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Permanent Secretary for Financial Services & the Treasury (Financial Services) Au King-chi
We are practically halfway through the decade of the 2010s. It has been eventful so far, with things less than perfect and well in the financial world. We entered the 2010s with major monetary authorities administering unprecedented loosening. The US federal funds rate was cut to 0-0.25%, and the US Fed, European Central Bank and Bank of England were all engaged in their asset-purchase programmes.
The financial markets became concerned about Greece's viability as a Eurozone member in 2010, which was the prologue to the European debt crisis and the infamous club of PIIGS (Portugal, Ireland, Italy, Greece and Spain).
The year 2011 was no less dramatic, with Japan hit by a massive earthquake and a nuclear disaster in March, then the US by a man-made earthquake, that was Standard & Poor's unprecedented downgrade of the US' AAA credit rating.
The US Fed responded by more quantitative easing, echoed by central banks in Europe and Japan, and the markets were flooded with excess liquidity. In 2013, the US Fed spoke more concretely about the US' inevitable exit from monetary easing. Another round of sell-offs across asset classes ensued.
The exodus of funds from emerging markets in the first half of 2014 amid re-rating of relative prospects of developed and developing economies was no less dramatic. Meanwhile, the European Central Bank strengthened its monetary easing and moved one of its benchmark interest rates to negative this year.
Performance of asset markets during the first half of the 2010s has been substantially driven by the liquidity conditions. Our equity market is no exception. Lately, we have witnessed a total of $75 billion being injected into the financial system after the Hong Kong dollar strong-side convertibility undertaking being triggered repeatedly in the summer months.
The concern is whether the liquidity will rapidly flow out again and hit our share prices. Another global development that Hong Kong cannot be immune to is the various regulatory reforms on the international agenda, in response to weaknesses in the Western markets as exposed by the 2008 global financial crisis.
These ambitious reforms, in both scope and timetable, have kept our practitioners, the Government and regulators constantly on our toes.
At the same time we have seen new opportunities arising from the increased cross-border use of renminbi, after the expansion of the renminbi trade settlement pilot scheme to cover the entire country and the introduction of the Renminbi Qualified Foreign Institutional Investor scheme in 2011.
The Shanghai-Hong Kong Stock Connect programme, which will be introduced right before the halfway mark of the 2010s, will provide a further channel to link up the capital markets in both places.
International financial landscape
The developments in the first half of the 2010s, to be sure, are not going to subside quietly in the remainder of the decade.
The market seems to have gotten used to the low interest rate environment. US Treasuries trading indicated that the market was requiring only an additional 0.2% real return, above the expected inflation rate, to hold 10-year treasuries, which appears to be extremely low. This has driven investors into a hunt for higher yield through risk taking, and investors may have become overly complacent.
The stock market volatility indices in the US, Europe and Hong Kong were hovering below 20 in recent years, similar to the 2004 to 2007 pre-crisis level when the economy was more robust. Without proper regard to the risk-and-return balance, the danger is that many investors may try to squeeze through the exit in a disorderly manner at the first sign of turbulence.
Long-term economic prospects are fraught with difficulties. Major advanced economies would continue to face overhang from the profound legacies of high unemployment, excess capacity and weighty debt burdens in the aftermath of 2008.
The market would always pin its hope on the emerging markets. However, their growth pace will be no less uncertain when negative spillover from monetary policy normalisation in the advanced economies, as well as domestic constraints, may prove challenging.
The combination of these dynamics means that a large amount of liquidity has been placed on risky assets that could be overvalued to various extents. When the monetary environment normalises, the decline in excess liquidity will result in reversal of capital flow and markets with vulnerable fundamentals will face enormous pressure.
The risk overhang begs for a revamp in global financial order, especially whether the increasing cross-border use of renminbi as a trade and investment currency can mitigate the risk associated with the global dominance of the US dollar. Hong Kong definitely has a key role to play to further this aspiration.
