or decades, Hong Kong has thrived as a global financial center, with its unique status as a gateway connecting the Chinese mainland and the rest of the world. But with uncertainties over global economic prospects, how should the city continue to maintain its competitiveness? In an exclusive interview with China News Service (CNS), Joseph Yam Chi-kwong, the first chief executive of the Hong Kong Monetary Authority (HKMA) from 1993 to 2009, offers his insights into how the city can build on its unique development path. He contributed to the establishment of the HKMA and Hong Kong’s Linked Exchange Rate System in 1983 which secures the stability of the Hong Kong dollar against the US dollar.
Yam is a Non-Official Member of the Executive Council of the Government of the Hong Kong Special Administrative Region (HKSAR) and Distinguished Research Fellow of the Lau Chor Tak Institute of Global Economics and Finance at The Chinese University of Hong Kong.
CNS: In a constantly changing world and amid the continuing pandemic, what financial risks is Hong Kong facing?
Yam Chi-kwong: Having been developed and strengthened over a long period of time, Hong Kong’s financial system already has, in its DNA, robust risk management. Although I’ve been retired for many years, I am very confident that Hong Kong is still ready for potential dangers, and fully prepared for financial risks.
Despite an unclear global economic picture, coupled with Covid-19, I’m not at all worried. Economies have boomand-bust cycles, which leads to market swings. This is a normal phenomenon. Hong Kong’s financial regulators regularly perform stress tests on the financial system, and they use very high factors [to make the tests difficult]. Although Hong Kong’s approach in fighting Covid-19 has been more conservative than elsewhere, it is justifiably conservative, and I think the impacts will be temporary.
But the world is facing major changes not seen in a century. The US still holds a very strong influence in international finance, and if it attempts to impact China’s development at the financial level, the situation could get very complicated. I believe the Chinese mainland and the HKSAR’s regulators will keep an eye on what is going on and analyze possible scenarios which will help them get ready for any contingency.
I think extreme scenarios are unlikely. First, as China and the US are the world’s two largest economies, a complete economic “decoupling” between them, especially at the financial level, is unlikely. Wall Street investment banks have a lot of business in the Chinese mainland, and with a lot of votes in hand, they influence US decision-makers. Second, the US is the world’s largest debtor, while the Chinese mainland, plus Hong Kong, are the largest creditor of US treasury bills. Therefore, it is not reasonable for the US to impose “sanctions” on China, which would keep other creditors on alert and therefore weaken the influence of the US in global finance.
CNS: What can be learned from Hong Kong’s 1998 defense against international short-sellers at the height of the Asia Financial Crisis?
YC: Before Hong Kong’s return to China, the HKMA had already done a lot of preparatory work in safeguarding financial security and monetary stability, including the introduction of the “Accounting Arrangements” in 1988 [a framework for the Hong Kong government to influence interbank liquidity and keep the exchange rate stable], and the Real-Time Gross Settlement system in 1996 [which enables safe and efficient interbank payment settlement], so the HKMA became capable of managing the monetary base. The 1997-1998 financial crisis was a test for us, as it was not due to anything Hong Kong had done wrong, but due to the failure of Southeast Asian countries to manage their debt risks amid financial globalization.
Those speculators took advantage of Hong Kong’s free market philosophy and manipulated the market. Facing this disappointing situation, corrections had to be made. So, we decided on a highprofile intervention in the stock market to prevent profiteering by manipulation. Whenever they drove down stocks, we bought up the stocks [to keep the prices buoyant]. This was a tough approach, but we had to fight, as there was no other choice in the end.
At that time, this [interventionist] approach drew criticism from some Western financiers, but it later won their approval. Although Hong Kong is a free economy that relies on the market, we must keep in mind there are times when the market fails. Preventing market failure requires regulation, and even intervention and participation. When regulators see the need to take action if something goes against public interests or threatens monetary and financial stability, they have to make up their minds to do it. The thing I learned from this experience is that the market is not absolutely sacred.
CNS: The latest Global Financial Center Index published by the London based commercial think tank Z/Yen and Shenzhen-based think tank China Development Institute in September 2022 shows that Singapore has overtaken Hong Kong, with the city slipping one place from third to fourth. Some believe Singapore has surpassed Hong Kong in terms of financial competitiveness. What do you think?
YC: These rankings are certainly important in some way, because they demonstrate how important a city is at the financial level. But I think it’s more important to understand what an international financial center is, which means a place of financing for international capital. In fact, Hong Kong, as an international financial center, is a place for capital flow between the Chinese mainland and overseas markets, and Hong Kong has done a great job in this regard.
