Joseph Yam: How Can Hong Kong Maintain Its Competitiveness as an International Financial Centre Amidst Global Changes?

The Hong Kong Special Administrative Region under “one country, two systems” is closely connected to Mainland China and extensively linked to the world. Hong Kong, which is regarded as the world's freest economy, has long played an important role as a bridge between mainland China and the world, and has grown into a leading international financial centre, relying on its unique advantages such as a sound financial system and a well-established legal system.

In the face of global changes, the centre of gravity of the world economy is shifting from west to east at an accelerated pace. Facing a complex and volatile external environment and uncertainties, how should Hong Kong continue to ride the waves and maintain its competitiveness as an international financial centre? Mr Joseph Yam, the first Chief Executive of the Hong Kong Monetary Authority and a non-official member of the Executive Council of the HKSAR, gives an in-depth explanation in an exclusive interview with East Meets West of the China News Service.

CNS: What possible financial risks does Hong Kong face under the influence of the changing international environment and the impact of the COVID-19 pandemic?

Joseph Yam: Hong Kong’s financial system has developed and become strengthened over an extended period, and sound risk management has been in the good genes of Hong Kong’s financial regulatory system. Although I have retired for many years, I am confident that this tradition of remaining mindful of potential risks has been maintained and that Hong Kong is well prepared for financial risks.

I am not worried about the current global economic uncertainty and the COVID-19 pandemic. It is normal for financial markets to fluctuate due to the business cycle. Hong Kong’s financial regulators routinely conduct stress tests on the financial system, and they do so using a very high factor. Although Hong Kong is now a little more conservative than other places in its approach to combating the pandemic, it is all justifiably conservative, and I think the relevant impact will be short-lived.

However, the world today is facing a change unprecedented in a century. In the international financial area, the United States has a strong influence, and a complex situation may arise if it tries to influence China’s development on a financial level. I believe that the financial regulators in both the Mainland China and Hong Kong will be on the lookout and analyse what could potentially happen and thus be prepared.

I think that the probability of an extreme situation is low. Firstly, China and the United States are the two largest economies in the world, and there will not be a complete “decoupling” of the two economies, especially on a financial level. Moreover, Wall Street investment banks have a lot of business on the Mainland and many votes, so they can considerably influence relevant policymakers in the United States. Secondly, as the United States is the world’s largest debtor and Mainland China, together with Hong Kong, is the largest creditor, it is unreasonable for the former to “sanction” the latter using financial means, which would make other creditors wary and lead to a significant reduction in the influence of the United States in the international financial arena.

Hong Kong Monetary Authority. Photo by Li Zhihua

CNS: What are the lessons from the “financial war” of 1998?

Joseph Yam: Before Hong Kong’s handover, the Monetary Authority had done a lot of preparatory work to safeguard financial security and monetary stability, including the introduction of the “New Accounting Arrangement” in 1988 and the “Prompt Payment and Settlement System” in 1996, which enabled the Monetary Authority to master the ability to control the monetary base. The years 1997 and 1998 were a test for us. The financial crisis at that time was not caused by anything particularly wrong with Hong Kong itself, but by the failure of the Southeast Asian countries to manage the risks of debt under financial globalisation.

Those speculators took advantage of Hong Kong’s free market philosophy to manipulate the market, and the free market became a market that could be freely manipulated. Facing this disappointing situation, we had to set things right, so we decided to intervene in the stock market in a high-profile way to prevent them from making money through manipulation. The other side wanted to push stocks down, so we bought them. This was actually a very aggressive approach, but in the end, there was no other way out, and if we had to “fight”, we would “fight”.

At the time, this approach drew criticism from some Western financiers, but they later accepted it. Although Hong Kong is a free economy that relies on the market, we must not forget that there are times when the market fails. Preventing market failure requires regulation and even intervention and participation in the market. When the regulator sees the need for this, for example, when it is not in the public interest or affects monetary and financial stability, the regulator has to make up its mind to do it. The thing I have learned from this is that markets are not absolutely sacred.

