International Financial Centre and Monetary and Financial Stability
The maintenance of the status of Hong Kong as an international financial centre is a requirement laid down in the Basic Law. The maintenance of monetary and financial stability is absolutely in the public interest. It is not obvious that there is a relationship between the two tasks. But there is, and we need to be alert to the dilemma between the two important objectives. I can remember recognizing this and amending the Exchange Fund Ordinance before 1997 to make it possible, with a view to maintaining Hong Kong as an international financial centre, to use the Fund to maintain the stability and the integrity of the monetary and financial systems of Hong Kong.
I have argued before that Hong Kong, as an international financial centre, is special, in that it is probably, or has the potential to be, the most international of financial centres in the world. Both the two legs of financial intermediation – investors and fund raisers – are, or are becoming, predominantly foreign. Hong Kong is already the centre for Mainland enterprises to raise money from the rest of the world. And hopefully when there is less concern about uncontrolled capital outflow from the Mainland, Hong Kong can also be the choice centre for enterprises from the rest of the world to raise money from the Mainland.
The domestic economy of Hong Kong is small. The volume of international financial activities conducted in Hong Kong and denominated in the Hong Kong dollar is huge. Behaviour of the latter has significant effects on the former and these should not be overlooked. Assuming further relaxation of capital account controls on the Mainland, allowing investors to access overseas investment opportunities and fund raisers to tape foreign money through the use of financial markets in Hong Kong, the volume contrast between the two will become even more pronounced.
The behavior of foreign money, whether in the hands of investors or fund raisers, is understandably influenced by foreign considerations as well as those of Hong Kong. Consequently, it is prudent to assume that the volatility and volume of capital flows in and out of the financial system of Hong Kong are higher than in other jurisdictions, presenting higher risks to financial stability. And if much of the financial activities of such foreign money conducted in Hong Kong are denominated in Hong Kong dollar, then there are risks for monetary stability in Hong Kong as well. Herein lies the dilemma between the objectives in the maintenance of the status of Hong Kong as an international financial centre and in the maintenance of monetary stability.
All international financial centres are exposed to these risks and face such a dilemma, but it is a matter of degree. The circumstances of Hong Kong are such that this dilemma is much more pronounced. I have said before that it would be unrealistic to expect the currency system of an economy of seven million people to have the capacity to serve well the international financial activities between an economy of 1.3 billion people (second largest and soon to be the largest) and the rest of the world. Users of our financial services may soon become concerned about that capacity, specifically the currency risk that they are assuming and the effectiveness of the hedging, if any, that they can undertake. These concerns may well constrain our further development as an international financial centre. And we ourselves, as we work to expand our role as an international financial centre, should also be alert to our increasing vulnerability to monetary stability.
This monetary dilemma should be addressed ahead of time, and certainly not in the context of a crisis. There is no need for foreign investors and fund raisers to take currency risk if their international financial activities can be conducted in other currencies of their choice, for example their home currencies, as conveniently as they are now conducted in Hong Kong dollar. Most of the financial infrastructure to facilitate this is already in place – the Real Time Gross Settlement (RTGS) systems for the renminbi, the US dollar and the euro, for example, were built years ago. As a start in addressing this monetary dilemma, it may be wise to make it conveniently possible for stocks listed in Hong Kong to be priced, traded and settled in the renminbi as well as in Hong Kong dollar. This move would have the added advantage of facilitating the further internationalization of the renminbi, in accordance with the declared policy objective of the Mainland. It would also enable banks in Hong Kong to manage their renminbi assets and liabilities more effectively.
14 September 2017