ENG-1982 — Page 75

46

FINANCIAL SYSTEM AND ECONOMY

The financial scene in 1982 was dominated by a crisis of confidence, which broke towards the end of September, stemming principally from concern over Hong Kong's future. Up until then, financial markets were comparatively steady, and any anxieties on this score muted; but these came to the fore following the visit of the British Prime Minister, the Rt Hon Margaret Thatcher, to China and Hong Kong. The exchange rate of the Hong Kong dollar and stock market prices then declined very sharply. Despite official assurances regarding the future stability and prosperity of Hong Kong, the markets remained weak and unduly susceptible to rumours for the remainder of the year.

The property market was particularly affected by the 1997 issue, at a time when it was anyway experiencing a cyclical downturn. As a result, a number of companies involved in property development found themselves in serious financial difficulty. Their problems, and the decline in property prices, in turn placed some financial institutions under strain. Partly because of this, but sparked by the alleged insolvency of one deposit-taking company for reasons apparently unconnected with Hong Kong's future or the property market, a growing loss of confidence in the deposit-taking company sector as a whole developed in November. Reassurances from major banks and the government helped to restore general confidence in the sector, although a handful of individual companies continued to face difficulties.

Before these developments hit the headlines, the event which perhaps drew the most public attention was a rare bank run. Branches of a local bank came under siege for a couple of days in early September from thousands of nervous depositors following entirely groundless rumours that the bank was connected with a jewellery company -- part of whose business involved the issue of gold certificates to the customers recording the company's holding of physical gold for them which had suddenly ceased trading. Following reassuring statements from the government and from other banks, the run subsided without having spread and without the bank concerned being forced to close its doors.

Monetary Sector

During 1982, a further nine banking licences were granted, bringing the number of licensed banks to 131, of which 35 are local companies. The banks maintain a total of 1 474 offices in Hong Kong. In addition there are 115 representative offices of foreign banks.

Absolute discretion in the granting of banking licences rests with the Governor-in- Council, in accordance with the provisions of the Banking Ordinance. However, certain guiding criteria are applied. Currently, a bank incorporated outside Hong Kong which wishes to apply for a banking licence is required to show total assets (net of contra items) of at least US$12,000 million (this figure is reviewed annually), and its country of incorporation must apply an adequate form of prudential supervision and offer some acceptable form of reciprocity to Hong Kong banks. In addition, the Governor-in-Council will have regard to the number of banks from the applicant's country of incorporation which already hold licences, and to the state of Hong Kong's commercial relations with that country.

A domestic company (one incorporated in Hong Kong and predominantly beneficially owned by Hong Kong interests) must satisfy a separate set of criteria in order to be considered for a banking licence: it must have a paid-up capital of at least $100 million; it must have been in the business of taking deposits from and granting credit to the public for at least 10 years; and it must hold deposits from the public of at least $1,750 million and have total assets of at least $2,500 million (these minima are also reviewed annually). Banks may accept deposits from the public of any size and any maturity, but the interest rate rules of the Hong Kong Association of Banks result in the setting of maximum

Page 75Page 76