## _wp0857

## Source details

**Canonical URL:** [_wp0857](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2008/_wp0857.pdf)

## Other formats

- [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2008/_wp0857.pdf.md)
- [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2008/_wp0857.pdf.json)

---

### I. INTRODUCTION
- Purpose: Document Hong Kong SAR’s evolving role as an international financial center in the Asia region, emphasizing its contribution to financial integration within Asia and its role as the financial services gateway for Mainland China.
- Approach: Compare Hong Kong SAR’s performance with other financial centers and identify key factors determining success of the authorities’ strategy to consolidate Hong Kong SAR’s position.
- Main summary findings:
  - Hong Kong SAR has a long established track-record as Asia’s premier center for cross-border financial transactions, particularly given its relatively small domestic base.
  - Preeminence derives from a special link with Mainland China, notably with respect to FDI flows, and from supply-side factors: availability of skilled labor, strong regulatory environment, and quality and depths of business services.
  - Further financial opening of China is likely to consolidate Hong Kong SAR’s leading position as Asia’s international financial center over the medium term.
  - As Hong Kong SAR’s competitive advantage in China-related intermediation diminishes with financial-system modernization in the Mainland, its long-term standing will increasingly depend on building a geographically diverse base for financial services that relies less on a domestic economy or hinterland.

### II. FOREIGN DIRECT INVESTMENT (FDI)
- Role: Hong Kong SAR’s role as an intermediary of FDI flows is small on a global scale but dominant within Asia.
- Key quantitative findings:
  - Between 1998 and 2006 Hong Kong SAR’s share in FDI flows involving key world regions in the sample gradually rose, but remained below 7 percent in 2006.
  - FDI flows involving largest five EU countries and the United States, exclusive of Asia, accounted for 66 percent of global FDI flows in 2006.
  - Within Asia, in 2006 Hong Kong SAR accounted for 26 percent of intra-Asian FDI flows, compared with China’s 36 percent and Japan’s 13 percent.
  - The two single-largest flows in 2006 were:
    - From Hong Kong SAR to China: US$27.8 billion; 15 percent.
    - From China to Hong Kong SAR: US$13.2 billion; 7 percent.
  - Excluding all China-related flows, Hong Kong SAR’s share in intra-regional FDI flows drops to 13 percent in 2006, up from 9 percent in 1998 but reflecting a steady increase to 13 percent by 2006.
- Interpretation and caveats:
  - Hong Kong’s leading role within Asia as an intermediator of FDI flows rests on the China link.
  - Round tripping, driven by differences in treatment of foreign and domestic investors, appears to be an important factor for dominance of the Hong Kong SAR–China FDI link and may inflate FDI flows that might be domestic investment; however, these flows require comparable services and therefore matter for measuring Hong Kong SAR’s status as a financial center.

### III. PORTFOLIO INVESTMENT
- Role: Hong Kong SAR plays a lead role inside Asia in intermediating portfolio investments, even if links with Mainland China are excluded.
- Key quantitative findings:
  - From a global perspective, the United States and EU5 account for the bulk of cross-border portfolio assets and liabilities; portfolio assets and liabilities involving them but not Asia accounted for over two thirds of all holdings in 2005.
  - Of total portfolio assets held by foreigners in Asia (some US$2.2 trillion in 2005), holdings by Asian countries account for 9 percent, the U.S. accounts for 40 percent, and the EU5 for 20 percent.
  - Within Asia, Hong Kong SAR’s share in assets and liabilities was 29 percent in 2005, followed by Singapore with 20 percent and Japan with 15 percent.
  - Excluding assets held in China, Hong Kong SAR’s share remained over 24 percent in 2005, up from 22 percent in 2001.
  - In 2005, Hong Kong SAR accounted for:
    - 6 percent of U.S. and EU5 investments in the region (role as intermediator of portfolio investment from/to outside Asia).
    - 10 percent of Asian investments in the United States and EU5.
  - On the outflow side, Hong Kong SAR’s share was the largest after Japan (83 percent). On the inflow side, Japan (61 percent) and South Korea (12 percent) ranked before Hong Kong SAR; Taiwan POC (6 percent) was on par with Hong Kong SAR.
- Data caveat:
  - China does not participate in the CPIS; liabilities vis-à-vis China are not reported in CPIS data and are believed to be small given capital controls (for example, under the QDII program less than US$1 billion invested by mid-2007).

