Ten years may have passed since Hong Kong was a British colony, but its best route to becoming Asia's international financial centre may yet be by following Britain's lead. Hong Kong's financial sector cannot rely solely on listings by mainland firms for its business, a number of commentators agree. It must broaden its role, become the 'London of the Far East' by attracting international firms to list, fending off competition from Shanghai. Local regulators, too, may need to follow the British example, as banks, insurance companies, brokers and asset-management firms are stepping into the others' fields. Some suggest Hong Kong should replace its current fragmented regulation model with a super-regulator like Britain's Financial Services Authority. Before the handover, the local exchange brought in mainland firms to list here. Charles Lee Yeh-kwong, former chairman of Hong Kong Exchanges and Clearing (HKEx), who masterminded that effort, recalls how a study after the 1987 crash led Hong Kong to ask Beijing to allow them in. 'In the late 1980s, some internal studies conducted by the stock exchange showed that the domestic equity market had limited growth potential, as market capitalisation was already over 150 per cent of Hong Kong's GDP,' Mr Lee said. 'Therefore, it was natural for the stock exchange to look to expand beyond Hong Kong, and the mainland was a natural choice.' Tsingtao Brewery became the first H share listed in Hong Kong, in July 1993. Since then, mainland enterprises have raised more than US$200 billion in Hong Kong. Today, more than 380 mainland-related companies are Hong Kong-listed, representing about half the total market capitalisation and more than 60 per cent of the turnover. While this is a major achievement, changes are still needed. That's because relying on mainland firms alone may not be a wise idea: they are increasingly opting to list in the domestic A-share markets in either Shanghai or Shenzhen, to tap funds at higher prices. HKEx chairman Ronald Arculli said the exchange's three-year strategic plan for 2007-09 sets out a new mission: 'to be a leading international marketplace for securities and derivatives products focused on Hong Kong, mainland China and the rest of Asia'. The past vision focused on Hong Kong and the mainland. 'We see the position of Hong Kong as [mainland] China's international finance centre will remain as the country continues to develop,' Mr Arculli said. 'State leaders have said there is a need for mainland businesses to face up to the world. HKEx will continue to improve its function as an 'international express' that can lead a bigger number of mainland companies to the world market.' At the same time, he noted, Hong Kong must be more international in focus, attracting more overseas companies to list here and investors to trade. 'To leverage on our international strength, we are seeking to attract more foreign companies from overseas to list in Hong Kong,' he said. 'One of the first steps was a joint statement with the Securities and Futures Commission in March this year, clarifying the requirements for foreign companies interested in listing in Hong Kong. 'In addition, our executives have been visiting a number of countries in the region and beyond, such as Vietnam, Russia and Kazakhstan, to explain the advantages of listing in Hong Kong, and those efforts will continue. Other initiatives being studied include the listing of depository receipts on overseas securities.' Mr Arculli believes strong growth in Asia should bring more Asian firms to list in a well-regulated market such as Hong Kong. 'An encouraging survey by the City of London Corporation said Hong Kong was the most likely Asian city to emerge as a real contender to become a global financial centre, thanks to our strong regulatory system and highly skilled financial services workforce,' he noted. 'Overall, Hong Kong was third in the Global Financial Centres Index, behind only London and New York.' KPMG chairman Carlson Tong Ka-shing, chairman of the stock exchange's listing committee, agrees that Hong Kong must reposition itself from being a Chinese exchange to an international market like London and New York. 'The convertibility of the yuan, if that should happen over the next 10 years, will mean the Shanghai and Shenzhen exchanges will become more internationalised and open,' Mr Tong said. 'Hong Kong's role under this scenario will be changed: instead of being the automatic first port of call for capital-raising by many [mainland] Chinese companies, it needs to position itself so that it becomes one of the key financial centres in China complementing the others, such as Shanghai. More Chinese companies are seeking an A-share listing instead of coming to Hong Kong.' To maintain its important role as an international financial centre, Mr Tong believes Hong Kong needs to add value and to strengthen its regulatory regime, corporate governance, liquidity of the market and product range. Chinese University of Hong Kong professor of accountancy Wong Tak-jun said Hong Kong could become the regional financial hub, although competition from Shanghai must be considered. 