TNAG-2306-FCO40-3340-Future-of-Hong-Kong-stock-market-and-exchange-rate-1991 — Page 98

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PS/Lord Caithness

9 January 1991

Mr McLaren

Mr Burns

Special Advisers

Mr Crystal, News Dept

1. Mr Hay Davison called on the Minister this morning. Mr Burns was also present.

2.

Mr Hay Davison explained the main recommendations of his report into the Hong Kong stock exchange. He said that in general it had been implemented with admirable rapidity and, he thought, had proved effective. The fact that the political crisis induced by the events of Tianamen Square had not been accompanied by a financial crisis was in part due to his reforms. He summarised his recommendations, in so far as they related to the stock exchange, as follows:

i)

ii)

iii)

The creation of the Securities and Futures Commission, with adequate staff and resources to monitor effectively the stock exchange.

Reform of the stock exchange itself. Prior to 1987 it had been corrupt. As a result of his reforms a new, independent, Chairman had been installed. He had tried to ensure that international brokers (who accounted for 50% of market dealing in the top shares) were represented on the stock exchange Council by requiring members to be incorporated. However, the local Chinese brokers (of which he said there were some 900, ie twice as many as in London) had simply incorporated themselves and still monopolised the Council. As a result he felt that key stock exchange staff, notably the Heads of the Listing and Investigations Divisions were vulnerable to pressure to acquiesce in lax, and ultimately corrupt, Chinese practices.

He had recommended a revised settlement system. This had yet to be implemented. Progress was slow and would require new legislation and changes to the banking

system.

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