Chief Executive CY Leung announced in his maiden Policy Address earlier this month the establishment of an Economic Development Council (EDC) and a Financial Services Development Council (FSDC). What could have been intended is the establishment of two "think tanks" that shall concentrate on looking into Hong Kong's long-term economic and financial competitiveness. There are a number of young thinks tanks in Hong Kong, but most are either personality-driven or related to certain political parties or ideologies. In other matured economies, think tanks are impartial bodies that provide strategic and cutting-edge recommendations. In Japan, the most successful think tanks contain tripartite participation from government officials (who regulate), businesses (who invest) and scholars (who research).

Although it can be argued that the FSDC can be included in the EDC because finance is one of the key economic sectors in Hong Kong, it is still acceptable to have two development councils which will look into the various economic aspects (infrastructure, industries, comparative advantages) and financial areas (products, banks, markets, regulations, trading and expansion), respectively. The financial sector can stand on its own. A financial development think tank should look into the path of the financial future in Hong Kong, including the consequences of expanding yuan businesses. What would happen if there were massive yuan inflow? How would it affect banking and investment businesses and the wider economy.

The establishment of unbiased and professional-driven think tanks will serve Hong Kong well. It would not matter if their members were to include mainland individuals. However, since it was announced and established, numerous critics have been questioning the intention and goal of the FSDC. In Hong Kong, the few organizations that are responsible for the financial sector include the Hong Kong Monetary Authority, the Securities and Futures Commission, Hong Kong Exchange and Clearing Limited and the Hong Kong Association of Banks. The Financial Secretary, the Treasury and the various divisions are responsible for overseeing the entire financial sector.

The establishment of the FSDC has been based on a study report that has outlined five tasks -- financial development policies, mainland opportunities, innovation business, marketing and human resources. A quick look at the functions of the various exiting financial institutions will agree that all these five areas have been taken care of by the existing institutions, though there can still be room to improve.

Due to a lack of clarity in its roles and functions, the legality of the FSDC has also been questioned. Should it be a government organization or a private institution? For a government organization, it will have to meet stringent conditions, including scrutiny by the Legislative Council. If it is just a private consultancy body, why the government got to be involved? The HKSAR Government, together with existing financial institutions, does have a large number of channels through which professional consulting advice can easily be secured.

One has to bear in mind that Hong Kong is the world's third-largest financial center after five decades of development. Thus, one is not talking as if Hong Kong were to start to run a financial center. Whatever Hong Kong does today in the financial world, it will have to build up from what we have already achieved. Indeed, there are inadequacies in the city's financial sector. Although Hong Kong ranks just after London and New York, the gap between Hong Kong and Singapore, ranked fourth in the world, is very narrow. Hong Kong can easily be overtaken by the Lion City. Thus, there is room for Hong Kong to improve. Typical examples include the lack of trading in treasury bonds and commodity, and Islamic finance. A number of regulations have to be revised. The large mainland market does support Hong Kong, but equally, focusing only in the mainland market would provide a narrow exposure.

Yuan business is an innovation, but it does have numerous economic and financial consequences. Being an offshore yuan center, there is effectively free flows of yuan to Hong Kong. The massive inflow will definitely have trading and economic consequences, say, on the property market, inflation, informal economy and so on. To a forward-looking government, there is indeed a need to examine and study how the rapidly developing yuan market will affect the local economy, to determine the mainland-Hong Kong integration path; to ensure that the Hong Kong market will be system-driven rather than personality-driven, to project how the mainland economy will develop, and to forecast how the yuan could be internationalized.

In establishing the Economic Development Council, a similar argument could be made. Since 1997, it has been popular for the SAR government to host economic summits, organize consultancy bodies to identify the path for the future economy. There has not been much improvement in Hong Kong's economy since.

Our economic development has been market-led, and the government often responses, acts and regulates along with the development of all markets, and the financial sector is no exception. Because most businesses are private in Hong Kong, it is difficult to pursue government-led development. Hong Kong's people will be happy to see new insights for future development of the economy, hoping not the same people repeatedly recommend similar advice to the government.

The author is an associate professor of the Department of Economics and Finance at the City University of Hong Kong.

(HK Edition 01/29/2013 page1)