Hong Kong's Intervention is Australia's Opportunity

Australia's chance of becoming the major financial centre in Asia got a real boost over the last month from the Hong Kong Government.

During the past three decades, Hong Kong has emerged as one of the major international financial centres (IFCs) of the world -- some say it is now the third largest IFC in the world after New York and London and the largest IFC in Asia.  It is home to 85 of the world's largest banks and to over 1,000 investment funds and unit trusts.  It is also the fifth largest foreign exchange market in the world.

Not bad for an island state of 6 million hard-working people, which two decades ago was a primarily a manufacturer of cheap clothes and toys.

The Hong Kong's success has been primarily based on good governance.  The territory had a business environment that international investors trust;  low taxes, high standards of corporate disclosure, rule of law, open capital markets, limited government and a sound currency.

A crucial part of Hong Kong's success has been the refusal of its administrators to become directly or indirectly involved in bank ownership, the stock market or the currency market.

Another critical fact was Hong Kong's currency board.  Under this system the Hong Kong Monetary Authority -- the de facto central bank -- maintained free exchange between the HK dollar and the US dollar at a reasonable fixed rate ($HK$7.8 to $US1).  Crucially, under the currency board system, the Authority did not intervene in the currency markets to defend, or otherwise support, the peg.  Instead any run against the currency was defended by raising interest rates to whatever level required.

When China took over Hong Kong last year there was concern that Beijing would discontinue these policies and thereby cause the decline of financial sector.  These concerns were allayed some what by China's promise to maintain "one country-two laws" and to foster the growth of the financial sector.

Over the last month, however, the Hong Kong Government has jettisoned these policies and intervened deeply in the markets.  During late August, in an attempt to prop up local share prices, the Hong Kong government went on a buying binge on the local stock market.  It spent around $US 15 billion in just the last two weeks and as a result has become the largest shareholder in the market and the largest shareholder in the island largest bank -- the Hong Kong Shanghai Bank.

Around the same time the HK Monetary Authority succumbed, it began to use its foreign reserves to support the local currency by buying $HK in contravention of the currency board system.

Not surprisingly, these moves sent shock waves through the financial sector.  They also failed to achieve there objective -- which was to stop the speculators.  As a result, speculators and financiers expect more of the same and Hong Kong's attraction as a international financial centre is damaged.

Hong Kong's cloud is Australia's potential.  Australia is now the only real competitor to Hong Kong as an Asian international financial centre.

However, to reap this potential, the next Australian Government will need to develop a much more investor friendly-taxation climate than is currently envisaged by the competing tax packages.

ADVERTISEMENT