### IV. BANKING ACTIVITIES
- Role: Based on BIS international banking statistics, Hong Kong SAR plays a less prominent role in cross-border banking intermediation than in FDI and portfolio investment.
- Key quantitative findings:
  - Hong Kong SAR’s total share in gross external positions reported by Asian banks was 18 percent at end-2006, down from 25 percent in 1998.
  - Japan and Singapore accounted for 49 percent and 23 percent, respectively, of Asian banks’ external assets and liabilities in 2006.
  - BIS reports total assets and liabilities vis-à-vis China were US$280.2 billion at end-2006.
  - Hong Kong SAR accounted for 0.6 percent of the aggregate external positions of all reporting banks in the BIS system.
- Data limitations:
  - BIS banking statistics do not permit a bilateral breakdown; nevertheless, the risk that activities with China skew results appears rather small.

### V. GAUGING 3RD PARTY FLOWS AND INTENSITY MEASURES
- Concept: Compare a country’s share in world capital flows with its share in world GDP to gauge international financial center status.
- Intensity findings:
  - FDI intensity (2006):
    - Hong Kong SAR: share in FDI flows 12 times larger than its share in GDP.
    - Singapore: 8 times larger.
    - United Kingdom: 3 times larger.
    - United States: ratio of less than 1 in 2006.
  - Portfolio investment intensity (2005):
    - Hong Kong SAR ratio rose to 4 (from 3 in 2001), narrowly overtaking Singapore.
    - Singapore’s ratio fell slightly below 4.
    - For intra-Asian positions in 2005, both Hong Kong SAR and Singapore had presence 15 times larger than their share in the region’s GDP.
  - Banking intensity (2006):
    - Singapore’s world share in cross-border banking positions relative to its share in global GDP was about 10.
    - This was nearly twice the level observed for Hong Kong SAR.

### VI. SUPPLY-SIDE DETERMINANTS
- Identified determinants of Hong Kong SAR’s international financial center role:
  - Availability of skilled labor.
  - Strong regulatory environment.
  - Quality and depths of business services and infrastructure.
  - Special link with Mainland China (particularly important for FDI intermediation).
- Additional evidence:
  - McKinsey survey and SFC study highlight skills, regulations, and infrastructure as top factors.
  - For Asian sample countries, rankings measuring availability of skilled labor and professional services, quality of regulations and government, and business infrastructure are positively related to intensity of cross-border FDI, portfolio investment, and banking.
  - Positive feedback mechanism: status as an international financial center and strong supply-side factors mutually reinforce each other.

### VII. REGRESSION EVIDENCE ON DETERMINANTS OF A COUNTRY’S SHARE IN GLOBAL CAPITAL FLOWS
- Empirical setup: OLS regressions on a sample of 47 advanced and emerging market economies; dependent variable is average share in global cross-border financial transactions (sum of FDI, portfolio investment, banking and other investment flows during 2003−05).
- Key regression results (Table 5 highlights):
  - Log of GDP share: coefficients 0.803 (t 14.9), 0.742 (t 14.4), 0.762 (t 16.1), 0.754 (t 15.3).
  - Log of per capita GDP: coefficients 1.44 (t 7.5), 1.237 (t 8.0), 1.204 (t 9.0), 1.213 (t 8.4).
  - Capital account openness (Chinn-ito index): coefficients 0.095 (t 0.8), 0.019 (t 0.2), 0.041 (t 0.5), 0.031 (t 0.3).
  - Dummy for EU: coefficient 0.938 (t 4.6) in Model 2.
  - Dummy for EU x regulatoryQ (World Bank Governance Indicators): coefficient 0.633 (t 3.9) in Model 3.
  - Dummy for EU x BURQ (ICRG: quality of bureaucracy): coefficient 0.254 (t 4.3) in Model 4.
  - Adjusted R-square: 0.8556 (Model 1), 0.8932 (Model 2), 0.8951 (Model 3), 0.8957 (Model 4).
- Interpretation:
  - A country’s share in international capital flows rises with its share in world GDP and with per capita income.
  - For each 10 percent increase in per capita GDP, a country’s share in international capital flows rises by about 12−14 percent (estimation result reported).
  - Capital account openness does not appear statistically significant in these specifications.
  - EU membership and interactions with governance and bureaucracy quality matter, implying regional integration amplifies the importance of structural factors.