Hong Kong Exchange Square. Photo by Zhang Wei

CNS: The latest Global Financial Centres Index report shows that Singapore ranks third in the Global Financial Centres Index, while Hong Kong has fallen to fourth place. There are voices suggesting that Singapore has overtaken Hong Kong. What do you think about this?

Joseph Yam: These rankings are certainly important to some extent, as they show the outside world the importance of a city on the financial level. But I think it is more important to understand the meaning of the word “international financial centre”, a place where international capital flows together. To be realistic, the activities of Hong Kong as the international financial centre are about the integration of capital between the Mainland and overseas, and Hong Kong has done a very successful job.

In the future, if China is to become the world’s largest economy, Hong Kong’s role in financing will be even more critical. In this respect, no place can match Hong Kong’s status as an international financial centre. Moreover, many people measure a city’s status as an international financial centre by the volume of market transactions and the number of financial institutions, which is understandable, but I think it is crucial for international financial centres to do a good job of financing. The status of Hong Kong's IPOs is indisputable. Moreover, most investors and fundraisers in Hong Kong are not from Hong Kong, so Hong Kong’s status as a financial centre is second to none in terms of internationalisation.

An international financial centre should be pragmatic in financing. Practices such as subsidies to attract financial institutions are not needed. New York and London, which are very advanced in financial innovation, have many derivative products and precise risk management, and these innovative products have enhanced financing efficiency. We can learn from them. However, we should bear in mind that finance is always for the economy and should not hold the mindset of self-serving and playing a zero-sum game in the market.

I believe that the Hong Kong national security law will strengthen Hong Kong’s position as an international financial centre in the long run. International financial institutions will not like to work in a place where security is compromised. When the social climate is stable and the social environment is reassuring, it is undoubtedly good for Hong Kong’s status as an international financial centre. In fact, Hong Kong’s national security laws are not “harsh” compared to those in Europe and the US. If this is criticised, someone may be looking for an excuse to suppress China based on their political stance.

Mr Joseph Yam (first from right), then Principal Assistant Secretary for Monetary Affairs, and Sir John Henry Bremridge (second from left), then Financial Secretary of the British Hong Kong Government, attended a press conference related to the Linked Exchange Rate System in 1983. File photo

CNS: Will Hong Kong’s role in the Mainland and global financing be replaced? How does this relate to Hong Kong’s characteristics of bringing together the East and the West?

Joseph Yam: It is a very clear policy and trend for China to continue to insist on reform and opening up, while the mainland capital account will not be fully opened up in the short to medium term. Therefore, with the support of Mainland policies, Hong Kong has always acted as a channel for Mainland investors and fundraisers to “go global”. This has been the case in the past, as Hong Kong and the Mainland have many financial interconnection arrangements, including the Shanghai-Hong Kong Stock Connect, Shenzhen-Hong Kong Stock Connect, Wealth Management Connect, and Bond Connect. As our country continues providing clear policy support, Hong Kong’s status as an international financial centre will be solid.

There is a difference in the financial roles of Shanghai and Hong Kong. I believe that the Mainland’s own financing, i.e. the meeting and bonding of Mainland investors and financiers, are often in Shanghai, and Hong Kong cannot be demanding of this. But at the international financial level, for the external circulation at the national economic level, Hong Kong, as part of China, can work for the country under “one country, two systems”.

Hong Kong’s ability to act as a financial intermediary between the Mainland and overseas is linked to its characteristics of bringing together the East and the West. Hong Kong has a long history as an international city and a capitalist society with a common law system. This is something that overseas economies, particularly capitalist ones, are used to, and they may not have a deep understanding of the socialist market economy of the Mainland, but are familiar with the rules of Hong Kong. As the place outside the Mainland, which best understands the Mainland’s ways and rules of doing things, Hong Kong is the best place for the Mainland to meet with overseas investors and fundraisers.

