Two systems, one market?
Raymond Zhou

What kind of role will Hong Kong play when the Chinese mainland reforms its financial system? How to define such a role?

It all depends on which part of the "one country, two systems" model is emphasized, says Vincent Cheng, Vice-Chairman and Chief Executive of Hang Seng Bank. If the emphasis is on "one country," then there is a lot that Hong Kong can do to help; otherwise its role will be quite limited.

There are three areas that the chief executive envisions where Hong Kong expertise can contribute to the improvement to China's financial system.

First and foremost is the sharing of the best business practices, Cheng said.

Best practices

Hong Kong's banking industry and capital markets are well established, integrated with the global financial market and keeping up with world standards in terms of regulatory regimes, products and services. On the mainland, authorities in the financial sector are fully aware of the problems that plague their system, Cheng says, but when it comes to concrete measures HongKongers can help "shorten the mainland's learning curves" so that it will avoid making mistakes in the process.

Cheng says that sharing the "best practices" can take the form of active participation of Hong Kong financial institutions operating on the mainland, or through personnel exchanges. This is already taking place as the Chinese mainland speeds up the opening of its financial markets after its acceptance into the WTO. Strategic alliances are commonplace, and the sharing of best practices will not be limited to commercial organizations but applied to regulatory institutions as well.

Yichen Zhang, CEO of CITIC Capital Markets Holdings Ltd, says he feels that the central government has been pushing companies onto the international financial market. "When mainland companies come to Hong Kong for listing, they have to abide by the rules here and this has significantly improved their corporate governance. Over the past 10 years, red-chip companies in Hong Kong are an unqualified success," he says.

The Executive Director of Corporate Finance Division, Securities and Futures Commission Hong Kong, Ashley Alder, says he feels that it is visionary for mainland authorities to have companies stand the test of international financial standards. "The history of the H shares tells us that Hong Kong can transfer its expertise." But he says that once corporate misconduct is suspected of these companies, it would be very hard, if not impossible, to "take your investigation to the mainland."

Junius Ho, council member of The Law Society of Hong Kong, pinpointed "mutual enforcement judgment" as the legal hot spot where improvement can be made. When business disputes arise involving HK-listed mainland companies, court judgment from Hong Kong cannot be applied to companies operating on the mainland. Ho compared the rip-roaring Chinese economy to a massive pile and said "you need the rule of law to make it stand up." Ho says Hong Kong can be "a close working partner" and help improve the mainland business laws and their enforcement.

Source of capital

The second role that Vincent Cheng sees for Hong Kong is as a source of capital for the restructuring and recapitalization of the Chinese mainland's financial institutions.

For historical reasons, China's financial institutions, especially banks, has high levels of bad and doubtful assets or loans and low levels of equity capital. Their return on equity and profitability was low as a result. Huge investment is required for them to upgrade their systems and technology to compete effectively in both domestic and international markets.

Hong Kong has efficient and highly liquid capital markets that will continue to help the mainland's financial sector tap into foreign funds, says Cheng. In addition, direct investment by Hong Kong firms, to the extent permitted by the mainland's regulations, will also serve as a catalyst for development, apart from bringing in capital.

Tim Krause, Senior Regional Manager of the International Finance Corporation (IFC), says that the IFC has made a point to invest in China's financial sector to develop competitive institutions that will meet international corporate governance and operating standards. It has invested in five banks. Krause argues for the securitization of distressed assets such as NPLs. "Better deal with it early than late, and better to sell them," he said.

Ka Shi Lau, Deputy Chairman of the Hong Kong Trustees' Association, argued for mortgage securitization and trust establishment, two areas where Hong Kong can advise the mainland.

Julius Wang, Senior Managing Director of the Search Investment Group, talked about venture capital. "The allocation of capital should be dynamic and efficient. But one big constraint is lack of transparency," he says.

Currency centre

The third role that Vincent Cheng sees for Hong Kong is as an international financial centre within the framework of China's financial development.

As China gradually relaxes its capital controls and prepares its currency for full convertibility, Hong Kong can serve as a testing ground where China experiments with its proposed changes. Cheng praised the first step that started early this year for Hong Kong to take renminbi deposits. "This may have been a small step for Hong Kong, as it represented just one more currency choice for banks and customers in Hong Kong. However, it was a big step for China, because in doing so, the renminbi has in a sense become a convertible currency, although with limitations."

Cheng says that the Qualified Domestic Institutional Investors (QDII) scheme that allows selected mainland institutions to invest outside the mainland market could be another change where Hong Kong serves as a testing ground.

While most participants in China Daily's Third CEO Roundtable predict a significant role for Hong Kong in the transformation of the mainland's financial sector, David Ting, Head of the Office of The European Commission, questions the base of such integration. "Given China's commitment to the one-country, two-system model, it would be hard for the Chinese mainland to include Hong Kong in all its economic policy considerations," he says.

Qi Zhu, CEO of ICBC (Asia) Ltd, says that regulations will change gradually. "It'll be one market, two systems."

Meanwhile, Vincent Cheng says that Hong Kong financial gurus should not overlook the difficulties ahead.

"In terms of mainland regulations, I feel that sometimes they open one door, but then close the window," he said.

Geng Xiao, Associate Professor at the School of Economics and Finance of the University of Hong Kong, says that Hong Kong as a success story is "not well broadcast in the mainland."

"The first step," he says, "is to let people know that we can help." And it will be a "dynamic role to play" as China transforms itself into one of the world's leading economies, says Vincent Cheng.


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