Monetary Relationship between the Mainland and Hong Kong

The recent 20th anniversary celebrations on the establishment of the HKSAR led me to reflect on the monetary relationship between the Mainland and Hong Kong in the past 20 years. I am actually quite pleased with how well it has developed, so well that I have almost forgotten about the efforts that all concerned had put in over a long period before the Handover in 1997 to ensure such outcome.

These efforts were encapsulated in the “Seven Principles Governing the Monetary Relationship between the Mainland and Hong Kong” spelt out by Chen Yuan, then Deputy Governor of the People’s Bank of China, on a joint roadshow with me, then Chief Executive of the Hong Kong Monetary Authority, that covered London, New York and Tokyo as we turned into 1997. The title of the roadshow was “Hong Kong’s Monetary Arrangements through 1997” and the speeches made were published in three booklets.

The Seven Principles covered:

1. The relationship between the two currencies and between the two monetary systems;
2. The relationship between the two monetary authorities;
3. Cooperation in prudential supervision;
4. People’s Bank of China will support the currency stability of Hong Kong;
5. Treatment of financial business between the Mainland and Hong Kong;
6. The standing of Mainland financial institutions in Hong Kong; and
7. Complementarity between Shanghai and Hong Kong.

Those interested in this aspect of the monetary history of Hong Kong may wish to read those booklets, which should be available in the library of the Hong Kong Monetary Authority open to public. The gist of these principles is that under “one country, two systems” there are two currencies, two monetary systems and two monetary authorities. Chen Yuan said: “The two monetary systems are of equal importance to China in its reform and liberalization. One does not precede or be subsidiary to the other. They will operate in a mutually independent manner… It follows from the two mutually independent monetary systems of the Mainland and Hong Kong that the two monetary authorities will also be mutually independent.”

These principles have served Hong Kong very well in the past 20 years.
Joseph Yam

31 August 2017





1. 兩種貨幣和兩個金融體制;
2. 兩個金融當局;
3. 在風險管理方面進行合作;
4. 中國人民銀行將對香港的貨幣穩定提供支持;
5. 兩地間的金融事務安排;
6. 內地金融機構在港的地位;及
7. 上海與香港之間的互補性。










Fiscal Stance

There has been interesting discussion at the professional level on public finance in Hong Kong. I have been asked to elaborate on what “fiscal stance” is all about. I am happy to do so.

Let me quote again from The New Palgrave Dictionary of Economics:

“Fiscal stance is commonly understood to denote the expansionary or contractionary implications for the economy of a government’s budgetary policy. More precisely, it represents an attempt to summarize, in a single measure, the combined effect on aggregate demand, and therefore potentially on real output and income, of all the various decisions taken by government in respect of public expenditure, taxation and other sources of revenue which go to make up a national budget… The most straightforward way of producing an indicator of budgetary policy is to sum the inflows of revenue and outflows of expenditure to which they give rise and to take the difference between the two, the budget balance, as a measure of fiscal stance…”

The following personal viewpoints are perhaps relevant in examining the fiscal stance of Hong Kong in recent years.

1. Hong Kong has been running substantial annual budget surpluses in the last decade or so.

2. A budget surplus means that the government is taking away more money from society than it is spending to promote the wellbeing of society.

3. The fiscal stance of a budget surplus on the economy is contractionary, meaning that the growth rate of the economy would be higher without the budget surplus.

4. Even after the popular tax rebates, the size of the annual budget surplus in the last decade has averaged nearly 3% of GDP. On occasions, it exceeded 4% of GDP.

5. This is notwithstanding a rather rapid growth rate of government expenditure recorded during the period. The growth rate of government revenue has also been rapid, possibly even more rapid.

6. It is not easy to estimate how much the growth rate of GDP would have been higher in a particular year (and in subsequent years through the multiplier effect), had there not been a budget surplus of nearly 3% of GDP.

7. This depends on how the money, had it been left in the hands of (or returned to) the community instead of being taken by government and held in foreign financial assets, would have been mobilized by the community.

8. The contractionary fiscal stance of the past decade, while inappropriate, is not the only factor that explains why the growth rate of the economy has been slow.

9. When “leaving wealth with the community”, if a government is in a position to do so, priority should be given to initiatives with higher multiplier and productivity-enhancing effects on the economy. In this, I am quite sure that the HKSARG will act in the best public interest.