In the future, if China aspires to become the world’s largest economy, Hong Kong’s role as a financing hub will become even more important. In this respect, there is no other place that can match Hong Kong’s status as an international financial center. In addition, many people measure a city’s financial center status by the volume of market transactions and number of financial institutions. There is nothing wrong with this. But I think what really matters for an international financial center is doing a good job in capital financing. Hong Kong is a crucial hub for IPOs. Moreover, most investors and fund raisers in Hong Kong are non-locals. Therefore, Hong Kong is a top-notch financial center in terms of internationalization.
An international financial center should focus on its job of capital financing. It is unnecessary to resort to practices like giving out subsidies to attract financial institutions. New York and London are leaders of financial innovation, with plentiful derivatives products and precise risk management. These innovative products have boosted the efficiency of capital financing, which we can learn from. But we should keep in mind that finance should always serve the economy, and it is not a self-serving activity, or a zero-sum game in the market.
I think Hong Kong’s national security law [effective June 30, 2020] will, in the long run, strengthen its position as an international financial center. International financial institutions don’t want to operate in a place where security is compromised. It is certainly good for Hong Kong’s global financial center status, with a stable social climate and a reassuring social environment. In fact, compared with European and US laws concerning national security, Hong Kong’s national security law is not so harsh. If even something like this gets criticized, it may well be that someone is seeking to suppress China out of their political stance.
CNS: Hong Kong serves as a financing gateway that links the mainland and the rest of the world. Will this role be replaced? How does this relate to Hong Kong’s role as a confluence between East and West?
YC: It’s a very clear policy and a trend that China will continue to reform and open up. But the mainland’s capital account will not fully open up in the short to medium term. Therefore, with the mainland’s supporting policy in place, Hong Kong acts as a gateway for investors and fund raisers from the Chinese mainland to go global. Hong Kong and the mainland have had many connect arrangements in the financial field, including the Shanghai-Hong Kong Stock Connect, the Shenzhen-Hong Kong Stock Connect, the Wealth Management Connect and the Bond Connect. As the country continues to offer support polices, Hong Kong is able to maintain its solid position as a global financial center.
Shanghai and Hong Kong are financial hubs with different roles. I think Shanghai is the place where investors and fund raisers can meet and unite to conduct business in the mainland. This is something that Hong Kong should not seek to change. But at the international financial level, Hong Kong, as part of China, can contribute to the external circulation of the country’s economy under the framework of “one country, two systems.”
Hong Kong’s role as a financing hub that links the mainland and rest of the world is underwritten by its role as a confluence between East and West. Hong Kong has been an international city for a long time, and a capitalist society with a common law system, something that overseas economies, especially capitalist ones, are used to. They may not know much about the mainland’s socialist market economy, but they are indeed familiar with the regulatory framework of Hong Kong. As the place outside the mainland that best knows how things are done and regulated in the mainland, Hong Kong is the best place for investors and fund raisers from the mainland and overseas to meet and match up.
CNS: How do you evaluate Hong Kong’s contribution to facilitating the yuan’s internationalization in recent years? In what direction will future efforts for Hong Kong develop?
YC: It’s been about 20 years since the idea of yuan internationalization was proposed. There has been considerable progress, but there is still potential for acceleration. The future direction should be to promote meaningful use of the yuan for multiple scenarios in the capital market. It means it can be used sufficiently and widely in the bond market, the stock market and the banking system. Take the bond market, there could be further development for yuan bonds issued by the Ministry of Finance of China and China Development Bank, which remain at a very basic stage. Stocks listed in Hong Kong could be quoted, traded and cleared in yuan, and in the banking system, there could be more development for yuan-related derivatives.
As yuan internationalization proceeds, there should be accelerated construction of related financial infrastructure, including the quotation system, the payment system and the asset custody system. Only when global investors with surplus yuan funds are able to find ways to invest, and those with insufficient yuan funds can easily raise capital, will yuan internationalization make sense.
For China, the best way to gradually reduce dollar reliance is to internationalize the yuan. Currently, offshore yuan markets operate in many places around the world, such as Singapore and the UK. But I don’t think we need to replicate the Hong Kong model elsewhere. If investors and capital raisers in Southeast Asia and Europe want to do business in yuan, they can do so through Hong Kong. This would maintain the depth, width and high liquidity of the Hong Kong offshore yuan market.