Diversifying Hong Kong's Financial Markets

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HK strives to boost appeal
Hong Kong Standard
Tuesday, September 12, 2006

The government is studying plans to resurrect the failed commodities exchange in Hong Kong as part of efforts to diversify the city's financial markets and boost their appeal to mainland companies and international investors.

"We are hoping to explore the trading of other financial instruments in which Hong Kong is lacking at the moment," Financial Secretary Henry Tang Ying-yen told reporters Monday at the conclusion of a high-level meeting attended by SAR business leaders.

The meeting was convened by Chief Executive Donald Tsang Yam-kuen to formulate policy proposals in response to China's latest Five-Year plan.

Tsang said the government will also study proposals to set up a foreign currency exchange, and ways to boost the SAR's markets for corporate debt and financial derivatives.

"Hong Kong needs to diversify from its almost total reliance on the equities market," said Core Pacific- Yamaichi deputy head of research Kent Yau Ho-yin. "If Hong Kong is to develop into a genuinely international financial center, it must think of how to broaden its markets."

As at the end of 2005, the SAR's stock market had a total capitalization of US$1.06 trillion (HK$8.27 trillion), but its debt market consisted of only US$99 billion in bond issues. In contrast, bond issues in both the United States and Japan exceed the capitalization of their respective stock markets.

Thin volumes at the ill-fated commodities exchange, which offered trading in cotton, sugar, soyabeans and gold
at its inception in 1976, resulted in its incorporation into the Hong Kong Futures Exchange in 1986. Trading in commodities soon ceased, and gave way instead to the trading of financial futures based on the Hang Seng Index.

Bank of East Asia (0023) chairman David Li Kwok-po said growth in the mainland economy has generated demand for commodities trading.

Li was appointed by Tsang to head a sub-working group on the development of financial services.

He said his committee will also study ways to help Hong Kong financial institutions set up in the mainland, as well as increasing the scope of yuan services in the SAR. Li's group will submit detailed policy proposals to the government by the end of 2006.

China's 11th Five-Year plan, drawn up in March, affirmed the SAR's position as the country's main international financial center, but it also promised to foster growth at other hubs - such as Shanghai - a development that could augment competition for Hong Kong.

Monday's meeting also spawned working groups studying three other industry sectors: trade and business, logistics and infrastructure, and professional services.

Li & Fung (0494) chairman Victor Fung Kwok-king, who heads the trade and business group, said the government should help the more than 80,000 Hong Kong-invested manufacturing companies based in Guangdong to sell to mainland customers. "The traditional focus for these companies has been to develop sales in markets such as the United States and Europe, but the growth in the wealth of mainland consumers in recent years meant there is now a new market outlet," Fung said.

Logistics and infrastructure working group convenor Tung Chee-chen, chairman of Orient Overseas (International) (0316), said faced with stiff competition from the region, the government should help local sea freight and logistics industries to improve their business environment and strengthen coordination with their mainland counterparts, to safeguard Hong Kong's status as a regional logistics hub.

Professional services working group convenor Executive Councillor Leung Chun-ying said the government should consider exporting Hong Kong tourism expertise in order to lift China's professional standards and resolve the infamous problem of its tour operators arranging tours for mainland visitors at unrealistically low prices.