland opened its market for foreign
     banks to run yuan-denominated business
     for the first time.
          The Bank of East Asia is planning
     to incorporate on the mainland as a
     local bank, says Li, in accordance with
     legislation enacted by the National
     People’s Congress. As a result it will pay
     higher taxes on the mainland, but will
     in return be able to issue domestic credit
     cards, grant consumer loans, accept yuan-
     denominated deposits (from corporate
     and non-corporate depositors) and
     open more branches, rather than being
     restricted to one a year. The bank has
     already submitted an application for the
     establishment of a local subsidiary based     accounting standards and also to             banks have been substantially reduced
     in Shanghai.                                  benefit from a credible banking and           because of better management.
          Li acknowledges big Chinese banks        financial system,” Li says.                       Li says China’s listed companies
     will be tough competitors, but says his                                                    are required to follow international
     bank has a future on the mainland.            Strength of the                              accounting standards beginning January
     “If you’re talking about the Industrial       mainland’s banking sector                    2007, which should force them to
     and Commercial Bank of China                  When queried about the 1991 collapse         comply with the requisite classification
     (ICBC),” he says, referring to the            of the Bank of Credit and Commerce           of bad loans.
     largest mainland lender, “it has got so       International (BCCI) and whether the
     many branches we would never be able          same thing could happen to a Chinese         Basel II accord
     to compete with it in terms of branch         bank, Li says: “I think the types of         Nearer at home, Li sees no difficulties
     networks or in terms of the amount of         problems that BCCI faced would be            for Hong Kong’s banks complying
     deposits it takes in, but we have our         very unlikely to occur again. Banks in       with Basel II, which comes into effect
     own niche customers – the overseas            China are now much better regulated          this month. At the most there may
     Chinese and also those corporations           than ever before. The authorities have       be teething problems, but no huge
     who want to do business with us in            learned a lot of lessons from BCCI,          difficulties, he says, thanks to the
     the mainland.”                                both in Hong Kong and overseas.”             preparatory work done by the Hong
          He regards as a milestone the recent     Li ascribes BCCI’s problems to its           Kong Monetary Authority (which Li
     floating of the ICBC in Hong Kong              minimal transparency.                        helped establish).
     and Shanghai, constituting the world’s            Li is unfazed about corruption
     largest initial public offering. Five years    cases involving high-ranking mainland        Currency convertibility
     ago, most analysts were predicting the        banking officials. “I think they are the       Hong Kong is already unquestionably
     imminent collapse of China’s banks, he        exception rather than the norm. You          a major banking centre. The financial
     points out.                                   can’t say that because there are criminals   services focus group Li heads is looking at
          “China wants to float companies           the whole of society is corrupt.”            how the SAR could boost its position as a
     in order to force them into being                 In the BEA chairman’s assessment         currency trading centre. One major area
     professionally run with the highest           the non-performing loans of mainland         would be to expand trading of the yuan.



[ 22 ] A Plus   +   January 2007
                                              how the scope of Hong Kong’s stock             itself into a global leader depends on
                                              exchange could be broadened.                   attracting financial service professionals
                                                   The banker contends Hong Kong             from around the globe.
                                              has an edge as an Asian financial centre             He concedes that there is resistance
                                              that’s difficult to beat, in part because        to such ideas because of a fear that
                                              of the depth of its equity markets             salaries will go down as a result, but
                                              and its experience executing IPOs for          he is not put off. In a recent speech to
                                              mainland companies.                            LegCo, he said, “Hedge fund managers,
                                                   Li is not worried about Hong Kong         pension fund managers and accountants
                                              being overtaken by Shanghai, which “has        with experience in other jurisdictions
                                              lost its status as a financial centre, for      – their presence makes our markets more
                                              the simple reason that the yuan is not         competitive and creates jobs here.”
                                              convertible. A financial centre should               As he sees it, “the pie will definitely
                                              have to have the rule of law, freedom          get much bigger.”
                                              of expression, freedom of the press...”             Apart from attracting talent, Hong
                                              Moreover, Li points to Shanghai’s              Kong needs to develop its own. Li, who
                                              technical deficiencies: “There is a lot of      holds honorary doctorates from five
                                              software that Shanghai has not got. By         universities, is less sanguine about the
                                              the time it catches up, Hong Kong will         language abilities of new graduates. “The
     Two proposals now under                  have moved on, I hope...”                      education system in Hong Kong is good,
consideration by China’s State Council –                                                     but I think that people’s language skills
trade settlement in yuan and the issuance
of yuan bonds in Hong Kong – will bring        Shanghai has                                  need to be improved – both in English
                                                                                             and in Chinese,” he says. “Our language
near- and long-term benefits, says Li.
     However, the first test for greater        lost its status as a                          skills are definitely not as strong as those
                                                                                             of the mainland.”
flexibility in yuan trading will be Tianjin.
In the near future the north China city
                                               financial centre, for                          Hong Kong’s
plans to allow investors greater freedom
to buy and sell currencies as China moves
                                               the simple reason                             role in the 21st century
                                                                                             “I strongly believe that the 21st century
towards a fully convertible yuan.              that the yuan is                              belongs to the Pacific region and I think
     Li believes Hong Kong would be                                                          Hong Kong will play a vital role in it.
a better testing ground than Tianjin           not convertible.                              All thanks to the rule of law and the
because it is a free market issuing its own                                                  freedom we have always enjoyed.”
tender and transacting in a multitude of                                                          To Sir David, it is perfectly possible
currencies. He expects Hong Kong could        Education and immigration                      for Hong Kong to become a financial
become the second test within the next        Queried about Hong Kong’s high                 centre on the lines of New York or
four months and, if it does, local banks      salaries, rents and general cost of living,    London. His focus group’s unofficial
could benefit.                                 Li maintains: “It’s definitely sustainable...   mandate seems to be to look at “what
     Hong Kong banks have been offering        because China needs Hong Kong and              makes New York and London financial
yuan-denominated services, including          Hong Kong needs China... and as long as        centres and how Hong Kong can
deposit, exchange, remittance and credit      the economy of China continues to have         become the New York of China.” Lofty
cards, since 2004, but there have been        six to nine percent growth I think Hong        goals, but attainable in the eyes of the
restrictions on the quantity of daily yuan    Kong will continue to be on top.”              veteran banker, given Hong Kong’s
purchases by individuals.                          He favours broad immigration              orientation towards ambition and
     Another part of the mandate of the       reform to attract top talent to the city,      achievement, and the support of the
financial services focus group is to explore   saying Hong Kong’s ability to transform        central government. A+



                                                                                                                      January 2007   +   A Plus [ 23 ]

				
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