ENG-2005 — Page 120

90 | Financial and Monetary Affairs

and services to the Mainland investors on asset management, including risk management and diversification of investment.

In addition, Hong Kong's well-developed and liquid financial market could also serve as a desirable investment platform for the Mainland. Hong Kong's financial market provides many products of high quality and liquidity, including securities, derivatives, warrants, bonds, equity linked instruments and various types of unit trusts and mutual funds. This array of products enables investors to choose the best investment portfolio on the basis of their preference with regard to risk and returns. More importantly, Mainland investors can use Hong Kong as their base for undertaking global investment to enhance investment returns and diversify risks.

The Government and concerned regulatory authorities will continue to actively promote the links and cooperation between Hong Kong and the Mainland on financial services. The SFC has regular meetings with the China Securities Regulatory Commission, the stock exchanges in Shanghai and Shenzhen, and HKEX to discuss issues of mutual interest.

Mainland and Hong Kong Closer Economic Partnership Arrangement

Under the Closer Economic Partnership Arrangement (CEPA), Hong Kong's financial services suppliers and professionals can enjoy greater market access and flexibility for their operations on the Mainland. Implementation of CEPA has not only enhanced Hong Kong's attractiveness to market users, but also strengthened its competitiveness as an international financial centre and the premier capital formation centre for Mainland enterprises. Further progress was made with the signing of CEPA III in 2005.

The Mainland's further liberalisation measures in the financial services sector under CEPA II were signed in October 2005 in Hong Kong to be effective from January 1, 2006. Under CEPA III, qualified securities and futures companies on the Mainland are allowed to set up subsidiaries in Hong Kong. CEPA III complements the earlier commitment by the Mainland under CEPA II to allow Hong Kong futures intermediaries to enter the Mainland futures market. The move will help broaden the intermediary base of Hong Kong and increase employment opportunities for local financial professionals. The SFC continued to work with the China Securities Regulatory Commission on the implementation details of the commitment.

CEPA III gives more flexibility to Mainland branches of Hong Kong banks to meet the requirement on the level of operating funds for offering renminbi and foreign currency businesses to local customers. With the minimum level of operating funds being assessed on an aggregate basis, the minimum requirement for each individual Mainland branch has been relaxed to RMB300 million, on the condition that the average level of operating funds of all Mainland branches of the bank concerned is no less than RMB400 million.

Meanwhile, banks from Hong Kong continued to take advantage of CEPA | and CEPA II during the year. By the end of 2005, five Hong Kong banks had taken advantage of the lower asset requirement to open branches in the Mainland. With these new entrants, the number of locally incorporated banks with a presence on the

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