Ensuring stability
Our financial system has been withstanding the periodic shocks in the 2010s. When asked by overseas visitors, I often said that we were fortunate in that, first, we had a full dress rehearsal during the Asian financial crisis and our financial institutions and the Government had strengthened our risk management; and, second, the strong economic growth of Mainland China had been a force of stability not only for Hong Kong but also for the region.
But there is no room for complacency in ensuring financial stability, particularly given the openness of our market. Our efforts in this regard continue. Allow me to cite a few examples.
Our bank regulator has introduced a series of countercyclical supervisory measures governing banks' liquidity and credit-risk management. These include lowering loan-to-value ratios, capping loan tenors at 30 years and tightening underwriting criteria for multiple mortgage borrowers to alleviate any risk associated with a property market bubble.
In addition, it has asked banks to raise their regulatory reserve against possible deterioration in their asset quality, and to ensure that they have sufficient long-term funding to match their new lending.
In the equity market, reporting requirements for net short positions on a stock-by-stock basis took effect in 2012. Our securities regulator also publishes the aggregate short positions of each eligible stock on an anonymous basis on its website. This provides further information to the market for better risk management.
Our regulators conduct stress tests for individual financial institutions from time to time to ensure that they can function properly even during extremely volatile situations. The regulators also maintain close liaison and co-operation with their overseas counterparts to help instil stability.
Promoting sustainable development
While sparing no efforts in maintaining financial stability, we are mindful of the need to strengthen our foundation for sustainable development.
With support from the Central People's Government, the cross-border use of renminbi in trade and investment transactions shifted into a higher gear in the 2010s. The Hong Kong Government has been working closely together with the industry to broaden the range of renminbi products, including bonds, investment funds, insurance policies, currency futures, real estate investment trusts, shares and derivative products.
For our fundraising platform, we continued to promote listing in Hong Kong with various initiatives. The Stock Exchange has spared no efforts to attract overseas issuers. International companies in such sectors as luxury and resources are now more aware of Hong Kong as a viable choice of their fundraising plans.
Our stock market is now Asia's second largest and sixth globally in terms of market capitalisation. The implementation of Shanghai-Hong Kong Stock Connect will attract more investors and hence liquidity by instantly adding another 568 A-shares to our trading platform.
Our debt market is vibrant with global issuers. But more should be done. We encourage issuers from both the public and private sectors to consider debt financing as a means of fundraising.
To promote our debt market, we launched a Government Bond Programme in 2009 to provide the market with steady supplies of government bonds. The programme seeks to enlarge our debt investor base and build a benchmark yield curve for private-sector debt issuances. The programme now has a size of outstanding bonds exceeding HK$100 billion.
A record $20 billion worth of government bonds, with tenors ranging from two to 10 years, were issued for institutional players last year. Since the launch of the programme, the size of outstanding Hong Kong dollar debts grew by nearly 10% to over $1.4 trillion last year.
Apart from conventional bonds, the Government has successfully issued sukuk, or Islamic bonds, last week. This inaugural sukuk offering has marked the first US dollar sukuk originated by an AAA-rated government in the global Islamic financial market.
It signified an important milestone. The transaction recorded an oversubscription of 4.7 times, demonstrating that it is a viable fundraising option to issue sukuk on our platform. To prepare for this, we have established a market-friendly taxation framework for sukuk issuance since July 2013. We will continue to encourage more issuers and investors to participate in our sukuk market.
It is important to update our laws to meet evolving market needs and improve market quality. For example, the new trust law and Companies Ordinance have come into effect to improve our business environment and facilitate our asset-management industry. Also, the new legislation on price sensitive information helps instil an ongoing disclosure culture among listed companies and enhance investors' confidence.
There are continuous debates on the extent to which we should regulate the merits of investment products and the sale conduct of intermediaries. While investors should be held responsible for their investment decisions, caveat emptor should not be given free rein.
To this end, the Investor Education Centre (IEC) and Financial Dispute Resolution Centre were both established in 2012. They aim to improve financial literacy and enable clients to resolve their monetary disputes with financial institutions more efficiently.
