Hong Kong's International Financial Centre: Retrospect and Prospect

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Share of Major World Financial Markets (%)
Equity Intl Bonds Domestic Bonds Bank Bank FX FX / Interest Rate
Turnover IPOs Outstanding Outstanding Fgn. Assets Fgn. Liab. Turnover Derivatives Turnover
US 49.0 16.3 23.3 44.6 8.9 11.7 19.2 19.4
UK 10.9 16.9 12.6 2.4 19.8 22.5 31.3 38.1
Japan 8.3 3.7 0.9 18.1 7.6 3.2 8.3 6.0
Hong Kong 1.2 12.9 0.3 0.1 2.3 1.4 4.2 2.7
Singapore 0.3 1.5 0.3 0.2 2.4 2.6 5.2 3.2
Shanghai 1.1 3.6 0.1 2.2 N/A N/A N/A N/A
Source: Lillian Cheung and Vincent Yeung, “Hong Kong as an International Financial Centre: Measuring its
Position and Determinants,” HKMA Working Paper 14/2007, 28 September 2007, p. 7.
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Shanghai’s financial markets obviously remain at an early stage of development, and it will
be a long time before they account for much activity on a world scale. That said, the city plays a
prominent role in raising domestic bond financing, and its market for domestic equities is vibrant
and growing. Like the other main market for equities in China, namely Shenzhen, its core
structure and the structure of the companies for which it raises funds are quite idiosyncratic. In
short, those companies are mainly small firms focused on the domestic Chinese market or linked
fairly low down in supply chains controlled by larger state-owned enterprises.
The Shanghai and Shenzhen stock markets continue to play key roles in the corporate
privatization plans of the Chinese government. They began their operations with two separate
kinds of listings: A-shares in local currency for domestic investors, and B-shares in foreign
currency for foreign investors. Notwithstanding such new distinctions in shares, most firms
entering the market already had complicated ownership structures, with much of their equity
‘non-negotiable,’ that is primarily controlled by governmental entities, and some of their equity
‘negotiable,’ that is potentially tradable. Despite some loosening of restrictions after their
inaugural period, including the post-WTO accession Qualified Foreign Institutional Investor
(QFII) initiative that permitted limited foreign purchases of certain A-shares, government
planners continue to limit the liquidity of the Shanghai and Shenzhen markets and to subject
share prices to abrupt and still unpredictable changes in policy. 29
The following table provides
an interesting snapshot in the year just before the global financial crisis began.
29 Introduced in 2002, the QFII program aimed to attract longer-term foreign investors and curb speculation. It was
complemented in 2006 by the Qualified Domestic Institutional Investor (QDII) program, which sought to utilize a
37