How to be a world financial centre in three easy moves
with Jake van der Kamp
'Hong Kong's continued success as an international financial centre depends on our ability to diversify and expand the financial products available and we are working hard to explore areas to develop this sector.'
Financial Secretary John Tsang Chun-wah
Writing in SCMP Insight page, June 17
I have worked in the finance business in this town for 30 years, 20 directly as an investment analyst and 10 as a scribbler, and I am still mystified as to what an international financial centre is. All that I am fairly certain of is that Hong Kong is no such thing.
The term connotes a city where people come from around the world to raise money for corporate ventures, invest in the securities of these ventures and provide the legal, accounting and other services related to them. That's my definition. You can make up your own. There is no formal one.
New York is an obvious example of a financial centre although more of a national than an international one. Its business is mostly that of the United States. London is probably the best example of an international centre. The City truly deals with all aspects of financial arrangements for countries around the world.
After London, however, you have to scratch your head. Geneva doesn't really fit the bill. Its finance business may be international but comprises only the narrow segment of asset management. Tokyo, on the other hand, busies itself across the financial spectrum but represents only Japan. It certainly isn't an international place.
And how of Hong Kong?
We have a thriving equities market, yes, and it covers the mainland as well as Hong Kong but remains limited to the sovereign nation of China. The same largely goes for the related investment banking business. This makes our services in these areas national rather than purely provincial. It doesn't make them international.
We have only a scant debt market, however, and also do not have the foundations for a big one as the Hong Kong dollar is not much used outside Hong Kong, and we have no cornerstone of government debt. We can dabble in US dollar instruments but this only gives us a secondary standing.
The same difficulty applies in commodities. We don't grow or mine them here and it is hard to establish a reputable commodities market without the base of an economy that depends on them. We can always establish a disreputable market for them, of course, but that's another matter.
Likewise asset management. We are national but not international players. Asset managers here manage Hong Kong and mainland money but few people come here from abroad to seek out Hong Kong expertise in this area.
I could go further down the list of financial services but the same things always come up. The fact is that international finance activity is measured in national accounts terms as net exports of financial services and this amounts in our case to only 5 per cent of gross domestic product, which isn't much.
It has admittedly risen in recent years although I would ascribe this mostly to the one financial service in which we do truly excel - helping people evade the mainland taxman. We do it very well but, somehow, I don't think John Tsang had it in mind when he talked of making our financial services grow.
The figure for overall contribution of financial services to GDP is higher at 17 per cent. One again, however, it does not mean much. Deduct that 5 per cent for international services and you get 12 per cent, which is exactly the figure for Taiwan and Taiwan is about the furthest thing you can get from an international financial centre. Domestic financial activity doesn't count in this equation.
Mr Tsang's difficulty in 'working hard to explore areas to develop this sector' is that he is a career civil servant, not a career financier. He doesn't have a good sense for what will work and what won't and tries to make up for it by recommending everything - commodities, gold, oil, Islamic finance, etc.
What is required here, however, after such absolute requirements as rule of law, a good legal system and talented people, is to keep costs down and allow seamless interaction with other financial centres.
For Mr Tsang this ought to mean keeping taxes low (a real miracle worker that steadily reaps results) while telling Hong Kong Exchanges and Clearing that it takes too much money from investors and also telling the Securities and Futures Commission to cut its levy way back.
If costs are held down and ease of dealing is further enhanced then he won't have to work hard at all.
His side of the job will be done and others, driven by the gains to be made, will take up the hard task of exploring what will work in Hong Kong and what won't.
More will work this way than by having our financial secretary trying to wrench misunderstood and under-considered ideas into existence.