Asia-Pacific Financial Market No.6
Introduction of financial environment in Hong Kong
Background of Hong Kong (See PPT p.3)
Hong Kong has unique historical background. On 1 July 1997, the transfer
of sovereignty from United Kingdom to the People's Republic of China
occurred. Hong Kong was colony of United Kingdom for 156 years.
Right now, Hong Kong is China's first special administrative region (特別行
政区). However for governance, they adopt that one country has two systems.
The declaration stipulates that the region maintain its capitalist economic
system and guarantees the rights and freedoms of its people for at least 50
years beyond the 1997 handover. Then they can still have self-government.
Historically, Hong Kong was the intermediation of trade between United of
Kingdom and China. The beginning of 1970s, they had plenty cheaper labor
force, so they could successfully build infrastructure like developing housing
environment, subways and so on. Under the policy of
“Positive
non-interventionism (積極的不介入)”, they could rapidly developed during
1970s. Before following this policy, they proposed “laissez-faire (自由放任主
義)”, but they changed their policy. Normally the Hong Kong government (香
港政庁) doesn’t control anything, however if economy or society got serious
problem, handled and solve it. Unfortunately this policy didn’t remain on
modern Hong Kong.
Exchange rate regime in Hong Kong (See PPT p.4)
The silver standard, 1863-1935
From 1863 to 1935, there is no exception. They were also under the silver
Standard. The silver standard became the basis of Hong Kong’s monetary
system until 1935. Considerable fluctuations in the value of silver against
gold gave Hong Kong a variable, and often volatile, exchange relationship
with the gold-based currencies, such as the pound sterling. This contributed
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to the sever financial and economic crisis that hit Hong Kong in the early
1890s. On the other hand, a largely consistent exchange relationship with
the Mainland of China provided stability in the price of some basic
commodities.
The sterling link, 1935-1972
In November 1935, as a result of the dramatic outflow of silver caused by
the rising price of silver in the USA and elsewhere, China abandoned the
silver standard. Honk Kong immediately followed suit. On 9th November
1935 the government declared the Honk Kong dollar as the local money unit,
with an exchange value fixed at the rate of one Hong Kong dollar to one
shilling and three pence (or HK$16 to the pound). Under the Currency
Ordinance of 1935 banks were required to surrender to an Exchange Fund
(which was invested in sterling assets) all silver bullion held by them
against their banknote issues in exchange for certificates of indebtedness.
These certificates were the legal banking for the notes issued by the
note-issuing banks under what became, in effect, a currency board system.
The floating years, 1974-1983
Because of Britain’s declining economic power, the bound became an
increasingly unreliable anchor for the Hong Kong dollar. Sudden and
dramatic devaluations of the pound in 1949 and 1967 were disruptive to
Hong Kong’s financial system. In June 1972 the British Government
decided to float the pound sterling. The Hong Kong dollar was then linked
briefly to the US dollar, first at the rate of HK$5.65 to the US dollar, and,
from February 1973, at HK$5.085. In November 1974, against a weakening
US dollar, the Hong Kong dollar was allowed to float freely. The first two
years of the floating regime went fairly well. But from 1977 onwards an
explosion in money growth and credit supply contributed to a deteriorating
trade balance, a persistent depreciation of the currency, and double-digit
inflation.
The crisis of 1983 and the linked exchange rate system
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The depreciation of the Hong Kong dollar was made worse by speculative
attacks and by the escalating crisis of confidence in the future of Hong Kong,
which came to a head in 1983. At one point in September 1983 the exchange
rate dropped to a record low of HK$9.60 to the US dollar.
Facing both a currency panic and nervousness about the soundness of a
number of banks, the government announced on 17th October 1983 a new
policy to stabilize the currency, which is now the basis of Hong Kong’
monetary system: the link between the Hong Kong dollar and the US dollar
at the fixed rate of HK$7.80 to the US dollar (right now $7.85).
Link to US dollar (See PPT p.5)
Hong Kong were remaining link to US dollar even they were faced to
several events, like Black Monday in 1987, Tiananmen Massacre (天安門事
件) in 1989 June, Gulf War (湾岸戦争) in 1990, Currency crisis in Mexico,
with pressure of devaluation. There are several reasons Hong Kong didn’t
give up link to US dollar even they got economical damages. One of reasons
is that people in Hong Kong think successes of securing international
confidence and economic growth due to their currency policy. Also for them,
stabilization was significant political purpose. Therefore they keep focus on
US dollar. Historically, on currency system in Hong Kong, they got many
influences from political background. Depend on who is the most powerful
trader for Hong Kong they had changed the target to peg their currency.
