Francis Yuen is considered one of the architects of Hong Kong's vibrant equity market. He is former chief executive of the Stock Exchange of Hong Kong Limited, founding director of Hong Kong Securities Clearing Company Limited, and a former member of the International Markets Advisory Board of Nasdaq in the United States. In 1996 he joined Pacific Century Group as deputy chairman. He is also deputy chairman of Pacific Century Regional Developments and Pacific Century CyberWorks. Editor Malcolm Ainsworth asked Mr Yuen to share his thoughts on the government's plan to strengthen Hong Kong's position as a financial centre and the impact electronic trading will have on the world's money markets.

The government says it wants to strengthen Hong Kong's position as a financial centre for the region. In your opinion, what needs to be done to accomplish this?

I think very little. I think Hong Kong's success as a financial centre has been based on a lot of special circumstances. A financial centre cannot be demanded. It is based on transactions created by willing buyers and willing sellers. It's very much based on a voluntary exchange basis, so it can hardly be planned or demanded. Hong Kong's position as a financial centre -- its success in the past -- has been based on certain main elements.

Number one, I think, is the rule of law. Hong Kong's rule of law compared to the rest of Asia has a very good record. The continuation and consistency of the government's market-based policy has been a very important part of it.

The second important element is essentially movement of capital in and out of Hong Kong has been very free, so that essentially capital coming in is on a voluntary basis, it can stay and can get out at any time. And people's confidence of moving capital in is on this very long tradition of the government's policy to keep capital markets free.

The third one -- as for any financial centre -- is that you have got to preserve an environment so that the buyers and sellers are trading on a fair basis. And how do you ensure that? It is essential that the buyers and sellers are making their decision on a full information basis. The transparency of information is very important, and free information flow is a very important element. Those, I think, are the necessary conditions for a financial centre.

Why has Hong Kong developed over the other cities in Asia, say like Singapore, Taipei or Seoul?

I think on that side Hong Kong has benefited tremendously from China. China is a very big country so international capital cannot ignore, say investing or having an investment related to, China. And Hong Kong has become a very good proxy for the international capital investors, in particular when China's currency, the renminbi, is not fully convertible.

But going forward, I think Hong Kong will be facing quite a bit of competition from the China side, like Shanghai. Hong Kong will also be facing competition from nearby cities, say like Singapore. But Singapore also has its shortcomings.

How much of an impact do you think electronic trading and commerce will have on Hong Kong and the world's stock markets?

I think it will have a very material impact, because electronic trading and commerce will remove all the barriers of protection. In the past, if your market was not efficient, you may be protected by a set of very localised rules and regulations, but now, essentially you have nowhere to hide. You have to compete with all competitors head on.

How will weaker markets compete?

The only way you can compete is to make yourself efficient, so the transaction cost has to come down so that more people will trade in Hong Kong and that will create the liquidity. It's more or less a natural law: when you are talking about liquidity the bigger market will have the tendency of absorbing the liquidity of the smaller market into it and in doing so become one market.

The only way that you can protect yourself is to strengthen your liquidity in your market. That can only be done by lowering the transaction costs, increasing the efficiency of the trading and settlements system, and also the security of the system so that people trading in that system can be sure trades will be settled.

Trading then will be on a fair basis, a very level playing field. So I think the impact will be very material. The only way to survive is to become more efficient. Those inefficient markets will have no place.

The dot-com frenzy seems to be fizzling out, how much of an impact will this have on bringing Hong Kong into the new economy?

I think one thing that is almost true in the development of any new industry is that the price always goes ahead of time. Then the consolidation will set in and the stronger one will take over the weak one. The weak one will either disappear or be absorbed into the stronger one. So that process of consolidation is inevitable in the development of any new industry. So I think in the dot-com industry it's nothing unusual, and that we are probably in this phase of consolidation.