ENG-1996 — Page 121

FINANCIAL AND MONETARY AFFAIRS

Increasing Financial Links Between Hong Kong and China

Hong Kong has been China's primary channel for international fund-raising. However, the cross-border capital flows have by no means been one-way. Direct investment and inter-bank fund flows in both directions have grown rapidly. Hong Kong banks have also stepped up their business activities in China.

Hong Kong has facilitated China's overseas fund-raising activities via Hong Kong's equity and debt markets. At the end of 1996, 23 Chinese state-owned enterprises were listed in Hong Kong through the issuance of H-shares, raising a total of more than $20.5 billion. Bonds issued by China's Ministry of Finance, the People's Construction Bank of China, and other major financial institutions are traded on Hong Kong's Stock Exchange.

Cross-border fund flows among financial institutions have also grown rapidly. Over the years, China has accumulated a substantial amount of funds in Hong Kong dollars from trading activities and inward investment. These funds are placed with financial institutions in China and subsequently channelled back to Hong Kong through the inter-bank market.

Since 1980, external liabilities of Hong Kong authorised institutions to financial institutions in China have grown at an average rate of over 40 per cent per annum to well over $250 billion by December 1996. Over the same period, claims on financial institutions in China by authorised institutions in Hong Kong registered an annual growth of almost 25 per cent to approach $300 billion.

Many banks from Hong Kong have expanded their businesses in mainland China. A total of 17 locally incorporated banks have established 29 branches and 28 representative offices there at the end of 1996.

Portfolio investment in the form of 'China funds' has also become increasingly popular. By the end of 1995, 19 such funds, amounting to some US$814.3 million, had been authorised by the SFC investing in B-shares listed on the Shanghai and Shenzhen stock exchanges as well as H-shares listed in Hong Kong.

Developments in Financial Infrastructure

To ensure that Hong Kong has an efficient and robust financial infrastructure, the HKMA and the banking community have been working closely to identify, minimise and, as far as possible, eliminate risk in Hong Kong's interbank payment system. With the benefit of studies conducted by central banking groups and advice from international experts, the HKMA concluded in early 1994 that the next-day net settlement system practised in Hong Kong fell short of the latest international standards and a move to move to Real Time Gross Settlement (RTGS) should be made as soon as possible.

The timetable provides for a phased implementation of RTGS starting in the first quarter of 1996 with full operation by the end of the year. The Hong Kong Interbank Clearing Limited (HKICL), jointly and equally owned by the HKMA and HKAB, was set up in May 1995 to take over in phases the Hong Kong dollar clearing facilities. from the Management Bank (the Hongkong and Shanghai Banking Corporation Ltd) of the HKAB Clearing House. This process started in August 1996 and will be completed in April 1997.

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