Hong Kong As An International Financial Centre:

Abstract

Traditional measures of concentration of financial market activities do not adequately

reflect an economy's status as an international financial centre (IFC). In this paper, we

construct alternative measures that better capture the ability of an IFC to attract capital

flows and international demand for its financial services, as well as its attractiveness as a

place for international financial institutions to congregate. We also explore the

determinants of the competitiveness of IFCs in an analytical and empirical framework.

Our findings suggest that, in addition to the pull factors of the IFC, push or demand

factors from the economies importing financial services from the IFC are also important.

The rise of Mainland China represents a potentially important push factor for the demand

for financial services exports from Hong Kong, and hence its status as an IFC.

JEL Classification Numbers: F21; G15; G28

Keywords: International financial centre; financial services exports; financial sector FDI

Author's E-Mail Address: lcheung@hkma.gov.hk; vyeung@hkma.gov.hk

1 The authors are grateful to Hans Genberg and Dong He for their valuable suggestions and comments.

The views and analysis expressed in this paper are those of the authors, and do not

necessarily represent the views of the Hong Kong Monetary Authority.

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Executive Summary:

* Hong Kong is often perceived as the hub of most major multinational companies and

an important centre for the provision of financial services to international investors.

Yet, based on traditional measures such as concentration of financial market activities,

it still appears to remain far smaller than major IFCs such as New York and London.

* This suggests that the traditional measures of the importance of an IFC may not be

fully adequate. First, these measures reflect, apart from international financial

activities, domestically-oriented activities. Secondly, their measurements of the status

of IFCs are limited to the concentration of financial market activity. Thirdly, due to

data limitations, these measures are compared on a country rather than on a city level

on which activities of an IFC should be based.

* In view of these caveats about traditional measures, we construct three alternative

measures to assess the importance of Hong Kong as an IFC relative to other major

economies, namely inward international investment position excluding FDI, exports of

financial services, and inward direct investment in the financial sector.

* While Hong Kong lags well behind major IFCs in terms of its concentration of

financial market activities, adjusted for GDP on a city basis, our alternative measures

suggest that Hong Kong has been the leader in inward financial sector direct

investment and comparable to the US in exports of financial services.

* There have also been few empirical studies of the determinants of the competitiveness

of IFCs. The second part of this study explores the determinants of the relative

importance among IFCs in an analytical and empirical framework. This will have

implications for what determines Hong Kong's competitiveness as an IFC, and how

Hong Kong could further strengthen its position.

* Our findings suggest that both macroeconomic and microeconomic/institutional

factors as well as financial market strength and efficiency are important in the

formation of IFCs. In terms of attracting the agglomeration of international financial

institutions, the fact that both Hong Kong and Singapore have been outperforming the

regional economies and many other major economies, including Japan, in this regard,

appears to be explained, in part, by their favourable microeconomic environment.

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* In terms of financial services exports, while Hong Kong fares well compared to other

regional economies, including Japan, there is still a considerable gap when compared

to the major IFCs. Our findings suggest that Hong Kong can enhance its role as an

IFC by increasing the international element in the stock market. While Hong Kong is

a major hub of international financial institutions, the number of foreign companies

listed on the domestic stock market remains small compared with major IFCs.

* At the same time, in addition to the pull factors of the exporting economy, push or

demand factors from the importing country are also important. Our findings show

that the size of the home country's economy is among the most important determinants

of IFCs. Thus, the demand for financial services exports from an economy could

increase when there is a large market with similar culture nearby. The rise of

Mainland China represents a potentially important push factor for the demand for

financial