With regard to trades, Hong Kong continues to serve as the major channel for the rest of the world to access Mainland China. Notwithstanding the decrease in the proportion of China’s exports of goods going through Hong Kong, our role as the intermediate hub for trading has never been diminished. Nowadays, the offshore trade conducted through Hong Kong and the re-export trade of Hong Kong still accounts for 30% of China’s total trade volume. And what kind of role has Hong Kong been playing in the reform and modernisation of the banking system in China? Can you recall the difficult times in the 1990s? In 1994, China implemented the significant reform of the exchange rate system and introduced the unification of the official and swap exchange rates. At the same time, transformation of stateowned banks into commercial banks started. Due to various reasons related to the history and the system of Mainland banks, the bad debt ratio of the banking system was very high. The International Monetary Fund once estimated that the total bad debt in China’s banking  BIS Review 166/2010  1  system reached RMB2.3 trillion, accounting for 23% of the total loans of the banking system and 19% of the GDP. At that time, many people were not optimistic about the prospect of China because they thought the reform of the banking system would unlikely be able to succeed. If the reform failed, not only would economic growth slow down, the entire system of reform and opening up may also collapse.
Some said that the development in the last three decades was a miracle and was almost incredible. Instead, I would describe it as a “world-shaking” development. Having encountered enormous difficulties and challenges at every single stage of reform and opening up, China, as the country with largest population in the world, managed to carry out an unprecedented transformation from a planned economy to a market economy. As there was no precedent to learn from, China could only rely on its own efforts and took one step at a time. Hong Kong has played an extremely important and irreplaceable role during the process of China’s reform and opening up. At the initial stage of opening up, China focused on attracting foreign investors to set up manufacturing factories. Hong Kong manufacturers were the first to move their operations to Mainland China. In the past 30 years, Hong Kong has always been the largest source of direct investment in the Mainland. In 2009, Hong Kong invested $ billion in China, accounting for one half of the total foreign investment in the country. In the course of investing in China, not only has Hong Kong injected capital but, more importantly, it has introduced skills in production and management. In the past decade, the Mainland projects in which Hong Kong invested have gone through some significant changes. The focus has been shifted from investment in the manufacturing industry to a range of diversified and multi-dimensional investments that include investment in all kinds of service industries.