### VIII. PROSPECTS AND SCENARIOS FOR HONG KONG SAR
- Drivers: Hong Kong SAR’s special relationship with the Mainland and supply-side strengths.
- Convergence scenario for portfolio investment intermediation:
  - Cheung and others (2006) estimate China’s outward portfolio investment would have amounted to some US$340 billion at end-2005 under OECD-like openness (about three times the actual level).
  - Using Hong Kong SAR’s share in China’s FDI outflows as benchmark (some 60 percent, excluding an estimated 50 percent of FDI outflows due to round tripping), the Chinese outward portfolio investments Hong Kong SAR could capture would be about US$200 billion.
  - Impact: increase Hong Kong SAR’s cross-border portfolio assets and liabilities by over 35 percent, from US$574 billion at end-2005.
  - It would raise Hong Kong SAR’s cross-border investments within Asia to some US$400 billion and boost its world share from 1.1 percent to 1.5 percent.
- Recent administrative measures enhancing Hong Kong SAR’s role:
  - Mainland and Hong Kong Closer Economic Partnership Agreement: Mainland fund management companies (with CSRC approval) allowed to establish subsidiaries in Hong Kong SAR.
  - Expansion of the Qualified Domestic Institutional Investor (QDII) program to allow investment in overseas stock markets.
  - A pilot project announced in mid-August enabling local retail investors to directly invest in non-Mainland securities, initially restricted to the Hong Kong SAR market.
  - First Chinese renminbi-based bond issuance in Hong Kong SAR in July (prospects limited due to a small renminbi deposit base).
- Strategic imperatives and policy recommendations:
  - Balance near-term benefits from special China role with the need to become a truly international center.
  - Expand role in Mainland intermediation while developing a more geographically diverse financial-services base.
  - Maintain competitive edge on skills, legal and institutional infrastructure, and regulation to promote stability and innovation.
  - Improve English language skills to attract and retain a globally diversified pool of human talent.
  - Address quality of life issues, including cultural vibrancy and a clean environment.
  - Pursue new market and product development opportunities: emissions trading, aging-related products, and other instruments to reduce China-centric reliance.

### IX. DATA ISSUES AND COVERAGE
- Bilateral financial linkage coverage: Asia (China, Hong Kong SAR, India, Indonesia, Japan, South Korea, Malaysia, Philippines, Singapore, Taiwan (POC), Thailand); Europe (EU5: Germany, France, Italy, Spain, United Kingdom); and the United States.
- FDI data:
  - Sourced from UNCTAD Foreign Direct Investment Database and Economist Intelligence Unit (EIU).
  - Use flows (preferred over stocks) and reported on a net basis.
  - IMF bilateral FDI data are not available; FDI inflow data reported by host economies are relied upon to address bilateral discrepancies.
- Portfolio investment data:
  - Bilateral portfolio investment data available only as stocks from IMF CPIS.
  - China and Taiwan POC do not participate in CPIS; no data on liabilities vis-à-vis China.
- Cross-border banking activities:
  - Measured using BIS Locational Banking Statistics (Table 2a).
  - BIS reporting covers more advanced economies; Asian subsample includes Hong Kong SAR, India, Japan, Singapore, South Korea and Taiwan (POC).