'The speed of Shanghai replacing Hong Kong as the financial hub of the region depends on yuan convertibility and the development of the market, rule of law and free flow of information in Shanghai,' Professor Wong said. 'In my opinion, Shanghai will take more than 10 years to catch up.' If Hong Kong is to prevail, Professor Wong said, it must protect market infrastructure, the rule of law and the free flow of information, while attracting national and international talent to work in the city. This involves launching better immigration policies, making the city more liveable for mainlanders and expats and training our own labour force. HKEx chiefs generally play down the competition from Shanghai. Mr Lee, the former chairman, said if the yuan became freely convertible, the Hong Kong stock market might well consider merging with mainland exchanges to combine their strengths. Mr Arculli said: 'We believe there is more than enough room for thriving exchanges in Shanghai, Shenzhen and Hong Kong.' Regulation will be a major challenge in the next 10 years. The large number of mainland firms listing in Hong Kong poses questions about whether Hong Kong's regulators can work with the China Securities Regulatory Commission (CSRC) to protect the interests of investors. Martin Wheatley, chief executive of Hong Kong's Securities and Futures Commission (SFC), said the SFC and the CSRC maintained a constant dialogue on cross-border regulation. 'Because of the differences in the legal systems between Hong Kong and the mainland, the two regulators have continuously strengthened regulatory co-operation, as evidenced in a recent agreement to enhance our ability to investigate cross-border crimes,' Mr Wheatley said. 'This effort will continue.' Mr Wheatley and other banking, insurance and pension regulators in the city are also facing challenges stemming from cross-selling among different institutions: banks are selling insurance, funds and securities; insurance companies are selling funds and pension products; and brokers are expanding into asset management and investment banking. This is a global trend. Britain some years ago launched the super-regulator model, the Financial Services Authority, to regulate banks, brokers, insurance companies and asset-management firms. But Mr Wheatley thinks it's too early to introduce the super-regulator model in Hong Kong. 'Please don't use the term 'super-regulator' - it creates too many concerns about overconcentration of power and increased costs,' he said. 'What we need is adequate levels of consumer protection regardless of the channel. So we need integrated regulation. The question then is whether we need an 'integrated regulator' to deliver that: I think it's probably too early to consider. 'We have only had the Securities and Futures Ordinance in place since 2003, so I think we need to see that bed down first before we think of more upheaval.' The deputy chief executive of the Hong Kong Monetary Authority (HKMA), William Ryback, said banks had to step into the insurance and broking businesses because of the intensified competition in the deposit and lending business in the past 10 years - particularly after the removal of interest rate rules in 2001. 'The net interest margin of retail banks in Hong Kong has narrowed from 2.19 per cent in 1997 to 1.8 per cent in 2006,' he said. 'It has prompted banks to diversify their income by exploring new lines of business.' Despite that, he is optimistic about the outlook for the banking sector. 'During the past 10 years, the HKMA has taken a number of initiatives to further strengthen Hong Kong's banking infrastructure and promote a high degree of market discipline and transparency,' he said. The introduction of the Mandatory Provident Fund (MPF) in 2000 was a milestone for the Hong Kong financial market since it was the city's first compulsory retirement scheme. The net asset value of all MPF schemes amounted to HK$211.2 billion as of March 31. The chairman of the Mandatory Provident Fund Schemes Authority, Henry Fan Hung-ling, believes MPF funds could grow to more than HK$600 billion by 2017. 'Hong Kong's ageing population will continue to be an important concern in the community and there will be discussions on the adequacy of retirement protection,' Mr Fan said. 'The MPFA will continue to drive down the operation cost of the MPF system as low as possible and will explore the feasibility and effects of allowing employees to choose MPF trustees. This might encourage more competition among trustees, and hence drive down fees.' Mr Fan said the MPF's investments had played a small but growing role in the rapid development of the city's investment fund industry and debt capital market in recent years. Up to last year, MPF investment contributed 0.4 per cent of Hong Kong's equity market capitalisation and 3 per cent of the city's debt-market capitalisation in Hong Kong dollars. 'The importance of MPF to the capital markets will also be that, in the longer term, the community will have a greater understanding of investments and a greater appreciation of the need to save for the future,' Mr Fan said.