Joseph Yam

24 August 2017





1. 在過去大概十年,香港每年的財政預算,均錄得龐大盈餘。

2. 財政盈餘意味政府從社會中取得的金錢多於政府用於社會以促進民生經濟發展的金錢。

3. 從財政姿態的角度而言,財政盈餘對經濟活動具緊縮性的含意,即如果沒有財政盈餘,經濟增長率應會較高。

4. 在過去十年,即使退稅後,年度財政盈餘與生產總值的平均比例仍接近3%,有時更超過4%。

5. 儘管這段期間政府支出的增長速度加快,但政府收入增長速度也同樣在加快,甚至可能更快。

6. 要估算每年有接近生產總值3%的財政盈餘的緊縮性,例如對當年本地生產總值增長率的影響,以及在往後數年因乘數效應所產生的續後影響,並不容易。

7. 這取決於如果接近生產總值3%的金錢是留在社會中,在市民或企業手上不斷流轉,而不是在政府手中以外國金融資產形式持有,會對本地經濟帶來的不同影響。

8. 過去約十年緊縮性的財政姿態,不是經濟增長偏低的唯一原因。

9. 當政府決定藏富於民及還富於民,應該優先考慮對經濟增長有較大乘數效應和有助提升生產力的項目。相信特區政府會作出最合乎大眾利益的決定。



The Status of Hong Kong as an International Financial Centre



The Status of Hong Kong as an International Financial Centre

Many cities in many jurisdictions aspire to be an international financial centre. In the many policy statements by the relevant authorities articulating this aspiration, I notice little reference to what exactly they meant by an international financial centre and what roles they contemplate to perform. Perhaps these issues are so basic that they are taken for granted. I disagree. All public policies must have clear objectives that the public can readily understand and be made on the basis of a sound theoretical foundation. In the absence of these, very simply the public interest may not be well served, in that valuable efforts and resources may be wasted, and public support may be less forthcoming than would otherwise be the case.

In other Viewpoint articles, I have defined “finance” as the mobilization of money from those who have it to those in need of it, and argued that if such mobilization is effectively organized the economy will be well served. A “financial centre” is obviously a place where such mobilization is organized. And an “international financial centre” is where the mobilization money is conducted on an international dimension, involving money of foreign entities (institutions and individuals), whether they are investing it or raising it. Thus, a company from the Mainland raising money in Hong Kong through the issue of shares traded in the stock market of Hong Kong, attracting money from investors from all over the world, is a typical example of such activity. And if this and other types of activities mobilizing money from those who have it to those in need of it on an international dimension are conducted on a large scale here in Hong Kong, then obviously we qualify to be called an international financial centre.

I used the volume of Initial Public Offerings (IPO) of stocks, rather than trading activity measured in terms of the daily turnover in our stock market, for illustration deliberately. The stock market is (merely) a secondary market that provides liquidity and facilitates accurate price discovery of the stocks listed. Indeed, these are the two conditions that enhance the attractiveness of the stock market as a channel for mobilizing money through IPO activities. But no more than that; even though there are many interests involved in the daily trading activities, including those of stock brokers, traders and the much larger population of investors holding stocks. This is why, in that context, it is called a secondary market and not a primary market; it is only of secondary importance compared with the primary IPO market, which is where money is mobilized to serve the economy. With the volume of IPO offerings in Hong Kong amongst the largest in the world, sometimes surpassing New York and London to be the largest, without doubt we are an international financial centre.

In my opinion, Hong Kong can even claim to be the most international of financial centres in the world, in that the two “legs” in the mobilization of money – investors and fund raisers – are predominantly foreign, for example, fund raisers from the Mainland tapping money from Europe and America. By comparison, if we take New York as an example: yes there is a huge volume of money being mobilized there, but if one looks at the matter carefully, one finds that either one of the two legs is predominantly domestic, in that foreign companies list their shares in New York to attract money from US investors and foreign investors go to New York to invest in financial assets issued by US entities. New York is important as an international finance centre because its home economy – the US – is the largest in the world, with huge amounts of US money wishing to invest overseas and a large number of US entities wishing to raise money from overseas. For Hong Kong, we are merely a city of seven million people and a small economy, and yet we are playing such an important role in international finance. But obviously we should not be complacent and, in any case, rankings of this nature are never quite meaningful enough to brag about. I mention it to sharpen our focus on what are the roles of an international financial centre.

It is particularly important for Hong Kong to be focused. Article 109 of the Basic Law says that: “The Government of the Special Administrative Region shall provide an appropriate economic and legal environment for the maintenance of the status of Hong Kong as an international financial centre”. I am sure that this is a heavy responsibility that the HKSARG takes seriously. Indeed, it does; and the results speak for themselves. But international finance is in a state of flux. Many economies are still nursing from the wounds inflicted by the 2007-08 crisis. The developed markets are still talking about the normalization of monetary policy. The process of shrinking the balance sheet of the central bank and the withdrawal of the huge volume of liquidity injected through quantitative easing are only starting in the US; in Europe these are just talks for the time being; in Japan talks have not even started. Less liquidity and higher interest rates will have implications for the prices of financial assets that have been pushed to record levels by the excessive liquidity injected through quantitative easing. Meanwhile, investment banks, particularly those in Wall Street, are getting excited about the prospects of de-regulation and renewed market volatility induced by the normalization of monetary policy! There is also widespread geo-political tension that may well erupt into something ugly and destabilizing to international finance. It is a scenario that we have not experienced before. As an international financial centre, we need, more so than before, to be vigilant and focused.

