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THE ECONOMY

and the Office of the Commissioner, as recommended by the SRC. Further steps will be taken over the next 18 months, with a view to bringing Hong Kong in line with the major international financial centres regarding securities regulation.

The two exchanges have undergone substantial changes both in their constitution and in their management since the events in October 1987. After a successful reconstitution exercise, which was completed within one year of the crash, the Stock Exchange now has a more broadly-based and representative council consisting of lay, individual and corporate members. The Stock Exchange and other parties involved, including a number of major banks, are now working on the detailed design of a new settlement system, which should be in place by early 1990. The Futures Exchange has reached an advanced stage in its reconstitution exercise. It has also prepared a new set of rules aimed at significantly strengthening its risk-management system, which involves a clear delineation of respon- sibilities among the clearing house, the brokers and the exchange itself, and the establish- ment of a properly-constituted guarantee fund. These reforms will be introduced shortly.

Thus, in less than 18 months, Hong Kong has been able to rectify most of the important weaknesses which were revealed during the market collapse in October 1987. The new Securities and Futures Commission will proceed to implement a large number of relatively minor recommendations of the Securities Review Committee.

Hong Kong as an International Financial Centre

The favourable geographical position of Hong Kong, which provides a bridge in the time gap between North America and Europe, together with strong links with China and with other economies in the South-east Asian region as well as excellent communications with the rest of the world, has helped Hong Kong to develop into an important international financial centre.

A total of 77 of the licensed banks were among the top 100 banks in the world in 1988. Most of the foreign banks in Hong Kong are ranked top of the list in their own countries. In addition, many of the most important merchant banks or investment banks operate in Hong Kong. A substantial proportion of the transactions in the banking sector are international in nature; over 50 per cent of the sector's aggregate assets and liabilities are external, spreading over more than 80 countries. The financial markets, particularly in foreign exchange and gold, form an integral part of the corresponding global markets. Moreover, Hong Kong serves as an important centre for the intermediation of interna- tional flows of savings and investment, particularly through the syndication of loans and international fund management. International investors play a significant and increasing role in Hong Kong, and Hong Kong's investment overseas is also believed to be considerable.

Increasing Economic Links between Hong Kong and China

China's adoption of an open door economic policy since 1979 in support of its modernisa- tion programmes has led to a rapid increase in economic links between Hong Kong and China, with a profound impact on the growth and development of the Hong Kong economy.

The most conspicuous development has been the rising importance of China as Hong Kong's trading partner. Between 1978 and 1988, merchandise trade between Hong Kong and China grew by 39 per cent per annum in Hong Kong dollar value terms. In 1988, this amounted to $289 billion. Since 1985, China has been Hong Kong's largest trading partner. China is now the largest market for Hong Kong's re-exports, and the second largest market