CURRENT PERFORMANCE INDICATORS

With Hong Kong firmly established as a major international financial centre, the financial markets and fund management services form a key component of our services economy.

• In terms of market capitalisation, the Hong Kong securities market is the eighth largest in the world, and second in Asia, after Tokyo. Its efficiency and risk management systems are among the best by international standards. In 1995, our securities market grew by 23% as measured by the Hang Seng Index (HSI), the highest in the Asia-Pacific region.

• At the end of 1995, 542 companies were listed on the Stock Exchange of Hong Kong (SEHK). The total market capitalisation was $2,348 billion.

• By the end of 1995, 17 Chinese state-owned enterprises had been listed on SEHK, raising more than $20 billion and making Hong Kong an important centre for raising capital for China.

• In 1995, there were 26 new listings on the SEHK, raising a total of $7.7? billion. In addition, $8.5 billion was raised through private placements and rights issues. The average daily turnover of SEHK was $3.3 billion.

• In 1995, the Hong Kong Futures Exchange recorded a 8.7% increase in its total turnover. This compared favourably with the 0.8% increase in Singapore, and the 10.2% drop in overall volume of the Chicago Mercantile Exchange and similar declines for other exchanges in the United States.

• Since 1994, the average daily turnover of HSI futures contracts has surpassed the previous peak in 1987. In 1995, the average daily turnover of HSI futures contracts and HSI options contracts amounted to 18?07 and 2?14, representing an increase of 9% and 7% respectively over 1994.

• In 1995, three new products namely, stock options, stock futures and currency futures contracts were introduced for trading.

• At the end of 1995, the outstanding amount of the Hong Kong dollar debt securities was $196.9 billion, comprising $58.7 billion of Exchange Fund papers and $138 billion of private sector issues. A total of 184 issues of Hong Kong dollar and foreign currency denominated debt securities were listed on the SEHK.

• Whilst Hong Kong's debt market was relatively small, the average daily turnover of Exchange Fund papers amounted to $17.2 billion in 1995, i.e. over 30% of such papers changed hands daily, making Hong Kong one of the most liquid government debt markets in the world.

• Hong Kong is the leading fund management centre in Asia with 87 authorised fund houses. Over 35 international fund houses have set up their Asia-Pacific headquarters here.

• In 1995, there were 1?83 authorised unit trusts and mutual funds in Hong Kong, compared with 978 in 1994. Their total value in 1994 was $440 billion, representing an increase of some 120% over 1990. A further $1,100 billion in institutional portfolios was estimated to be managed from Hong Kong.

• In 1994, the total value added of the financial markets and fund management services amounted to $21.4 billion, representing 2.2% of Hong Kong's Gross Domestic Product.

• In 1995, about 51?00 people were employed in this sector.

THE GOVERNMENT'S COMMITMENT

The Government is committed to supporting Hong Kong's development as a major international financial centre. A prosperous and efficient securities, futures, debt and fund market is an integral part of this goal. We seek to achieve this objective by maintaining a simple, effective and professional regulatory regime conducive to the healthy development of the asset markets. Our aim is to?

• protect the interests of investors, shareholders and other market participants;

• provide a level playing field where all existing and potential market participants can compete on equal terms;

• promote the highest standards of services and business integrity;

• enable Hong Kong to compete effectively with other major financial centres; and

• foster the development of new financial products and services.

To achieve these objectives,

• We will consolidate as far as possible the legislation relating to the regulation of the securities and futures market so as to remove inconsistencies and streamline the framework in general. The Securities and Futures Commission will issue a paper for public consultation in 1996.

• We will continue to streamline our regulatory regime to facilitate the introduction of new financial products whilst ensuring adequate safeguards for our investors.

POLICY DIRECTIONS

We propose to :

• introduce ten-year Exchange Fund Notes to extend further the benchmark yield curve for Hong Kong dollar debt, facilitate the development of the longer end of the local debt market and increase the supply of long term high quality and liquid Hong Kong dollar investment products. To ensure a successful launch, the exact timing for the introduction of the new product will have to be carefully examined with regard to market conditions;

• expand the Central Moneymarkets Unit under the Hong Kong Monetary Authority to enhance the efficiency of the clearing services for debt instruments;

• pursue the establishment of the Mortgage Corporation under the Hong Kong Monetary Authority which will facilitate the development of a secondary mortgage market, promote mortgage securitisation, boost the development of fixed rate instruments and enrich the product variety of debt instruments;

• support a series of measures proposed by the securities and futures industry to improve the regulatory environment and risk management systems, launch new products, introduce more market makers for certain products, link up with reputable international exchanges, reinforce Hong Kong's role as a capital market for China and the region, and encourage more participation through investor education; and

• support measures to upgrade the technology level of the financial markets to enhance efficiency.

THE PRIVATE SECTOR'S CONTRIBUTION

The remarkable success of the financial services sector depends very much on the enterprise of the private sector, and on its adaptability and readiness to respond to changing demands. The private sector makes its vital contribution by :

• investing in research and development to launch more investment products on the market to cater for investors' needs;

• observing the best business ethics so as to enhance investors' confidence in the integrity and stability of the financial markets;

• adopting a Code of Practice in pursuit of service excellence;

• exploring the feasibility of setting up a second board or other trading facilities in Hong Kong for regional stocks and for smaller companies with growth potential; and

• continuing their vigorous efforts in market development, product development, quality improvement and efficiency enhancement.

LONG TERM ISSUES

According to a recent consultancy study in which 50 top chief executives of financial institutions in Hong Kong were interviewed, Hong Kong has the right ingredients to remain the regional centre for financial services. There is, however, no room for complacency. Competition, both globally and in the region, has intensified.

Whilst we believe that we should let the market determine Hong Kong's most appropriate roles, the Government will continue to maintain a sound, professional and world-class framework within which the market can operate effectively. Regulatory bodies will continue to be forward looking and supportive of change in order to cope with the latest market development. The Securities and Futures Commission is developing a strategy in this regard.

The opening up of China and the rapid economic development of Asian countries offer unparalleled opportunities for Hong Kong. The World Bank estimates that by the year 2004, the East Asian bond market is set to reach the US$1 trillion mark. Hong Kong and China currently account for over 13% of the East Asian bond market. Similarly, competition in the fund management market has become more intense than ever with the entry of international and regional players. The Government and the private sector should join hands to ensure that Hong Kong can continue as the major channel for capital flows and fund management services serving both China and the region.

The impending launch of the Mandatory Provident Fund Scheme, apart from providing retirement protection for the workforce, will generate a substantial retirement reserve for investment purpose. The asset size is estimated to grow exponentially from $146 billion in 2000 to $2,954 billion in the year 2030 at 1995 price level. The fund management sector will need to gear itself up for this enormous increase in business volume.

Secretary for Financial Services

March 1996