Hong Kong's International Financial Centre: Retrospect and Prospect

the vital importance of monetary stability to the future of Hong Kong’s IFC, clarifying that as the
main mission of the HKMA could be constructive. The separate agencies, in short, would
provide a political buffer for monetary and currency policy changes in the future.
Similarly, and in the context noted above, such agencies would create new and useful
buffers for future governments committed to limiting perceptions that fiscal resources will
always be available to support troubled financial institutions. In extremis, the messy business of
winding up such institutions is best left to agencies that are at arm’s length from the Financial
Secretary and also from the Chief Executive of the HKMA. 72
For not dissimilar reasons, even
when market conditions are calm, assigning the task of protecting consumers of financial
products to an official agency a step removed from both monetary and fiscal politics would seem
politically wise. Of course, it could be overridden under crisis conditions, but such an
assignment might help deflect pressures for market interventions or tax concessions that could
become more routine in the wake of the Lehman mini-bonds incident.
The mission of the SFC is being widened to cover more than ‘fairness, efficiency,
competitiveness, transparency and orderliness’ in Hong Kong’s securities and futures markets.
But the rationale for giving it primary responsibility for consumer protection is still not clear.
Given the need for Hong Kong’s IFC to develop deeper markets for a full range of equity, debt,
and derivative instruments, the borderlands between the HKMA, the SFC, and the HKEx will
need continuing scrutiny. The main task should be clear: to keep regulation, supervision, and
consumer protection on par and competitive with regimes prevailing in New York and London.
Among other things, this means ensuring that brokers and dealers feel under constant pressure to
compete on price, speed, service, and quality. The merger of unstable exchanges into a stable,
efficient, and unified exchange was a signal and necessary success. Openness to ideas and
competition is now particularly vital if the HKEx is to retain its key position in Hong Kong’s
IFC. Even if self-regulation were not an oxymoron, it would seem unwise to count on it
ushering in that kind of openness.
That essential notion of openness also makes it necessary to recall that internal reform
issues are directly connected to the issue of the optimal size and quality of the Exchange Fund.
Dysfunctional markets, poorly regulated and supervised, and inadequately prepared for
externally generated shocks require bigger reserves behind them. Efficient, safe, and stable
markets are unlikely to need bailouts or other forms of official intervention. The authorities can
economize on reserves, and they can also be more amenable to holding some reserves in less
liquid, high-yielding form. Hong Kong’s financial policymakers are fully aware of the trade-off.
Their constituents have every reason to keep them focused on getting regulatory and supervisory
structures right.
72 This is a key lesson coming out of the 2008 crisis in the United States, where the Fed and the Treasury were very
widely perceived to be too close to the big commercial and investment banks . Other agencies will likely play ever
more prominent role in the years ahead when it comes to winding up failing intermediaries, while the Treasury and
the Fed will be more prominent in the general oversight of systemic risks.
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