Hong Kong as an International Financial Centre:

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Traditional measures of concentration of financial market activities do not adequately reflect an economy's status as an international financial centre (IFC). In this paper, we construct alternative measures that better capture the ability of an IFC to attract capital flows and international demand for its financial services, as well as its attractiveness as a place for international financial institutions to congregate. We also explore the determinants of the competitiveness of IFCs in an analytical and empirical framework. Our findings suggest that, in addition to the pull factors of the IFC, push or demand factors from the economies importing financial services from the IFC are also important. The rise of Mainland China represents a potentially important push factor for the demand for financial services exports from Hong Kong, and hence its status as an IFC. JEL Classification Numbers: F21; G15; G28

Keywords: International financial centre; financial services exports; financial sector FDI Author's E-Mail Address: lcheung@hkma.gov.hk; vyeung@hkma.gov.hk 1 The authors are grateful to Hans Genberg and Dong He for their valuable suggestions and comments. The views and analysis expressed in this paper are those of the authors, and do not necessarily represent the views of the Hong Kong Monetary Authority. - 2 -

Executive Summary:
· Hong Kong is often perceived as the hub of most major multinational companies and an important centre for the provision of financial services to international investors. Yet, based on traditional measures such as concentration of financial market activities, it still appears to remain far smaller than major IFCs such as New York and London. · This suggests that the traditional measures of the importance of an IFC may not be fully adequate. First, these measures reflect, apart from international financial activities, domestically-oriented activities. Secondly, their measurements of the status of IFCs are limited to the concentration of financial market activity. Thirdly, due to data limitations, these measures are compared on a country rather than on a city level on which activities of an IFC should be based.

· In view of these caveats about traditional measures, we construct three alternative measures to assess the importance of Hong Kong as an IFC relative to other major economies, namely inward international investment position excluding FDI, exports of financial services, and inward direct investment in the financial sector. · While Hong Kong lags well behind major IFCs in terms of its concentration of financial market activities, adjusted for GDP on a city basis, our alternative measures suggest that Hong Kong has been the leader in inward financial sector direct investment and comparable to the US in exports of financial services. · There have also been few empirical studies of the determinants of the competitiveness of IFCs. The second part of this study explores the determinants of the relative importance among IFCs in an analytical and empirical framework. This will have implications for what determines Hong Kong's competitiveness as an IFC, and how Hong Kong could further strengthen its position.

· Our findings suggest that both macroeconomic and microeconomic/institutional factors as well as financial market strength and efficiency are important in the formation of IFCs. In terms of attracting the agglomeration of international financial institutions, the fact that both Hong Kong and Singapore have been outperforming the regional economies and many other major economies, including Japan, in this regard, appears to be explained, in part, by their favourable microeconomic environment. - 3 -

· In terms of financial services exports, while Hong Kong fares well compared to other regional economies, including Japan, there is still a considerable gap when compared to the major IFCs. Our findings suggest that Hong Kong can enhance its role as an IFC by increasing the international...
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