No Central Bank in Hong Kong (See PPT p.6)
There isn’t any central bank in Hong Kong. Hong Kong Monetary Authority
(HKMA) governs the issue of banknotes, which are issued by three
commercial banks, Standard Chartered Bank (渣打銀行), The Hongkong and
Shanghai Banking Corporation Limited (香港上海滙豐銀行有限公司) and
Bank of China (Hong Kong) Limited (中國銀行(香港)有限公司). They issue
$20, $50, $100, $500, $1,000. For the $10 notes, there is a paper note issued
by the Government in 2002 in recognition of a continuing demand among the
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public for a note in addition to the coin and a polymer note issued by the
Government in 2007 to assess the performance and acceptability of polymer
notes in Hong Kong. The $10 notes issued by two note-issuing banks in the
1990's remain legal tender, but are no longer printed. Objects of HKMA are
to maintain currency stability within the framework of the linked exchange
rate system. Also they have responsibility to promote the stability and
integrity of financial system, including the banking system and so on.
Besides, Currency Board is one of significant features of financial system in
Hong Kong. It is one of exchange policies. Normally central bank carries on
but there is no central bank in Hong Kong. Then they adopt specific system
on exchange rate. Under Currency Board, HKMA guarantee to change Honk
Kong dollar to US dollar with pegging fixed rate. Also HKMA reserves US
dollar amount as same as Honk Kong dollar amount. Therefore they
guarantee the value of Honk Kong dollar indirectly. However they can get
stability on exchange rate but they loose the method of financial policy.
Financial Institutions in Hong Kong (See PPT p.7)
Hong Kong has three types of deposit taking institutions. Honk Kong has
one of the highest concentrations of banking institutions in the world.
Seventy of the largest 100 banks in the world have an operation in Hong
Kong. At the end of December 2009, there were 145 Licensed Banks
(including banks issuing banknote), 26 Restricted License Banks and 28
Deposit Taking Companies. Of these 199 authorized institutions, 180 are
beneficially owned by interests from 29 countries. In addition, there were 71
local representative office of overseas banks in Hong Kong at the end of
2009.
The first type is Licensed Banks that may operate current and savings
accounts, and accept deposits of any size and maturity from the public and
pay or collect checks drawn by or paid in by customers. Only Licensed
Banks can deal in them.
The second type, Restricted License Banks, are principally engaged in
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merchant banking and capital market activities. They may take deposits of
any maturity of HK$500,000 (approximately US$64,103) and above.
Then last type is Deposit-taking companies that are mostly owned by, or
otherwise associated with, banks. These companies engage in a range of
specialized activities, including consumer finance and securities business.
They may take deposits of HK$100,000 (approximately US$12,821) or above
with an original term of maturity of at least three months.
Apart from the above three categories of authorized institutions that are
permitted to carry on the business of taking deposits in Hong Kong, overseas
banks may establish local representative offices in Hong Kong. However,
these offices are not allowed to engage in any banking business and their
role is confined mainly to liaison work between the bank and its customers in
Hong Kong. However they don’t adopt “Pay Off” until the end of 2010 since
Oct. 2008. Deposits in Banks are generally guaranteed by government. In
US and Japan, deposits are guaranteed only under, $100,000 (until Dec.
2013, temporally $250,000) and ￥10,000,000.
Stock Market in Hong Kong (See PPT pp.8-10)
According historical date issued by Hong Kong Exchange and Clearing
Limited (HKEx: 香港交易所) , the end of 1996, their value was HK$3,476
billion, 48% increased from previous year, it was next bigger market of US,
Japan, England, Germany, France, Canada. Stock market in Hong Kong
rapidly expanded to be the 7th biggest stock market in the world. (For
references See Appendix file “World Stock M 1999”.) The highest value of
Hong Kong stock market was about HK$22 trillion in 2007. 2008 was
HK$18 trillion. 2009 was HK$15 trillion.
Securities trading in Hong Kong began the mid-19th century. However the
first formal market, the Association of Stockbrokers in Hong Kong was
established in 1891. The Association was re-named the Hong Kong Stock
Exchange in 1914. A second exchange, the Hong Kong Stockbrokers'
Association was incorporated in 1921. The two exchanges merged to form the
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Hong Kong Stock Exchange in 1947 and re-establish the stock market after
the Second World War.
Rapid growth of the Hong Kong economy led to the establishment of three
other exchanges - the Far East Exchange in 1969; the Kam Ngan Stock
Exchange in 1971; and the Kowloon Stock Exchange in 1972. Pressure to
strengthen market regulation and to unify the four exchanges led to the
incorporation of SEHK, the Stock Exchange of Hong Kong Limited in 1980.
The four exchanges ceased business on 27 March 1986 and the new exchange
commenced trading through a computer-assisted system on 2 April 1986.
Prior to the completion of the merger with HKFE in March 2000, the unified
stock exchange had 570 participant organizations. Following the data of
1997 (554 Participant organizations), 140 participants, over 30%, were
Enterprises relating Real Estate, and 55 participants, about 23%, were
Financial Enterprises.
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