September 15, 2011

Chief Executive Donald Tsang

As the French writer Voltaire once said: "We look to Scotland for all our ideas of civilisation."
 
As you probably know, Voltaire was referring to the period of "Scottish Enlightenment" in the 18th Century that helped to shape European society.
 
Given Hong Kong's long and deep connections to Scotland, we have also benefited from many great Scottish ideas.
 
A Scotsman, Thomas Sutherland, provided the inspiration for establishing a bank called the Hong Kong & Shanghai Banking Corporation (HSBC) back in 1865.
 
Nowadays, HSBC is a household name, while Hong Kong has firmly established itself as an international financial centre in the Asian time zone.
 
Today, I'd like to talk about Hong Kong's role in Asia's fast-moving financial markets and our ideas and aspirations for our city and our business partners, including those from Scotland.
 
I believe there is no better time than now to expand the already strong links between our two business communities.
 
Lessons from the Asian financial crisis
Asia has emerged from the recent global financial crisis in relatively good shape. Hong Kong has made a full recovery, recording GDP growth of 7% last year. In the first half of this year, our economy expanded 6.3%.
 
Part of Asia's recovery has been home-grown, and reflects the region's rapid and comprehensive policy response to the financial tsunami.
 
In particular, we learned some very important lessons from the Asian financial crisis a decade earlier. As a result, across our region, fiscal positions have improved, monetary policies have been strengthened and corporate and bank balance sheets are healthier.
 
When the global financial tsunami hit, many governments in Asia were able to cut interest rates sharply and implement large fiscal stimulus packages without creating policy excesses.
 
We all benefited from Mainland China's resilience to the global financial crisis. The Mainland helped to cushion an export collapse with strong domestic demand, lifting credit constraints and implementing an exceptionally large fiscal stimulus. At the outbreak of this financial tsunami, all of Asia lost about 20 per cent of its trade with Europe and America.
 
But what of Hong Kong?
 
Similar to Edinburgh, Hong Kong is built upon a rock; in our case famously suggested by Lord Palmerston in the 1840s to be a "barren rock". Fortunately for us, the past 170-plus years have been anything but barren.
 
Hong Kong has successfully evolved into an international business and financial centre. And we are not done yet.
 
Our unique and rapid development makes Hong Kong an interesting test case for the free economy philosophy.
 
The economist Milton Friedman long argued that economic freedom is a key to economic prosperity. Hong Kong's ranking as the world's freest economy by both the Heritage Foundation in the US and the Canada-based Fraser Institute for the past 17 years would seem to prove his point.
 
Friedman summed it up by saying: "If you want to see capitalism in action, go to Hong Kong."
 
The foundations that underpin Hong Kong's economic freedom include: the rule of law; the free flows of capital, ideas and information; a low and simple tax regime with profits tax of 16.5% and salaries tax capped at 15%. There is no VAT, no estate duties, no capital gains tax and even zero duty on wine in Hong Kong. We also work hard to maintain a highly transparent and effective regulatory environment.
 
Hong Kong's strengths
Let me highlight three areas to illustrate Hong Kong's strengths as both a global financial centre and as China's most important city for international finance.
 
First, we are increasing our cross-boundary collaboration with our immediate neighbours in Guangdong Province, particularly in the Pearl River Delta, or the PRD. This region is often called "the world's factory" because of its dynamic manufacturing base - which I hasten to add includes substantial Hong Kong investments. Our closer links with the PRD are helping to open up new business opportunities and strengthen our financial ties with the Mainland.
 
Last year, we signed a Framework Agreement on Hong Kong-Guangdong Co-operation. This reflects a shared commitment to break down barriers to trade and investment and open up the flow of ideas and innovation throughout the PRD region.
 
The agreement reaffirms Hong Kong's status as a global centre for finance, trade and logistics. By combining our city's strengths with those of our neighbour, we aim to establish the PRD as one of the most competitive regions in the world by 2020.
 
A number of major infrastructure projects are underway or planned to improve physical integration within the region.
 
