HONG KONG: BANKING AND FINANCIAL SERVICES

Hong Kong is a fully-fledged international financial centre, and all types of financial services are readily available in a business environment which combines light but effective regulation with low taxation.

According to figures released by the Census & Statistics Department, the business receipts of all service industries in Hong Kong rose in value in the third quarter 2007, over the same period in the previous year. Among them, finance-industry business receipts rose 100.1%, those for banking 47.7%.

Banking

Hong Kong has one of the largest representation of international banks in the world: 71 of the world's 100 largest banks have a presence there. Hong Kong is the world's 9th largest international banking centre in terms of the volume of external transactions, and the second largest in Asia after Japan. The banking sector plays a vital role in establishing Hong Kong as a major loan syndication centre in the region.

In December, 2007, there were 142 licensed banks, 29 restricted licence banks and 29 deposit-taking companies in business. These 200 authorised institutions operate a comprehensive network of 1,600 local branches. In addition, there are 79 local representative offices of overseas banks in Hong Kong.

Total Employment in the sector is nearly 80,000. Banking assets amount to more than HKD10 trillion.

The banking system in Hong Kong is characterized by its 3-tier system, which is formed by 3 types of banking institutions, namely licensed banks, restricted licensed banks and deposit-taking companies, which are authorised to take deposits from the general public. The 3rd tier of deposit-taking institutions operate under different restrictions. Only licensed banks and restricted licensed banks can be called banks.

China's WTO accession will mean that foreign banks, including Hong Kong banks can in the future provide meaningful competition to local commercial banks, since they will be allowed to conduct local currency business with local clients. At the same time, competition among foreign banks -- already present as well as new entrants -- will inevitably intensify. Under the provisions of CEPA, the asset requirement for Hong Kong banks to establish on the mainland is being reduced from a minimum of HKD20 billion to HKD6 billion, making it easier for many of the SAR’s banks to set up in China.

In December, 2006, eight foreign banks had applied for retail banking licenses in mainland China, as the country opened its banking market under WTO rules it agreed five years ago.

There are more than 70 foreign banks in China already, but until now most of them were limited to handling foreign currency business, and they hold just 2% of the country's banking assets. During the last few years the Chinese authorities have been racing to clean up major domestic banks, which were weighed down with bad debts and clunky administration.

The banks which have applied for retail licenses are Hong Kong's Bank of East Asia, Hang Seng Bank, Citigroup, Mizuho Corporate Bank, HSBC, ABN Amro and DBS Bank. Many of these banks had already taken stakes in mainland banks and created financial infrastructure to be ready for this moment.

There are still obstacles to the growth of foreign banks in China, however, including a 25% limit on foreign ownership of an existing Chinese bank. New entrants to the market have to incorporate in China as wholly-owned banks or joint venture banks. Few international banks have done this; to date, they have mostly operated through branches, which are not covered by the new regime, or through minority holdings in Chinese banks. It is not clear whether the requirement to incorporate wholly-owned subsidiaries is in conformity with China's WTO obligations, although the minimum capital requirement of USD10bn in assets does conform.

The new Regulations allow a fairly wide range of activities to wholly-owned and joint venture banks, but disallow bank card business for branches, something they were previously permitted to engage in under 2001 rules which have now been replaced.

2003 saw a number of moves towards greater banking integration between the SAR and the mainland. In August, the Hong Kong Monetary Authority (HKMA) and the China Banking Regulatory Commission (CBRC) signed a Memorandum of Understanding aimed at strengthening supervision of banks operating on both sides of the border. HKMA operates in effect as Hong Kong's Central Bank, while the CBRC was formed earlier in the year to to take over banking supervisory responsibility from the People's Bank of China. The 15-department CBRC says its major responsibilities include "formulating supervisory rules and regulations for banking institutions, (and) authorizing the establishment, changes, termination, branching out and business scope of banking institutions.'' It is also responsible for dealing with problem deposit-taking institutions. The MOU calls for the two regulators to share supervisory information for banks operating in China and Hong Kong and they will work together to ensure that a parent bank exercises "adequate and effective" control over the operations of cross-border branches and subsidiaries. They will also meet formally twice a year.

