LME bolsters HK's connector role

Under the scheme, Hong Kong and overseas investors will be able to buy directly Shanghai-listed shares for the first time, and Mainland investors will be able to buy Hong Kong listed shares. The scheme benefits both places. This is just the latest example of Hong Kong's role in connecting the Mainland's financial markets to the global markets.

 

Also this month, the International Monetary Fund endorsed Hong Kong's financial policy strategies and risk management initiatives. The IMF expressed support for our Linked Exchange Rate System as well as our strategies for managing the impact of the global financial crisis.

 

Since the acquisition of LME by HKEx in 2012, Hong Kong has become an important platform for the trading markets of international commodities. LME is where prices of metals are discovered and where international trades in futures, in options and swaps are made.

 

LME Asian presence welcome

The derivative contracts offered by LME provide global market players with important tools for offsetting price risk in the physical market and locking in a price for the same commodity in the derivative market.

 

I am delighted that LME is stepping up its presence here in Asia. Last year, LME's Asian Helpdesk opened in Hong Kong to provide full technology support for users throughout the Asian trading day. LME has also enhanced its Asian Benchmark pricing to become more accessible to the Mainland and other parts of Asia.

 

The huge demand in the Mainland for commodities and resources, combined with the liberalisation of the renminbi, presents new opportunities for Hong Kong.

 

As China's global financial centre, Hong Kong remains at the forefront of offshore renminbi business. We have a highly liquid market for renminbi-denominated financial derivatives among a range of renminbi investment offerings.

 

Offshore renminbi hub

Hong Kong accounts for about 70% of global offshore renminbi transactions, and we have the largest and most active pool of offshore renminbi funds.

 

In June last year, our Treasury Markets Association launched the CNH Hong Kong Interbank Offered Rate fixing. It facilitates the pricing of various offshore renminbi interest-rate derivatives and renminbi loan facilities.

 

We shall continue to upgrade our renminbi financial infrastructure to meet the evolving need and growing demand of the market.

 

Another important development in the derivative market in Hong Kong is the launch of HKEx's clearing house for OTC (over-the-counter) derivatives. OTC Clear was launched last November.

 

According to BIS, the Bank for International Settlements, Hong Kong ranks sixth in the global foreign exchange market, including transactions in the OTC interest rate derivative market.

 

Minimising risks

OTC clearing remains a relatively new market for Hong Kong. Mandatory clearing of standardised OTC derivative transactions through central counterparties is one of the reform initiatives of the G20. The aim is to increase transparency and minimise systemic risks of OTC clearing.

 

Last month, we enacted the primary legislation for the reform of the OTC derivative market. Our regulators will conduct a public consultation on the detailed rules in phases, and will continue their close dialogue with the industry.

 

Here in Hong Kong, there is great long-term potential for OTC Clear to compete for renminbi-denominated OTC derivative products.

 

Commodity investment is an increasingly important component of asset management. A sharp increase in the popularity of commodity investment in the past decade has triggered an unprecedented inflow of institutional funds into commodity futures.

 

According to Thompson Reuters in London, asset management investment in the global commodities market has increased from 1% in 2003 to 20% in 2013. In Hong Kong, given the increase in offshore renminbi liquidity, our city could follow a similar path to that of London in terms of commodity investment.

 

Asset-management initiatives

Allow me to briefly mention also some of our initiatives to foster Hong Kong's development as the premier asset management centre in the Asia Pacific region.

 

We aim to develop Hong Kong into a regional hub for exchange traded funds, or ETFs. In my Budget in February this year, I proposed to waive the stamp duty for all the trading of all ETFs, making Hong Kong a more attractive place for the development, for the management as well as trading of ETFs.

 

We are also preparing legislative proposals to facilitate the introduction in Hong Kong of open-ended fund companies. This new market choice will help attract more funds to use Hong Kong as their investment platform. A public consultation on the proposal is under way.

 

We also want to attract more private equity funds to domicile in Hong Kong. We plan to extend the profits tax exemption for offshore funds to include transactions in private companies which are incorporated or registered outside Hong Kong and do not hold any Hong Kong properties nor carry out any business in Hong Kong.

 

And finally, to develop our trust industry, settlors are now able to establish perpetual trusts in Hong Kong. This measure is currently not available in most other major common law jurisdictions.

 

Connecting role

I have just mentioned some of the opportunities for global investors to tap into our risk management, our asset management and capital formation platforms in Hong Kong.

 

Hong Kong is an international financial centre in the Asian time zone. We also serve as the financial connector linking the Mainland with the rest of the world. Given the development of emerging economies in Asia, in particular Mainland China, commodity trading is an increasingly important element of the financial trading mix in our region.

 

LME is an essential part of our financial architecture. LME strengthens Hong Kong's global financial connectivity and opens up new opportunities for our development as a regional asset management hub.

 

Financial Secretary John Tsang gave these remarks at London Metal Exchange (LME) Week Asia 2014 at the Convention & Exhibition Centre.