Hong Kong has had more than its fair share of surprises in the past decade. The Asian financial crisis, SARS, dynamic growth on the mainland – all have sent shockwaves through the economy. During this time, the Hong Kong government has faced numerous demands from all sides to take action. It has been responsive but it has flatly rejected calls for Hong Kong to adopt an industrial strategy in which the government picks winners and becomes an active participant in the market.
This is why a remark by Hong Kong’s chief executive, Donald Tsang, that the government no longer subscribed to the principle of “positive non-interventionism”, has reverberated so loudly in Hong Kong and abroad. Such luminaries as Nobel prize-winning economist Milton Friedman have entered the fray to decry the folly of abandoning the philosophy that has underpinned Hong Kong’s success for so long.
Why such a fierce tempest? Mr Tsang has simply recognised that circumstances have changed. It is no longer sufficient for Hong Kong to declare itself a free port and wait for the world to beat a path to its door.
Market barriers
Hong Kong will increasingly make its living from high value-added services, in particular financial services. To provide a hospitable environment in which a financial services industry can grow, the government must update its own policies. It must engage with the authorities in China – of which Hong Kong is now a part – to eradicate market barriers. It must be proactive.
This is no different from the strategy that it has been following for some time. The financial services industry has benefited greatly from government initiatives in recent years, including a major overhaul of the financial regulatory regime in 2002.
Helped by other initiatives as well, Hong Kong took off as the market of choice for the public listing of China’s largest companies. Those efforts were due to be capped by the world’s largest initial public offering to date, with the listing of Industrial and Commercial Bank of China at the end of October.
Other initiatives that the government has undertaken in the past year include the abolition of estate duty (death taxes) and the exemption of offshore funds from Hong Kong tax to raise the island’s importance as an international fund management centre.
Until 2003, most local Hong Kong banks were barred from opening new branches on mainland China. Then banks’ fortunes changed for the better: the Closer Economic Partnership Arrangement (CEPA), negotiated between the mainland and Hong Kong, recognised the close political, economic and regulatory ties between the two economies. The change was timely: the mainland was liberalising the banking sector in line with its commitments under the World Trade Organization accession agreement.
Without CEPA, Hong Kong banks would have been excluded from the market as it was taking off, missing a valuable opportunity. Government action – and inaction – has a profound impact on the operation of the market.
The next step
Hong Kong is now taking the next logical step to improve co-ordination of the development of its financial infrastructure with that of the mainland. In September, the government launched the Economic Summit on China’s 11th Five-Year Plan and the Development of Hong Kong to solicit views from the Hong Kong business community on future co-operation with mainland China. The participants will submit their proposals by the end of the year.
The summit aims to ensure that Hong Kong is more attuned to market needs on the mainland, and better able to capitalise on opportunities. It will also put the Hong Kong government in a stronger position to follow through with the relevant authorities on the mainland regarding any policy or regulatory issues that need attention. The aim is to create win-win opportunities for both the mainland and Hong Kong.
The Hong Kong government has not given up its faith in the market. Rather, it is working to further open the market, and allow market forces to work more effectively.
Sir David Li is chairman and chief executive of The Bank of East Asia, and convenor of the financial services focus group under the Economic Summit on China’s 11th Five-Year Plan and the Development of Hong Kong.