*Source: _wp0857 - References (IMF staff paper content provided in the source PDF).*

### References..............................................................................................................

### _wp0857 - References..............................................................................................................

### I. INTRODUCTION
- Purpose: Document Hong Kong SAR’s evolving role as an international financial center in the Asia region, emphasizing its contribution to financial integration within Asia and its role as the financial services gateway for Mainland China.
- Approach: Compare Hong Kong SAR’s performance with other financial centers and identify key factors determining success of the authorities’ strategy to consolidate Hong Kong SAR’s position.
- Main summary findings:
  - Hong Kong SAR has a long established track-record as Asia’s premier center for cross-border financial transactions, particularly given its relatively small domestic base.
  - Preeminence derives from a special link with Mainland China, notably with respect to FDI flows, and from supply-side factors: availability of skilled labor, strong regulatory environment, and quality and depths of business services.
  - Further financial opening of China is likely to consolidate Hong Kong SAR’s leading position as Asia’s international financial center over the medium term.
  - As Hong Kong SAR’s competitive advantage in China-related intermediation diminishes with financial-system modernization in the Mainland, its long-term standing will increasingly depend on building a geographically diverse base for financial services that relies less on a domestic economy or hinterland.

### II. FINANCIAL CENTERS AND INTEGRATION: TRENDS FROM AN ASIAN PERSPECTIVE
- Conceptual observations:
  - No universally accepted definition of “international financial center.”
  - No unique framework of quantitative measures documenting activities and relative performance; many studies cover related aspects (size of financial markets, activity indicators) but often cannot distinguish international intermediation from domestic activity.
  - Focus of this paper: cross-border financial transactions (foreign direct investment, portfolio investment, banking activities) with emphasis on bilateral data to identify special country factors and linkages.
- Historical perspective:
  - Reed (1981) study based on five banking sector variables identifies Hong Kong SAR as leading center in Asia, ahead of Tokyo from 1900−1925 and again after the war until 1960; London and New York consistently top positions.
  - Implication: preeminence of certain financial centers relates to enduring structural factors (language, legal system, infrastructure, proximity to markets).
- Methodological note:
  - For this paper, a country’s share in bilateral flows is calculated as the sum of all outflows from and inflows into this country over the total of gross inflows and outflows; a given flow is attributed twice (as outflow from source and inflow to destination), so the share of bilateral inflows and outflows accounted for by a country is half the share of actual flows to which this country is a party.
- Data and country samples: described in Appendix I.

### FOREIGN DIRECT INVESTMENT (FDI)
- General role:
  - Hong Kong SAR’s role as an intermediary of FDI flows is small on a global scale but dominant within Asia (Figure 1).
- Key quantitative findings:
  - Between 1998 and 2006 Hong Kong SAR’s share in FDI flows involving key world regions in the sample gradually rose, but remained below 7 percent in 2006.
  - FDI flows involving largest five EU countries and the United States, exclusive of Asia, accounted for 66 percent of global FDI flows in 2006 (Table 2).
  - Within Asia, in 2006 Hong Kong SAR accounted for 26 percent of intra-Asian FDI flows, compared with China’s 36 percent and Japan’s 13 percent (Table 3A).
  - The two single-largest flows in 2006 were:
    - From Hong Kong SAR to China: US$27.8 billion; 15 percent.
    - From China to Hong Kong SAR: US$13.2 billion; 7 percent.
  - Excluding all China-related flows, Hong Kong SAR’s share in intra-regional FDI flows drops to 13 percent in 2006, down from 9 percent in 1998 but reflecting a steady increase to 13 percent by 2006 (Figure 2).
- Interpretation and caveats:
  - Hong Kong’s leading role within Asia as an intermediator of FDI flows rests on the China link.
  - Round tripping, driven by differences in treatment of foreign and domestic investors, appears to be an important factor for dominance of the Hong Kong SAR–China FDI link and may inflate FDI flows that might be domestic investment; however, these flows require comparable services (legal, consulting, financial, advisory) and therefore matter for measuring Hong Kong SAR’s status as a financial center.