These include the Hong Kong-Zhuhai-Macao Bridge, which will span 29km and provide quicker and easier access to the relatively undeveloped western shores of the Pearl River Delta. An express rail line that will plug Hong Kong into our nation's expansive high-speed rail network. A new boundary crossing to improve access between Hong Kong and the fast-growing Shenzhen city in the PRD.
 
These large scale projects will open up new opportunities and make it easier and more efficient to move people and goods around the region. The region measures about 180,000 square kilometres, more than double the size of Scotland. It has a population of more than 100 million - about 20 times the population of Scotland, or more than one and a half times the size of the UK.
 
The second area that highlights Hong Kong closer financial integration is our role in the liberalisation of the Mainland currency, the renminbi.
 
At a time when markets in Europe and the US remain volatile, Asia, and in particular China, have been relatively resilient to the economic downturn.
 
Economists are debating when the Mainland currency, the renminbi, will become an international currency. It will eventually, but it will take time. As China's global financial centre, the internationalisation of the renminbi is a vitally important area for Hong Kong.
 
Renminbi business
Meanwhile, under One Country, Two Systems, Hong Kong will be the main testing ground for the wider international use of the renminbi.
 
We bring to the table what no other city in China has - a freely convertible currency and free flows of capital and information. Our financial system is highly transparent and is driven by international best practice. And we have the highly developed multi-currency, real-time gross settlement system needed to handle massive volumes of currency transactions. 
 
Renminbi banking in Hong Kong has been gathering momentum since its launch in 2004. Today, some 128 authorised institutions engaged in renminbi business including deposits, remittances, credit cards and checking accounts. Total renminbi deposits in Hong Kong at the end of July topped RMB572 billion, or 55 billion pounds.
 
A more recent development has been the introduction of the renminbi trade settlement scheme. Businesses around the world are now able to settle trade using renminbi with companies in the whole of China.
 
In the first seven months of this year, renminbi trade settlement through Hong Kong's banking system reached RMB953 billion, or almost 93 billion pounds. In fact, trade through Hong Kong accounted for more than 80% of the total cross-border trade settlement in renminbi.
 
Our deep pool of local and international financial talent, and large cluster of international banks, makes Hong Kong an ideal conduit for the wider use of the renminbi outside the Mainland.
 
This brings me to my third point. How Hong Kong can use its special status as China's offshore renminbi centre to play a greater role in the international financial community.
 
For one thing, we will continue to encourage more overseas companies to use Hong Kong as a centre for settling their Mainland trade in renminbi, instead of using a third currency.
 
Last year, Hong Kong became the first place outside the Mainland to have an interbank market for renminbi. Also, businesses from anywhere in the world can now open an account in Hong Kong and freely exchange renminbi.
 
All this activity is encouraging a greater range of financial products in the marketplace. This is spurring Hong Kong's development as a capital-raising centre for overseas businesses.
 
Last year, fast-food giant McDonald's Corporation became the first non-financial overseas company to issue a renminbi corporate bond in Hong Kong. This represented the start of a new funding channel for overseas companies looking to raise capital for their China operations.
 
In the first half of this year, 38 entities issued renminbi-denominated bonds raising a combined total of RMB42.7 billion, or more than 4 billion pounds.
 
We also see great potential for more overseas companies to list on the Hong Kong stock market.
 
For the past two years, Hong Kong has led the world in total funds raised through Initial Public Offerings (IPOs). In recent months, high-profile brands including Prada, Samsonite, Prudential and L'Occitane have successfully listed in Hong Kong. I hope we will see Scottish companies launching IPOs in Hong Kong soon.
 
As well as tapping wealthy investors from the Mainland and across Asia, a Hong Kong listing also helps companies promote their brands across the region. That includes a potential customer base of over a billion people in China alone. Just imagine what that could do for your businesses!
 
Of course, we cannot guarantee that a business venture will succeed in Hong Kong, but we'll do our best to ensure that every company has the best opportunity to get it right.
 
Having said that, I can assure you, that the future in our part of the world is extremely bright. We look forward to seeing more great Scottish ideas, innovations and products coming to Hong Kong soon.
 
Chief Executive Donald Tsang gave this address at the Hong Kong: China's Global Financial Centre Conference in Edinburgh on September 15.