Offshore financial centres sometimes have a bad name in the international financial community. There are, however, reasons for their existence, and not all of these reasons are dishonourable, Monetary Authority Chief Executive Joseph Yam says in his latest Viewpoint column published today.

"Because of our desire, when circumstances permit, to play an active role in Hong Kong in the intermediation of renminbi funds, this term has come to be recognised in Hong Kong as a desirable status," he said, adding this is in contrast to the general perception of the international financial community, in particular among the regulatory authorities.

He said there has been quite strong pressure exerted by the international financial institutions, such as the International Monetary Fund and the Bank for International Settlements, and by national regulatory authorities, on offshore financial centres in the past few years for improvements in financial regulation.

The pressure has been strongest from the Financial Stability Forum, which in 2000 went as far as to name and shame them by publishing a list of jurisdictions, and giving them this doubtful label as offshore financial centres, he added.

"Regrettably, Hong Kong was on the list, along with a few significant international financial centres (Singapore and Switzerland, for example) and a larger number of jurisdictions that have variously also been called tax havens or booking centres or other names."

Efforts to get Hong Kong's name off the list have been unsuccessful, although it has from the start been honoured with a Group One status, quite separate from those in Group Two and Group Three, he said, adding there must be reasons for doing things - conducting financial transactions and organising financial businesses - offshore instead of onshore.

"I believe there are three distinct reasons. The first is regulatory arbitrage, aimed at getting around stringent onshore regulatory requirements, such as disclosure, corporate governance, liquidity and capital adequacy."

The second reason is simply for convenience, he said.

Rising demand for 24-hour market operation

With the globalisation of financial markets come increasing demands for their operation on a 24-hour basis, ahead of and beyond the operating hours of the onshore market on the same trading or settlement day.

Indeed, in one or two markets of the developed economies, the degree of participation of non-residents is now as significant as, if not higher than, that of residents.

For convenience as well as for better risk management, there is an increasing need for trading and settlement platforms offshore, in the other major time zones, linked to the onshore platform, for effecting transactions in those time zones when the onshore facilities are closed for business.

The third reason has to do with the existence of controls onshore.

"Financial markets have a way of getting around controls. While many financial activities are not permissible onshore, this may not be the case offshore; and so there is a tendency for free markets in the controlled financial instruments to develop offshore, perhaps in non-deliverable form, operating along side the controlled onshore markets."

Indeed, this often becomes an important incentive for financial liberalisation, and offshore markets are used as testing grounds, he said.

"This is actually the pivotal role that Hong Kong is playing in the financial liberalisation of the Mainland."

To this extent, the unfavourable connotation in the term offshore financial centre is also inappropriate, he added.