The IEC in particular has become a useful platform for the investors to obtain information on financial planning, use of credit as well as financial products. For example, in anticipation of the implementation of the Shanghai-Hong Kong Stock Connect, the IEC is organising free investor education seminars to help investors better understand the key features and associated risks of the pilot programme.
Remarkable growth
Thanks to the hard work of industry players, the financial industry has witnessed robust growth in the first half of the 2010s, contributing to 16% of our GDP. Just to quote some industry figures when compared with 2009:
* first, employment in the industry in 2013 rose 9% to a record 230,300, accounting for 6.1% of total employment;
* second, SFC-licensed individuals increased by 8% to 37,172 and SFC-licensed firms jumped 23% to over 2,100;
* third, equity market capitalisation expanded by 45%, to $25 trillion, and the number of listed companies rose by almost 400 to over 1,700 with funds raised through IPOs totalling $968 billion from 2010 to 2013, consistently among the global top five;
* fourth, banks' loan portfolio doubled to $7.1 trillion, with cross-border lending tripling;
* fifth, assets under management almost doubled at $16 trillion at end-2013, with the share of funds from overseas rising to 72%; and
* sixth, premiums for life insurance also doubled to $92 billion, 16% of which were attributable to Mainland policyholders versus a ratio of 6% in 2009.
The picture is never complete without mentioning our renminbi business. Hong Kong has emerged as the leading offshore renminbi business hub with the world's largest offshore renminbi liquidity pool, exceeding RMB1.2 trillion.
Renminbi activities are serving the real economy. Renminbi trade settlement handled by banks in Hong Kong amounted to RMB3.8 trillion in 2013, tenfold of that in 2010. Renminbi bonds issuance in Hong Kong during the first half of 2014, valued at RMB143 billion, already exceeded the figure for the entire 2013.
Outstanding renminbi bonds are now worth some RMB380 billion, versus RMB30 billion at end-2009. Corporates can also borrow renminbi from banks for their liquidity needs, and the size of the renminbi loan portfolio of Hong Kong banks currently stands at a respectable RMB140 billion, four times that in 2011.
For retail investors, we host some 150 listed products denominated in renminbi and another 120 SFC-authorised unlisted renminbi products like funds and structured products.
The way forward
The first half of the 2010s has seen exciting developments for our financial services industry. But turbulence in the external environment was equally remarkable. Can we expect more of the same for the remainder of the decade? How should we get better prepared to leverage the opportunities ahead?
Needless to say, we have to consolidate our position as China's global financial centre. We have already made notable achievements in this regard. Seventy of the world's 100 top banks are operating in Hong Kong, while 14 of the global top 20 insurers are conducting their business here. Overseas investors accounted for 46% of cash market trading on our Stock Exchange.
Following global practices and maintaining market quality are keys to enhance our attractiveness to market participants from around the world and sustain our international DNA. We should continue to speak the international financial language and appreciate the international market values in anchoring global players and bridging the Mainland with the rest of the world.
It is almost certain that the financial markets will continue to be subject to periodic shocks, with shorter market cycles, more rapid fund movements and more jittery investors.
While Hong Kong has emerged relatively unscathed from the last financial turmoil, we have to keep our regulatory regime under review to ensure that it continues to serve present-day market needs. A fair, open and orderly financial market will help facilitate the smooth operation of our real economy and promote economic growth.
More importantly, Hong Kong needs to leverage fully our unique advantages in facilitating the opening up of Mainland financial markets, and assisting Mainland enterprises in going global, in a risk-controlled manner.
Our roles as a testing ground for our country's reform measures and a firewall to shield its financial market from international volatility are evolving, alongside the Mainland's fast-changing financial landscape and implementation of further reforms. We would have to position ourselves such that our financial infrastructure and financial institutions stand ready to provide the best value-added services to Mainland enterprises as they look for growth opportunities overseas.
Fulfilling global obligations
To keep Hong Kong well-connected with the global financial system, we cannot lose sight of the global trend in financial development and regulation. For this, our regulators are participating actively in relevant international forums like IOSCO and the Financial Stability Board to help shape the regulatory agenda.
