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

By Raymond Zhou

In the past few years I have been spending nearly half of my time expanding Hang Seng Bank's business in the Chinese mainland market, and through that process I have accumulated some experience.

A modernized banking structure is now taking shape in China, though at this stage the industry is still dominated by State-owned banks. At present, the big-four State-owned commercial banks have a market share of about 60 per cent in terms of deposits and loans. Ten years ago their share was 90 per cent. A new generation of commercial banks has been established, some of which are funded privately and are listed on the mainland bourses.

Today, there are about 70 foreign banks with over 150 branches in China providing domestic and foreign currency business. Compare it with 1993 when the figures were 27 and 58 respectively.

On the capital market, as of 2003, the two stock exchanges had 1,285 listed companies with a total capitalization of US$510 billion. Since 1990, the mainland's stock market has grown to be the third largest in Asia, after Japan and Hong Kong, in terms of market capitalization. In mid-2004, the number of stockbroking firms totalled 170, and the number of offices in which they operated throughout the country exceeded 2,000.

However, the majority of the listed companies are still State-owned enterprises, and the majority of their share capital is held by various State or provincial entities. The listed portion of those shares accounts for less than one-third of the total market capitalization.

What's more, foreign investors and investment banks have only limited access to China's stock market, which still has characteristics typical of emerging markets, including low transparency, the prevalence of connected party transactions and speculative trading.

In terms of currency, the renminbi is still not fully convertible, which restricts capital flows, especially outflows of funds. But this should not blind us to the achievements that China has made. Over the past 10 years, China has unified its currency by abolishing the Foreign Exchange Certificate designated for use by foreigners in the mainland. It also unified the renminbi exchange rate by scrapping the foreign exchange swap centre in 1994. During this period, China has accumulated the world's second largest foreign currency reserves totalling over US$400 billion.

Looking ahead

In 20 years, the renminbi will hopefully become a fully convertible currency. First, it would mean that by then China would have a very robust banking and financial system to handle the volatility of the international financial flows in and out of China. Second, it means that the economy can function more efficiently.

By Vincent Cheng