### PORTFOLIO INVESTMENT
- General role:
  - Hong Kong SAR plays a lead role inside Asia in intermediating portfolio investments, even if links with Mainland China are excluded (Figure 3).
- Key quantitative findings:
  - From a global perspective, the United States and EU5 account for the bulk of cross-border portfolio assets and liabilities; portfolio assets and liabilities involving them but not Asia accounted for over two thirds of all holdings in 2005.
  - Of total portfolio assets held by foreigners in Asia (some US$2.2 trillion in 2005), holdings by Asian countries account for 9 percent, the U.S. accounts for 40 percent, and the EU5 for 20 percent (Table 4).
  - Within Asia, Hong Kong SAR’s share in assets and liabilities was 29 percent in 2005, followed by Singapore with 20 percent and Japan with 15 percent (Table 3B).
  - Excluding assets held in China, Hong Kong SAR’s share remained over 24 percent in 2005, up from 22 percent in 2001.
  - In 2005, Hong Kong SAR accounted for:
    - 6 percent of U.S. and EU5 investments in the region (role as intermediator of portfolio investment from/to outside Asia).
    - 10 percent of Asian investments in the United States and EU5.
  - On the outflow side, Hong Kong SAR’s share was the largest after Japan (83 percent). On the inflow side, Japan (61 percent) and South Korea (12 percent) ranked before Hong Kong SAR; Taiwan POC (6 percent) was on par with Hong Kong SAR.
- Data caveat:
  - China does not participate in the CPIS; liabilities vis-à-vis China are not reported in CPIS data and are believed to be small given capital controls (for example, under the QDII program less than US$1 billion invested by mid-2007).

### BANKING ACTIVITIES
- General role:
  - Based on BIS international banking statistics, Hong Kong SAR plays a less prominent role in cross-border banking intermediation than in FDI and portfolio investment (Figure 4).
- Key quantitative findings:
  - Hong Kong SAR’s total share in gross external positions reported by Asian banks was 18 percent at end-2006, down from 25 percent in 1998.
  - Japan and Singapore accounted for 49 percent and 23 percent, respectively, of Asian banks’ external assets and liabilities in 2006.
- Data limitations:
  - BIS banking statistics do not permit a bilateral breakdown; nevertheless, the risk that activities with China skew results appears rather small.
  - According to BIS, total assets and liabilities vis-à-vis China were US$280.2 billion at end-2006 (source table reference within BIS data).

### SUPPLY-SIDE FACTORS AND DETERMINANTS
- Identified important determinants of Hong Kong SAR’s international financial center role:
  - Availability of skilled labor.
  - Strong regulatory environment.
  - Quality and depths of business services and infrastructure.
  - Special link with Mainland China (particularly important for FDI intermediation).
- Strategic implication:
  - Continued financial opening of China is likely to consolidate Hong Kong SAR’s regional position in the medium term.
  - Over the long term, as Mainland China’s financial-system modernization erodes Hong Kong SAR’s China-related intermediation advantage, Hong Kong SAR must build a geographically diverse financial services base less dependent on its domestic economy or hinterland.

### APPENDIX AND DATA NOTES
- Appendix I: Data issues are discussed (reference to Appendix I in the main text).
- Methodological and data caveats reiterated:
  - Treatment of bilateral flows attributes flows twice (as outflow and inflow) for share calculations.
  - CPIS excludes China; BIS data limitations on bilateral detail noted.
  - Round tripping can affect FDI statistics but remains relevant for measuring demand for services associated with cross-border investment intermediation.

