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Hong Kong as a Financial Center for Asia: The Role of the China Link

Hong Kong as a Financial Center for Asia: The Role of the China Link. Olaf Unteroberdoerster IMF Resident Representative Hong Kong SAR March 2009. Motivation. Background paper for 2007 IMF consultation with Hong Kong SAR

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Hong Kong as a Financial Center for Asia: The Role of the China Link

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  1. Hong Kong as a Financial Center for Asia:The Role of the China Link Olaf Unteroberdoerster IMF Resident Representative Hong Kong SAR March 2009

  2. Motivation • Background paper for 2007 IMF consultation with Hong Kong SAR • Document Hong Kong’s evolving role as an international financial center in the region • Identify key factors determining the success as an international financial hub • Assess the scope for future financial services growth

  3. Findings • Hong Kong has long track-record as Asia’s premier financial center • Special link with Mainland China • Supply-side factors play a role • Medium-term prospects : further financial opening of the Mainland will likely consolidate Hong Kong’s lead • Longer term prospects : will depend on ability to rely less on the Mainland as hinterland as financial system there modernizes

  4. Key trends: FDI • Hong Kong’s role appears small on a global scale 1998 2006 Percent of total bilateral flows

  5. Key trends: FDI • Within Asia, Hong Kong is only second to China 1998 2006 Percent of total bilateral flows

  6. Key trends: FDI • Hong Kong’s leading role in Asia rests on the China-link (contd.)

  7. Key trends: Portfolio Inv. • Hong Kong again appears to be a small player. 2005 2001 Percent of total bilateral investment

  8. Key trends: Portfolio Inv. • But in Asia it accounts for nearly one third of PI. 2005 2001 Percent of total bilateral investment

  9. Key trends: Portfolio Inv. • Inside Asia, Hong Kong plays a lead role, even without China HKSAR percent share in PI within Asia

  10. Key trends: Banking • Hong Kong plays an important, but less prominent role in cross-border banking activities, both globally…. 1998 2006 Percent of international lending and borrowing

  11. Key trends: Banking • … and inside Asia. 2006 1998 Percent of international lending and borrowing

  12. Gauging 3rd party flows • Presence in international finance due to: • (1) domestic demand; or • (2) services to non-residents • Share in world capital flows relative to share in world GDP gives better sense of (2) • HK, SGP, UK consistently stand out on this measure

  13. Gauging 3rd party flows(Intensity of foreign direct investment) Reminder: Share in bilateral flows, 2006

  14. ImplicationsDemand vs. supply • Hong Kong’s presence as an IFC derives primarily from services to non-residents • Yet, the China link dominates, particularly for FDI • Hong Kong resembles more NY (hinterland) than Singapore or London (no hinterland)

  15. ImplicationsDemand vs. supply • But supply side factors are also important

  16. Prospects for growth • Medium term outlook : Combination of special relationship with the mainland and supply-side strengths would be the key growth drivers • Illustration (taking FDI outflows as a benchmark) : outward portfolio investment from Mainland could amount to some US$ 200 billion • This would make Hong Kong by far the dominant portfolio investment center in Asia (2005 cross-border investment at some US$400 billion)

  17. Prospects for growth • Recent administrative measures seem to underscore Hong Kong’s privileged role • Mainland fund managers to establish subsidiaries here • Expansion of QDII • RMB deposits and trade settlement • RMB bond issuance

  18. Prospects for growth • Longer term : • How can HKSAR maintain its first-mover advantage? • Preeminence of financial centers can last long-time • But competitive strengths geared toward less China-centric model should be bolstered early

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