In 2007, the Hong Kong Securities and Futures Commission (SFC) also entered into a Memorandum of Understanding (MOU) with the China Banking Regulatory Commission (CBRC) for co-operation and information sharing with respect to Hong Kong licensed intermediaries who provide services to Mainland commercial banks conducting overseas wealth management business on behalf of their clients

“The MoU is conducive to further enhancement of the regulatory co-operation framework. It provides a solid foundation for the commencement of effective regulatory co-operation," stated Liu Mingkang, Chairman of the CBRC. "Through mutual assistance and information sharing, we can promptly identify risks, and take timely regulatory measures to protect the interests of investors.”

In February 2004 the eagerly anticipated move to liberalise trading and exchange of the yuan in Hong Kong took its first step forward after the city’s banks were given the go-ahead to begin taking deposits in the Chinese currency.

Analysts consider this an important first step towards Hong Kong becoming an offshore yuan trading centre. "The integration between the two places will be closer and closer, so that means that renminbi will co-circulate with the Hong Kong dollar in Hong Kong going forward," said Chris Leung, senior economist at DBS Bank, "Obviously, if that's the case, there's sort of a demand for renminbi storage with the banks. So it's a natural development, but the problem is there are many technicalities and contradictions in order for this to become a reality," Leung added.

The Hong Kong Monetary Authority (HKMA) announced in December 2007, that it will review its work in the area of banking stability, and has appointed former Jersey banking regulator, David Carse as consultant to conduct the review.

The aim of the review was to make recommendations on how the HKMA can best discharge its functions in promoting the general stability and effective working of the banking system, taking into account recent and likely future developments in Hong Kong’s banking system, and the changing nature of the risks facing it.

The review was expected to be completed in about five months. It took into account developments including the globalisation of finance and banking business, the increasing integration of the financial systems of Hong Kong and Mainland China, the growing complexity of banking products, the increasing reliance of banks on information technology, the increasing need to combat financial crime, the changing nature of supervision, and the expectations of the community. Carse was chared with making recommendations on the focus and priorities of the HKMA’s banking supervisory functions over the subsequent 5 years.

Securities Markets

Hong Kong has the world's 10th largest securities market and the second largest in Asia after Tokyo. As of March 2000 the Hong Kong Stock Exchange and the Futures Exchange were merged into Hong Kong Exchanges and Clearing. The launch of the Growth Enterprise Market (GEM) in November 1999 for smaller and high growth companies has broadened Hong Kong's stock market, although the timing of GEM's launch was unfortunate, and the 'dotcom' shakeout in 2000 weakened its initial impact.

Hong Kong's securities market has been increasingly internationalised. There has been a continued rise in the participation of international investors in the market. Many of the initial public offerings through the Stock Exchange are also made global. The majority of these issuers are supernational bodies, whose issues are almost invariably accompanied by global fund raising.

HKEx announced in its third quarter 2008 results that, as at September 30, 2008, 1,078 and 181 companies were listed on the Main Board and the Growth Enterprise Market (GEM) respectively with a total market capitalisation of about HKD12.55 trillion (USD1.6 trillion). Total capital raised during this period, including post-listing funds, reached HKD182.2bn.

In addition, there were 3,941 Derivative Warrants , 759 Callable Bull/Bear Contracts, seven Real Estate Investment Trusts, 24 Exchange Traded Funds (ETFs) and 174 debt securities listed as at September 30, 2008. The average daily turnover in the first nine months of 2008 was about HKD79bn on the Main Board and about HKD262m on the GEM.

The period also saw the listing of the first gold ETF, SPDR Gold Trust, on the exchange on July 31, 2008, providing investors with an additional channel to access the international gold market. Up to September 30, 2008, the average daily turnover of the SPDR Gold Trust was about HKD34m.

Hong Kong Exchanges and Clearing (HKEx) introduced AMS/3, a third generation automatic order matching and execution system, in late 2000. In February 2001 it added an Order Routing System (ORS). ORS is an open system that enables investors to place stock market orders through the Internet, mobile phones and other electronic channels, which may be developed by HKEx or vendors. After an order is placed through an electronic channel connected to ORS, the system automatically sends the order to a Stock Exchange Participant for approval and submission to the market for matching and execution.