*Source: _wp0857 - References (IMF staff paper content provided in the source PDF).*

### 0.6 percent of the aggregate external positions of all reporting banks in the BIS system.

### _wp0857 - 0.6 percent of the aggregate external positions of all reporting banks in the BIS system.

### Gauging 3rd Party Flows
- The presence of countries in international financial markets arises either from domestic demand or from providing services to other countries; the latter reflects the role of an international financial center.
- Comparing a country’s share in world capital flows with its share in world GDP provides a gauge for international financial center status.
- Hong Kong SAR, Singapore, and the United Kingdom consistently stand out across FDI, portfolio investment, and banking flows (Figures 5, 6, and 7).
- FDI intensity (2006):  
  - Hong Kong SAR: share in FDI flows 12 times larger than its share in GDP.  
  - Singapore: 8 times larger.  
  - United Kingdom: 3 times larger.  
  - United States: ratio of less than 1 in 2006.
- Portfolio investment intensity (2005):  
  - Hong Kong SAR ratio rose to 4 (from 3 in 2001), narrowly overtaking Singapore.  
  - Singapore’s ratio fell slightly below 4.  
  - For intra-Asian positions in 2005, both Hong Kong SAR and Singapore had presence 15 times larger than their share in the region’s GDP.
- Banking intensity (2006):  
  - Singapore’s world share in cross-border banking positions relative to its share in global GDP was about 10.  
  - This was nearly twice the level observed for Hong Kong SAR.
- Sources used: UNCTAD; EIU; IMF staff estimates; BIS; CPIS.

### Supply- and Demand-Side Drivers (Implications)
- Hong Kong SAR's international finance role derives primarily from offering services to nonresidents, and especially from bilateral flows with the Mainland (notably in FDI).
- Supply-side strengths contributing to Hong Kong SAR’s role:
  - High concentration of financial institutions.
  - Well functioning legal and regulatory systems.
  - Highly skilled and flexible labor force.
- McKinsey survey: these supply-side factors were among the most important of 18 factors defining success of a financial center.
- Competitiveness indicators (SFC study) show Hong Kong SAR and Singapore top various rankings on skills, regulations, and infrastructure.
- For Asian sample countries, rankings measuring availability of skilled labor and professional services, quality of regulations and government, and business infrastructure are positively related to intensity of cross-border FDI, portfolio investment, and banking (Figures 8, 9, and 10).
- Positive feedback mechanism suggested: status as an international financial center and strong supply-side factors mutually reinforce each other.

### Regression Evidence and Determinants of a Country’s Share in Global Capital Flows
- OLS regressions on a sample of 47 advanced and emerging market economies: dependent variable is average share in global cross-border financial transactions (sum of FDI, portfolio investment, banking and other investment flows during 2003−05).
- Key regression findings (Table 5):
  - Log of GDP share: coefficients reported as 0.803 (t-value 14.9), 0.742 (t 14.4), 0.762 (t 16.1), 0.754 (t 15.3) across models.
  - Log of per capita GDP: coefficients reported as 1.44 (t 7.5), 1.237 (t 8.0), 1.204 (t 9.0), 1.213 (t 8.4) across models.
  - Capital account openness (Chinn-ito index): coefficients reported as 0.095 (t 0.8), 0.019 (t 0.2), 0.041 (t 0.5), 0.031 (t 0.3).
  - Dummy for EU: coefficient 0.938 (t 4.6) in Model 2.
  - Dummy for EU x regulatoryQ (World Bank Governance Indicators): coefficient 0.633 (t 3.9) in Model 3.
  - Dummy for EU x BURQ (International Country Risk Guide: quality of bureaucracy): coefficient 0.254 (t 4.3) in Model 4.
  - Adjusted R-square: 0.8556 (Model 1), 0.8932 (Model 2), 0.8951 (Model 3), 0.8957 (Model 4).
- Interpretation:
  - A country’s share in international capital flows rises with its share in world GDP and with per capita income (a proxy for level of development and supply-side factors).
  - For each 10 percent increase in per capita GDP, a country’s share in international capital flows rises by about 12−14 percent (estimation result reported).
  - Capital account openness does not appear statistically significant in these specifications.
  - EU membership and interactions with governance and bureaucracy quality matter, implying regional integration amplifies the importance of structural factors.

