Hong Kong's success today is largely attributed to how it has harnessed the opportunities presented by China while also assisting the country as it develops, every step of the way. One central theme of this development over the last 30 years was capital inflows. China was poor and needed capital for development, so Hong Kong served as a reliable fundraising centre. China, however, as we all know, doesn't lack for funds anymore. It is a capital-abundant country seeking new investment channels, not more funding ones. So does it still need Hong Kong?
The answer, of course, is a resounding yes. Hong Kong's open markets, legal environment, transparent and internationally-recognised regulatory system, robust markets, and pool of highly-trained and bilingual professionals are unmatched in the Mainland. This unique environment in Hong Kong has been built up over generations. So while cities like Shanghai and Shenzhen may have surpassed Hong Kong in terms of the hardware, it will take them much longer – if ever – to surpass Hong Kong in terms of software.
There are several big things Hong Kong can do to add value going forward. Hong Kong can become China's global wealth management centre. A few years ago, domestic wealth was mainly held in real estate and bank deposits, and then in stocks and bonds. But China lacks more diverse investment instruments, as the products available on the Mainland don't meet the needs of sophisticated investors who are seeking international asset diversification.
Secondly, Hong Kong can become the top offshore risk management centre for managing onshore investment risks. Interest rate and exchange rate controls in China mean the debt and currency derivatives markets are not mature enough to meet investors' sophisticated risk management needs. Furthermore, while the Mainland's stock markets are relatively open, the derivatives market is not, leaving international and domestic investors unable to properly hedge and manage risk.
This creates a natural opportunity for Hong Kong, which already has both domestic and foreign investors in an environment that is largely trusted and familiar to both sides. We are seeing the potential now with rising volumes of our RMB currency futures contract as a way to hedge risks from the two-way fluctuation in the RMB exchange rate. We are now set to launch more RMB currency futures pairs against the US dollar, Euro, Australian dollar, Japanese yen, and many other currencies to meet rising demand.
Thirdly, Hong Kong can become China's global asset pricing centre. As Chinese capital goes global over the next 30 years, Chinese investors will no longer just play a creditors' role in overseas markets. They will buy goods, commodities and acquire interests in overseas companies. As more international equities and commodities are priced in RMB, China will be able to gradually master the RMB exchange rate and interest rate pricing worldwide.