More than 100 Stock Exchange Participants have so far connected to ORS, and are able to offer their clients Internet trading. All Stock Exchange Participants, including those who have connected to the HKEx channel, will also be able to offer their clients electronic trading services, including Internet and mobile trading, through Proprietary Network System (PNS) channels provided by vendors.

CCASS provides settlement services under which securities are credited or debited to participants' CCASS stock accounts and funds are recorded in the participants' money ledgers on settlement day.

Details of all Exchange trades, including trade data and trade amendments, are electronically and automatically transmitted to CCASS by the Stock Exchange on each trading (T) day. There is no need for broker participants to input or further confirm their trade details in CCASS. Broker participants receive Provisional Clearing Statements of their stock and money positions through their CCASS terminals shortly after 1800 hours on each T day for reconciliation. Final Clearing Statements are available to broker participants shortly after 1400 hours on T+1 day for confirmation purposes.

Generally, online securities trading in Hong Kong was an early casualty of the dot-com meltdown and the international equity slump, with a number of major US brokerages retreating from the SAR in 2001 almost as quickly as they had arrived in 1999 and 2000, but by 2003 it seemed that on-line trading would finally have its day in Hong Kong, as a combination of better technology, burgeoning interest from mainland visitors and the impact of SARS pushed on-line trading volumes to historic highs.

Fund Management

Hong Kong is widely recognised as the leading fund management centre in Asia with the largest concentration of fund managers. The industry is characterised by its international and offshore nature.

In August, 2007, the Hong Kong Securities and Futures Commission released the findings of its latest Fund Management Activities Survey (FMAS), which indicated that the territory's fund industry continued to expand through 2006.

The FMAS has been conducted by the SFC on an annual basis since 1999 to collect information and data on the general state of affairs of the fund management industry in Hong Kong. The survey covers the fund management activities of two types of firms in Hong Kong, namely: corporations which are licensed by the SFC and engage in asset management and fund advisory businesses; and banks which engage in asset management and other private banking activities.

According to the main findings of the 2006 survey:

• There was 36% year-on-year growth in the value of funds in Hong Kong.80% of the assets managed are located in Asia.
• 62% of combined fund management business were sourced from overseas.
• 75% of the fund management business was enjoyed by SFC licensed corporations.
• 56% of the assets under management were managed onshore.

Separately, the SFC has reviewed the growth of the retail fund business in Hong Kong since the establishment of the SFC in 1989. It found that the number of retail funds offered to the public has grown from 783 at the end of 1989 to 1,980 in 2007. In value terms, the size of retail funds has grown 22 times, from HKD283 billion to HKD6,154 billion over the same period.

During 2006, the SFC authorised a total of 223 unit trusts and mutual funds (excluding REITs), bringing the number of SFC-authorised funds at the end of the year to 1,973, with a net asset value of around HKD7,100 billion, up 36.4% year-on-year. In line with the global interest in emerging markets, a number of funds authorised during the year offered exposure to countries such as the Mainland, Brazil and India.

The SFC's 2007 Fund Management Survey, released in July 2008, found that Hong Kong's total fund-management business hit HKD9.63tn in 2007, a record year-on-year rise of 56.5%. Overseas investors contributed HKD6.547tn, or 68.4%, to assets under management, exclusive of real estate investment trusts. Asset management, historically the largest segment in the combined fund-management business, expanded 57.5% to HKD6.51tn.

Assets managed in Hong Kong logged a new high of HKD4.07tn or 62.5% of HKD6.51tn in the asset-management segment. The commission said Hong Kong was favoured as a hub for managing investments in the Mainland and other Asian markets with 82.1% of the assets managed locally invested in the region.

Rapid accumulation of wealth in Asia boosted the fund advisory and private banking business, which expanded 102.9% and 36.7% respectively between 2006 and 2007.

Although many hedge funds have been managed from Hong Kong, until 2002 these were exclusively for professional investors. In 2002 however the Securities and Futures Commission issued guidelines permitting certain types of hedge fund to be offered to retail investors.

• close economic ties with the Mainland
• a well-established, deep and liquid market
• a world class regulatory regime
• a broad range of investment products
• a critical mass of financial talent with international exposure and Mainland
  experience

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