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Eddie Yue: Hong Kong as an international financial center – the China factor

Introductory remarks by Mr Eddie Yue, Deputy Chief Executive of the Hong Kong Monetary Authority, at the “Hong Kong: China’s Global Financial Centre” conference, New York, 1 March 2011.

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Ladies and gentlemen, It’s my great pleasure to be here today.

No doubt I fully agree with Ms Leung and Mr Wheatley as they have rightly set out the key strengths of Hong Kong in serving as a financial hub in Asia. But I would also like to go deeper into the matter and focus on one very important factor, which may explain why more and more asset managers have been looking to set up their regional operations in Hong Kong. And this is the China factor – a unique competitive advantage of Hong Kong that is difficult for other financial centers to replicate.

The China factor is growing in prominence as China continues with its path of very impressive growth: over the past three decades, Mainland China’s GDP has registered an amazing 29-fold increase, from around US$200 billion to more than US$5.8 trillion in 2010, with an average annual growth rate of 10%. Today, Mainland China is already the second largest economy in the world and the single biggest contributor to the world’s economic expansion, creating nearly one-fifth of the world’s newly generated economic activities.

As an international financial center of China, Hong Kong stands to benefit the most from the country’s phenomenal development. Today I will highlight two aspects that I believe are key drivers for Hong Kong’s growth in the next few years. The first is the gradual financial liberalisation in Mainland China and the second is the wider external use of the renminbi (RMB).

The gradual financial liberalisation in mainland China

In the gradual financial liberalisation process in Mainland China, we can observe three key patterns: inflows being de-regulated before outflows, direct investment flows being liberalised before portfolio investment flows, and collective investment schemes being relaxed before individual investors.

Specifically, during the early stages of Mainland China’s reform process, in the late 1970s and early 1980s, only Foreign Direct Investment (FDI) was encouraged. Hong Kong has been the largest source of FDI for the Mainland, accounting for more than half of the total amount in 2009.

In the opposite direction, Mainland China’s Overseas Direct Investment (ODI) has also been liberalised gradually over the years. Hong Kong has been the largest recipient of ODI flows from the Mainland. At present, about 60% of ODI from the Mainland has gone to Hong Kong or via Hong Kong to other places.

The significant share of Hong Kong in Mainland’s FDI and ODI underscores the unique role of Hong Kong as a gateway for foreign enterprises to access the Mainland market, while at the same time being a springboard for Mainland institutions to gain exposure to international markets.

With respect to portfolio investment flows, market attention has been focusing on portfolio flows from advanced economies towards Mainland China. In my view, portfolio flows in the opposite direction – i.e. portfolio outflows from Mainland China – will also present huge

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