Hong Kong

Julian BenichouOmar HamiehLiya YangSoham Biswas

Hong Kong Hong Kong Special Administrative Region of the People's Republic of China “one country, two systems” Favorable time zone location low taxation; free trade; laissez-faire economic policies strong emphasis on the rule of law and fair market effective and transparent regulations absence of exchange controls no barriers of access to the market no restrictions on capital flows

“Fragrant Harbour”

Alpha+ city

Global Cities

Index 5th

Economic freedom

Ist

Foreign exchange market 5th

Financial center

3rd Price of property

2nd

Human Development Index

15th

Global Competitiveness 7th

Macroeconomic Overview Weakness• Long-term competition from Mainland; Sensitive to

political developments in Mainland• Highly sensitive to global economic and financial

shocks• Exposed to property sector

Strengths• gateway to China; strong dynamic growth;• Strong external liquidity and public debt position;• Sound banking system and proven monetary

policy framework;• strong business environment;

Hong Kong Monetary Authority

History

Advantages of the exchange rate during external shocks

Exchange Rate Arrangement

Foreign Exchange Reserves Management

Objectives:Preservation of long-term or real purchasing power.

Strategy and Coordination:Maintaining liquidity to support currency board or fixed exchange rate regime.

Foreign Exchange reserves (in millions of US $): 324,821 ( As of Jan-2015)

Organization of the financial system

Banks which print notes

Foreign Exchange MarketKey Facts-

● 5th Largest FOREX market in the world.● One of the leading financial centers in the world.● Hong Kong received the IFC status.

Reasons for growth in FX markets:

● Brilliant infrastructure● Political stability● The financial and trade tie ups with China● Free business environment● No Foreign Exchange and capital controls● Low operation costs● The country is an international financial center● The financial professionals in the country are very

efficient and well-trained● Scope for both domestic and international trade● Derivatives products & Speculative trading

Offshore Renminbi (RMB) Business in Hong Kong:

Hong Kong-> World’s largest offshore RMB business hub.

RMB deposits & outstanding RMB certificates of deposit-> RMB 1.169 trillion 9As of Apr,2014)

EMB bonds issued in Hong Kong-> RMB 388.9 billion (As of May,2014)

220 banks participated in the RMB clearing platform in Hong Kong.

Other financial markets in HK

● Debt Market

● Stock Exchanges

● Commodities

● Futures & Options

Debt MarketHIBOR → Daily turnover: HK$201 billion (April 2014)Characteristics: one of the most liberal in the world

(no restriction for foreign borrowers)

2013 issuancesPublic - $182bnPrivate - $74bn

Government Bond (GB) Programme• Launched in 2009: promotion & development of local bond market. • 2014 issuances: 12 for institutional bonds (HK$66.5bn)

+ 3 for inflation-linked bonds (HK$30bn)

Debt market growth: driven by local corporates & overseas issuersLocal corporates issued HK$33bn in 2014 (+30% than in 2013)

Relatively small but growing fastOutstanding debt amount: • 1994: 8% of HK GDP

• 2013: 67% of HK GDP

Stock ExchangesFounded: 1891

Rankings:• World - 6th after Euronext• Asia - 2nd after Tokyo Stock ExchangeMarket capitalization: HK$23,622.7bn (May 2014)

Composition:

Companies provenance Quantity

Mainland 822

Hong Kong 749

Abroad 102

Total 1673

Largest Capitalizations (billions of HK$)

CommoditiesHistory• Chinese Gold & Silver Exchange Society: gold trading in HK since early 20th century

• Hong Kong Mercantile Exchange: electronic commodities futures and options tradingCreated against liquidity risks due to Asian participants trading in faraway markets (New York, London)

Facts• HKMEx’s Gold & Silver Futures reached 1 million contracts on 13th Feb. 2012

$50bn (or HK$390bn)• On 18th May 2013: HKMEx surrendered its authorization to supply exchange services

• Insufficient revenues to support operating expenses• Low trading volumes• Competition from other countries• “Irregularities in financial affairs” caused 5 persons to be arrested

Futures & OptionsHistory: cotton, sugar, soybean and gold

first futures and options were traded on the HK Commodities Exchange (creation: 1986) In 1986, HKCE was renamed HKFE

HKFE and SEHK: wide range of instruments• Index futures & options • Stock futures & options • Interest rates futures • Bond, Gold futures...

HKFE: established in 1976 (formerly called HKCE)Went bankrupt one time in 1987

6th March 2000: HKFE merges with SEHK and HK Securities Clearing Company

Hong Kong Exchange and Clearing Limited

Historical Interest Rates

Positively correlated with the US interest rates so as to keep the exchange rate linked to the US and within the range of (7.75,7.85).

Historical 3-month Interbank rate

Reasons for high interest rates:1. Determined by the supply & demand for funds in an economy.2. Also expectations of return on capital, the inflation rate, and market risks such as credit, exchange rate, political and payment risks. 3. Under linked exchange rate system, it should track closely to that of the US.

Historical Exchange Rate

From 1983 till date: From 2008 till date:

Historical Hong Kong Govt. Bond-10Yr

Historical Stock Market Index

International financial crisis

Impact on the economy:

Impact on stock market● 31,958 to 10,676

● 66% drop

● Wiping HKD 6 trillion

Spillover channels (US to HK)

1. Loss exposures: Collapse of the Lehman brothers – financial institutions holding large amounts of subprime assets

2. Loss of confidence: Increase number of press releases, pessimist projections

3. Uncertain direction of capital flows: credit crunch led to capital outflow- QE by the US led to hot money and rise in asset prices “asset bubbles”

4. Slower export growth: domestic demand reduced, weak consumer and investment sentiments

Measures implemented

1) Use of exchange fund: guarantee repayment of all deposits held with authorized institutions in HK.

2) Establishment of a contingent bank capital facility to provide additional capital to locally incorporated banks when necessary.

Special loan guarantee scheme

Employment opportunities, lowered the base interest rate

Current Issues of financial market

Not wide enough and not enough depth:

• Emphasis on stock market, lack of diversification

• IPO and stock transactions: 70-80% from mainland companies

Conditions for market choice

Conclusions

Freedom Risk