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2020 July
Enhance Strengths to Consolidate International Financial Centre Status

In the latest ranking of the “Global Financial Centres Index” published at the end of March this year, Hong Kong dropped from third to sixth, leapfrogged by Shanghai, Singapore and Tokyo. How should Hong Kong further enhance its strengths to maintain its status as an international financial centre?
 

 

Romnesh Lamba: Deepen Bridging Role Between Mainland and the World to Consolidate Hong Kong’s Financial Centre Status

There have been concerns related to Hong Kong’s status as a financial centre against the current macro backdrop. After the latest ranking of the above-mentioned index was published in March this year, the Government responded by issuing a press release, stressing that Hong Kong’s underlying strengths are still strong, its financial system remains resilient, the different facets of its financial services sector continue to function in an orderly manner, the Linked Exchange Rate System has been operating smoothly, and there have been no notable outflows of funds.

 

Romnesh Lamba, Co-President of Hong Kong Exchanges & Clearing Limited (HKEX), stressed that not only has Hong Kong’s status as a financial centre remained as relevant as ever, but its importance has been on the rise in recent years. “Over the past decade, Hong Kong has provided overseas funds for Mainland enterprises to grow their businesses, while supporting more regional and international investors to enter the Mainland market.”

 

Hard to replace connector role between Mainland and the world

As an example, Lamba said that MSCI, a leading global financial index company, has signed a licensing agreement with HKEX to introduce 37 futures and options contracts in Hong Kong that track several MSCI indexes in Asia and Emerging Markets, confirming Hong Kong’s important role as a connector between the Mainland and the rest of the world.

 

It is difficult for other cities to replace Hong Kong’s long-standing role as the main bridge to access the Mainland market. “Hong Kong is the world’s leading offshore RMB market, which is one of the most important factors in successfully putting the Connect schemes in place, and it has established a close collaborative relationship with Mainland regulators. These factors cannot be replaced overnight.” Lamba said.

 

Interconnection and mutual access are imminent

At present, the trading volume of the Stock Connect and Bond Connect schemes amounts to about two trillion RMB annually, but Lamba believes that this is just a prelude to further interconnection and mutual access, “Hong Kong plays a key role in the process of opening up the Mainland’s capital markets, especially in promoting northbound capital flow. The next chapter in Hong Kong’s development as a financial centre will focus on promoting southbound capital flow. This process may take decades.”

 

As Mainland investors begin to seek more opportunities in global capital markets, they will do so via Hong Kong. Lamba said that Hong Kong should continue to actively participate in Mainland-related trade, investment, financing and other businesses. “The Mainland’s continuous market reforms in recent years have brought unprecedented opportunities for Hong Kong’s financial services. Hong Kong will be able to further consolidate its status as Asia’s premier financial centre if it leverages its unique strengths to help the Mainland market gradually align with international best practices.”

 

Promote ESG to cater to market trends

Hong Kong should strive to attract more international investors by pooling together good assets. At the same time, Hong Kong’s regulatory system and policies have always been able to effectively protect investors, safeguard the integrity of the market and maintain financial stability. Nevertheless, as the development of the financial services industry becomes more complex, the HKEX has been regularly reviewing the different aspects of the Hong Kong regulatory system in recent years to ensure that it is keeping up with market trends.

 

With investors increasingly using environmental, social and governance (ESG) metrics to measure corporate performance, the HKEX has raised the requirements and regulations that listed companies must observe for ESG reporting and disclosure. In summary, Hong Kong can further consolidate its status as an international financial centre by accelerating the development of the ESG investment market and promoting the development of green finance, while relying on the development of an interconnection and mutual access platform with the Mainland market.

 

 

Terence Chong: Hong Kong’s International Financial Centre Status is Unlikely to Falter as its Solid Financial Foundation

In March this year, a regularly updated global financial centre index showed that Hong Kong’s ranking fell by three places compared with last September, which triggered a lot of discussions among members of the public. Many of them were concerned whether Hong Kong will lose its strengths or even gradually be replaced by other cities?

 

Drop in ranking is due to temporary factors

Terence Chong, Executive Director of the Institute of Global Economics and Finance at the Chinese University of Hong Kong, believes that this is largely influenced by social movements. He stressed that the causes are short-term political factors. It is neither due to changes in the financial system nor institutional changes nor Hong Kong being overtaken by key competitors in the region. Therefore, undue concerns are unnecessary.

 

Using London as an example, Chong said that although many market participants expected its status as a European financial centre to be hit hard by Brexit, it remained firmly in second place globally as of March this year. It is clear that international financial centres do not lose their status easily, unless they have lost their existing strengths or their financial system has undergone dramatic changes.

 

Hard to replace inherent strengths

Chong added that the above-mentioned global financial centre index is based on five areas of competitiveness: business environment, human capital, infrastructure factors, financial sector development, and reputation and general factors. The ranking is an aggregate of indices from these areas over a period of time, which is not very comprehensive and may not accurately demonstrate the overall financial development prospects of a region. “As a competitively strong international financial centre, the most important thing is to have both excellent systems and underlying strengths, and Hong Kong’s traditional strengths cannot be replaced by its competitors in the same region.”

 

For Hong Kong to continue maintaining its status as an international financial centre, Chong stressed that it must first keep its current strengths that are conducive to financial development, especially allowing free flow of funds, no foreign exchange control, low tax rates, judicial independence, and providing an English-speaking environment, which will help attract funds and talents from different countries and regions to Hong Kong.

 

Actively develop financial products and technology

“Relatively, Hong Kong is inadequate in diversification of financial products and promotion of fintech. It particularly lags behind other regions at home and abroad in the latter, e.g. e-payments and personnel training, and must catch up urgently.” Chong added that financial products are a case in point. Besides government-issued bonds, Hong Kong should introduce diversified bonds, such as Islamic bonds, to keep pace with Singapore, which has long promoted Islamic finance. As for the promotion of fintech, he suggested that Hong Kong should consider a different approach for technology R&D. Meanwhile, maintaining a low-tax regime and English-speaking environment is indispensable for attracting relevant talents.

 

Would the implementation of the National Security Law for Hong Kong have an impact on its ranking as a global financial centre? Chong expects it to have an impact on the perception of overseas investors in the short term, but at this stage, investors at home and abroad are still confident in Hong Kong, as evidenced by the sustained strength of the Hong Kong exchange rate and the rise of the Hang Seng Index.