Joseph Yam (left) signed a supplementary memorandum of cooperation with Zhou Xiaochuan (right), then Governor of the People’s Bank of China, on the addition of RMB business in Beijing in 2007. Credit: Hong Kong Information Services Department

CNS: How do you assess Hong Kong’s contribution to helping RMB internationalisation in recent years? What should we work towards in the future?

Joseph Yam: It has been about 20 years since the internationalisation of the RMB was proposed, and there has been considerable progress, but there is still room for acceleration. The way forward should be to promote the effective use of the RMB in the capital market on multiple levels, such as the bond market, the stock market, and the banking system. For example, in the bond market, the Ministry of Finance and China Development Bank issue RMB bonds, but they are still at an elementary stage of development and can continue to be promoted; stocks listed in Hong Kong can be quoted, traded, and cleared in RMB; and in the banking system, there can be more development of RMB-related derivatives.

As the internationalisation of the RMB progresses, it is imperative to accelerate the building of the relevant financial infrastructure, including quotation, payment, and asset custody systems. When global investors have a surplus of RMB, they can find ways to invest; when their RMB is insufficient, they can easily go and raise funds, and only in this way can internationalisation be meaningful.

Hong Kong’s Central district is full of financial institutions. Photo by Zhang Wei

From a national perspective, the best way to gradually reduce dependence on the US dollar is by internationalising the RMB. There are currently offshore RMB markets in many places worldwide, such as Singapore and the UK. But I don’t think we need to replicate the development model of RMB internationalisation in Hong Kong elsewhere. If investors and fundraisers in Southeast Asia and Europe want to trade in RMB, they can do so through Hong Kong. The advantage of doing so is that the offshore RMB market in Hong Kong will maintain its depth, breadth, and high liquidity.

Joseph Yam, the first Chief Executive of the Hong Kong Monetary Authority, is currently a non-official member of the Executive Council of the HKSAR and a Distinguished Fellow of the Lau Chor Tak Institute of Global Economics and Finance of the Chinese University of Hong Kong. He was awarded the Gold Bauhinia Star and the Grand Bauhinia Medal by the HKSAR Government in 2001 and 2009 respectively. Mr Yam obtained a Bachelor of Social Sciences degree from the University of Hong Kong in 1970, majoring in Economics and Statistics. He has been an Emeritus Professor at the School of Business and Management of the Chinese University of Hong Kong, a Professional Research Fellow at the Institute of Global Economics and Finance of the Chinese University of Hong Kong. He has been awarded Honorary Doctorates and Professorships by many overseas universities. He joined the British Hong Kong Government in 1971 and during his more than 38 years of public service, he was mainly responsible for monetary and financial affairs. He was also involved in the development of Hong Kong’s linked exchange rate system, and was appointed Chief Executive of the Hong Kong Monetary Authority in April 1993 and continued to serve until the end of June 2009 after Hong Kong's return in 1997. Over the years, he has actively introduced a number of strategic reforms to ensure the financial stability of Hong Kong and its development as an international financial centre. During the Asian financial crisis, Mr Yam helped the HKSAR Government use over HK$100 billion of foreign exchange reserves to combat market manipulation by entering the market to buy many Hong Kong stocks, successfully repelling speculators and saving Hong Kong’s monetary and financial systems from collapse. Since leaving the Hong Kong Monetary Authority, Mr Yam has served as Vice Chairman of the Board of Governors of the International Finance Forum, a member of the Board of Directors of UBS and Executive Vice President of the China Society for Finance and Banking, and was awarded a Membership of the Hong Kong Academy of Finance. He served as a non-official member of the Executive Council of the HKSAR until 2017 and was re-appointed by Mr John Lee Ka-chiu, the Chief Executive of the HKSAR, as a non-official member of the Executive Council of the HKSAR in 2022.