In the work to maintain the status of Hong Kong as an international finance centre in accordance with Article 109 of the Basic Law, there is one strategic focus that we should always bear in mind and direct our efforts accordingly. Accepting my definition of an international financial centre, we should realistically be concentrating in the mobilization of money between the Mainland and the rest of the world, whether it is the mobilization of money from the rest of the world into the hands of Mainland fund raisers or the mobilization Mainland money into the hands of fund raisers in the rest of the world. Investors in the rest of the world are attracted by what Hong Kong can offer when they wish to invest in financial instruments issued by Mainland entities. They would not come to Hong Kong to look for financial assets issued, for example, by fund raisers in the US or Europe. Equally, the many entities around the world wanting to raise money would not come to Hong Kong unless they are interested in money originating from the Mainland (policy permitting). Our strategic focus should, therefore, be the mobilization of money between the two geographical or jurisdictional “legs”, namely, the Mainland and the rest of the world.

I can almost hear the criticism of some that Hong Kong, including our financial system, is quickly becoming “Mainlandized”, as if it is something evil. I must say frankly that, insofar as the financial system of Hong Kong is concerned, there is no meaningful international role to play if it is not because of the need to mobilize money between the Mainland and the rest of the world. This is an area of activity that we all should, in fact, welcome and be thankful instead. The financial activities supporting a small economy with seven million people simply do not justify a financial system of our size and do not make us an international financial centre. Our highly international financial system is itself a substantial part of the Hong Kong economy providing a lot of jobs and attractive incomes, supporting much domestic consumption and the livelihood of those employed in other sectors of the economy.

We have made considerable progress in the mobilization of money between the two “legs”. There are, of course, the now familiar Shanghai-Hong Kong Connect and Shenzhen-Hong Kong Connect for stock trading, which have I am sure raised the general interest of investors in the rest of the world in Mainland stocks and Mainland investors in stocks listed in Hong Kong. Hopefully, these will in time, and with the necessary (Mainland related) policy adjustments, lead to more entities in the two “legs” to organize listings in Hong Kong. There is also the Bond Connect which opens up the bond channel for the mobilization of money between the Mainland and the rest of the world through Hong Kong, particularly if in time two-ways flows are allowed. There are many other opportunities, as long as we stay focused in the role in the mobilization of money between the Mainland and the rest of the world. The current efforts in structuring a platform in Hong Kong for the mobilization of money from the Mainland and other economies to fund infrastructural projects along “One Belt, One Road” are right on. I wish them well, although I would not underestimate the difficulty in dealing with the politics of the project, given the many interests of the many jurisdictions involved. The hope is, of course, that the Mainland’s leadership and influence in all this, and its recognition of the role that Hong Kong can play (and play distinctly well), would help.

With capital controls still being implemented on the Mainland, such mobilization of money between the Mainland and the rest of the world will obviously involve specific policy decisions concerning the capital account by the financial authorities on the Mainland, specifically the People’s Bank of China. Outside of the Mainland, Hong Kong knows the capital account of the Mainland of China and the relevant policies best, and is also in the best position to offer advice on how international capital flows can be mobilized in the best interest of China. We are also in the best position to assist in the actual mobilization, through providing a safe and efficient financial platform that addresses both risks and opportunities. We need to remind the financial authorities on the Mainland of the utility of Hong Kong as the international financial centre of China and that using the financial services of Hong Kong is in the national interest. For the effective maintenance of monetary and financial stability, against the background of a rather confused state in international finance, the Mainland still needs some form of capital controls and for some time to come. My hope is that this will give us enough time to achieve such a critical mass as the international financial centre of China as to be indispensable, even if capital account openness is eventually achieved on the Mainland. But I don’t know much time we have. So let us stay focused.

Joseph Yam
17 August 2017














Earlier in the summer, my wife and I went to Canada to see relatives.  We took the opportunity to go to Quebec City.  The purpose was to locate a few scenes we saw in a particular TV series that Miranda likes a lot.  Instead of talking more about finance, let me share with readers a few photos that I took of those scenes.  Perhaps they look familiar to some of you.  A pity that there was no autumn foliage.  Definitely a reason to go back when there is.




Viewpoints on Public Finance in Hong Kong.docx


Blog Entry

Just published a series of 9 Viewpoint articles on Financial Culture. For those interested in the subject matter, here they are.

Viewpoints on Financial Culture (1) – Finance and the Modern Economy.pdf

Viewpoints on Financial Culture (2) – Back to Basics.pdf

Viewpoints on Financial Culture (3) – Transformation, Transfer and Transaction of Risks.pdf

Viewpoints on Financial Culture (4) – The Zero-Sum Game in Finance.pdf

Viewpoints on Financial Culture (5) – Conflicting Interests in Finance.pdf

Viewpoints on Financial Culture (6) – Incentive and Behavior.pdf

Viewpoints on Financial Culture (7) – Financial Infrastructure.pdf

Viewpoints on Financial Culture (8) – Inter-Temporal Shift of the Intermediation Spread.pdf

Viewpoints on Financial Culture (9) – Recommendations for Culture Change.pdf