### Prospects for Future Growth (Hong Kong SAR)
- Drivers: Hong Kong SAR’s special relationship with the Mainland and supply-side strengths.
- A scenario based on convergence of Hong Kong SAR’s share in Chinese portfolio flows to its current share in FDI intermediation:
  - Cheung and others (2006) estimate China’s outward portfolio investment would have amounted to some US$340 billion at end-2005 under OECD-like openness (about three times the actual level).
  - Using Hong Kong SAR’s share in China’s FDI outflows as benchmark (some 60 percent, excluding an estimated 50 percent of FDI outflows due to round tripping), the Chinese outward portfolio investments Hong Kong SAR could capture would be about US$200 billion.
  - Impact: increase Hong Kong SAR’s cross-border portfolio assets and liabilities by over 35 percent, from US$574 billion at end-2005.
  - It would raise Hong Kong SAR’s cross-border investments within Asia to some US$400 billion and boost its world share from 1.1 percent to 1.5 percent.
- Recent administrative measures enhancing Hong Kong SAR’s role:
  - Mainland and Hong Kong Closer Economic Partnership Agreement: Mainland fund management companies (with CSRC approval) allowed to establish subsidiaries in Hong Kong SAR.
  - Expansion of the Qualified Domestic Institutional Investor (QDII) program to allow investment in overseas stock markets; Hong Kong SAR is an attractive destination given preeminence in listings of Mainland companies.
  - A pilot project announced in mid-August (year not specified in extract) enabling local retail investors to directly invest in non-Mainland securities, initially restricted to the Hong Kong SAR market.
  - First Chinese renminbi-based bond issuance in Hong Kong SAR in July (prospects limited due to a small renminbi deposit base).
- Strategic imperatives for sustaining momentum:
  - Balance near-term benefits from special China role with need to become a truly international center.
  - Expand role in Mainland intermediation while developing a more geographically diverse financial-services base.
  - Maintain competitive edge on skills, legal and institutional infrastructure, and regulation to promote stability and innovation.
  - Improve English language skills to attract and retain a globally diversified pool of human talent.
  - Address quality of life issues, including cultural vibrancy and a clean environment.
- New market and product development opportunities: emissions trading, aging-related products, and other instruments to reduce China-centric reliance.

### Data Issues and Coverage
- Bilateral financial linkage coverage: Asia (China, Hong Kong SAR, India, Indonesia, Japan, South Korea, Malaysia, Philippines, Singapore, Taiwan (POC), Thailand); Europe (EU5: Germany, France, Italy, Spain, United Kingdom); and the United States.
- FDI data:
  - Sourced from UNCTAD Foreign Direct Investment Database and Economist Intelligence Unit (EIU).
  - Use flows (preferred over stocks) and reported on a net basis (capital transactions credits less debits).
  - IMF bilateral FDI data are not available; FDI inflow data reported by host economies are relied upon to address bilateral discrepancies.
- Portfolio investment data:
  - Bilateral portfolio investment data available only as stocks from IMF CPIS.
  - China and Taiwan POC do not participate in CPIS; no data on liabilities vis-à-vis China. Amounts believed relatively small given tight controls.
- Cross-border banking activities:
  - Measured using BIS Locational Banking Statistics (Table 2a: External positions of banks in all currencies vis-à-vis all sectors in individual reporting countries).
  - BIS reporting covers more advanced economies; Asian subsample includes Hong Kong SAR, India, Japan, Singapore, South Korea and Taiwan (POC).

*Italic: Source: _wp0857 - 0.6 percent of the aggregate external positions of all reporting banks in the BIS system.*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2008/_wp0857.pdf_