We will ensure that our regulatory standards are on a par with those in other international financial centres, taking into account local market circumstances. We will continue to maintain a close dialogue with our industry in the process.
Latest developments are close to you as industry practitioners. For the banking sector, Hong Kong is committed to implementing the Basel III reforms. Standards on capital buffers, liquidity coverage and disclosures are on the cards for gradual implementation from now to 2019.
As financial markets become increasingly globalised, the need for cross-border co-operation has been brought to the fore. A major international initiative is to develop an effective resolution regime for systemically important financial institutions. It seeks to minimise the need to ask taxpayers to support any failing financial institutions. It also seeks to better co-ordinate actions between jurisdictions in case a multinational financial institution goes bust. We aim to conduct the second stage of public consultation on this important subject later this year.
Another international initiative is to regulate the over-the-counter derivative market. We have just enacted the enabling legislation and will commence the new regulatory regime in phases, starting with the reporting of certain standardised interest rate swaps and non-deliverable forwards, to be followed by requirements on clearing and trading in subsequent phases.
International expectation for the exchange of information against tax avoidance is mounting. We have just announced this Monday our pledge to implement the new global standard on automatic exchange of information to enhance tax transparency and combat cross-border tax evasion. We shall engage local stakeholders in developing a legal framework for effective implementation.
Enhancing market quality
In parallel to keeping track of international reforms, we are pursuing an active domestic policy agenda to improve our regulatory regime for better investor protection, more efficient market infrastructure and more market-friendly statutes and rule books. Allow me to mention a few notable examples.
We plan to improve the safety net for our depositors and establish a new one for insurance policyholders. For this purpose we have just rolled out a public consultation on enhancements to the Deposit Protection Scheme last Friday.
To implement a scripless securities market, we have introduced the enabling legislation into the Legislative Council in June. It represents a major step forward for this long overdue initiative to enhance market efficiency and corporate governance.
The regime will allow shareholders to enjoy the full benefits of legal ownership by registering the securities in their own name. Also, we are preparing legislation for the regulation of stored value facilities and retail payment systems to ensure their safety and soundness.
After the rewrite of our Companies Law, we are modernising our corporate insolvency and winding-up regime, as well as formulating a statutory corporate rescue procedure and insolvent trading provisions, in response to demands from the community and the legislature.
The regulatory regimes for both the insurance sector and auditors of listed entities will have to be reformed so that the regulators would become more independent of the industry and the Government. Such independent regulatory regimes should be more nimble in responding to regulatory challenges and more effective in keeping the regulatory standards up to date.
We have introduced into LegCo the legislation to establish an independent insurance authority in April and hope that LegCo will complete its deliberations by mid-next year. To modernise our prudential regulation for insurers, we have launched a consultation on a Risk-based Capital framework yesterday. Also, we are consulting the public on auditor oversight, and aim to introduce an amendment bill into LegCo in 2015.
Nurturing human capital
The quality of our financial markets is very much dependent on that of our practitioners. We are endowed with a pool of financial talents, drawn locally and from overseas.
In 2013, 67% of the workforce in the industry had post-secondary education, versus 35% for the economy as a whole. Thirty-eight per cent of them were in managerial or professional positions, more than doubling the economy-wide ratio of 17%. Their ability to offer value-added services is being handsomely rewarded by the 20 to 30% premium in median income, compared with occupations of comparable skill level in the overall economy.
Strengthening the quality of practitioners is not only necessary for maintaining the stability and robustness of our financial markets. It is also paramount for sustaining the development and expansion of the industry.
We welcome the recent launch of an Enhanced Competency Framework for private wealth-management practitioners by the Private Wealth Management Association. The framework is a good example of an industry-driven framework that sets out core competence demands on practitioners and the necessary ongoing professional development. It takes advantage of close collaboration between the industry and training institutions. I know that the Hong Kong Securities & Investment Institute is also involved in providing programmes and examinations for the framework. We hope to see more of such initiatives.
At the same time, the Financial Secretary has tasked our bureau to conduct a study on the training of professionals and skilled personnel, as they are of vital importance to the sustainable development of the industry. We have been engaging the industry through various channels and holding focus group meetings to gauge practitioners' views.
Taking into account industry's views, and drawing reference from overseas, we see the need to accord priorities to at least three areas:
* first, to raise the awareness of the young generation as well as the community at large of the wide spectrum of career opportunities available in the financial markets;
* second, to facilitate young people to gain exposure to the financial sector and to enter into the profession; and
* third, to encourage existing practitioners to sharpen their skills and obtain professional/accredited qualifications.
We are exploring measures to address these areas in nurturing human capital. They include publicity drives on financial careers, programme-based scholarships for students, financial incentives for in-service practitioners and young people to obtain professional qualifications, and exposure schemes such as trainee programmes and internship network.
We will continue to work with the industry to develop concrete proposals in the coming months.
Facilitating market development
All these efforts to comply with international requirements, modernise regulation and nurture market talents should together serve a higher purpose. Seasoned practitioners always remind me that for Hong Kong to succeed as a leading international financial centre, we should endeavour to attract the "Three Is", namely the issuers, the investors and the intermediaries, who would bring expertise, liquidity and new products and services.
Active initiatives on this front include developing a framework for the mutual recognition of funds between the Mainland and Hong Kong, introducing an open-ended fund companies regime and extending profits tax exemption to offshore private equity funds. These initiatives seek to attract more issuers and intermediaries at the manufacturing end of the asset-management value chain to use Hong Kong as their base.
Other measures to nurture potential growth areas include cutting profits tax for captive insurers, exploring incentives to attract corporate treasury activities, and waiving the stamp duty for all exchange-traded funds trading. These would enrich our financial platform, and attract market players who otherwise may not have Hong Kong on their radar screen.
These measures alone are not enough to bring our financial services industry to its next level.
Unique position
The Government would need to join hands with the market to consolidate our strengths and leverage our unique advantage as China's truly global financial centre while the Mainland's financial market is opening up and Mainland enterprises are "going global".
It is a blessing for China to have two financial systems in the Mainland and Hong Kong. Our financial co-operation with the Mainland is based on two key principles: first, bringing mutual benefits, and second, protecting national financial security.
We should proactively leverage our unique position under ‘One country, two systems’ to better serve market participants from Hong Kong and elsewhere, including the Mainland.
Promoting the international use of renminbi has been a key theme in the 2010s so far, and will likely remain so for the rest of the decade. The rising use of renminbi outside the Mainland would help China gain a more effective voice in shaping the international financial agenda to match its growing economic position.
Good progress has been made for the renminbi internationalisation trilogy, that is renminbi first as a trade settlement currency and, second, an investment currency. Hong Kong is playing a key role in handling the flow of offshore renminbi funds. According to SWIFT, banks in Hong Kong now handle around 70 to 80% of the global renminbi payments.
We would continue to upgrade our renminbi infrastructure. For instance, with effect from October 1, the operating hours of our renminbi Real Time Gross Settlement system will be extended from 15 hours to 20.5 hours daily - until 5am of the next day - to cover both the European and American time zones.
For the last leg of the trilogy, that is, renminbi as an international reserve currency, progress has been made as more central banks including those in Malaysia, South Korea, Japan and Thailand have invested in renminbi-denominated assets for their foreign reserve. In this regard, the Ministry of Finance has successfully made special placements totalling RMB5 billion to overseas central banks for renminbi sovereign bonds issued in Hong Kong.
The Shanghai-Hong Kong Stock Connect, together with the mutual recognition of funds, points to another innovative way for Hong Kong to act as a super-connector for the Mainland and the global market with proper regulatory safeguards. They would facilitate the gradual and controlled two-way opening of the Mainland's financial markets, and benefit Hong Kong in the process.
We should continue to tap market wisdom as to how best we may improve our renminbi infrastructure and enrich our renminbi services and products, with a view to contributing more to the internationalisation of renminbi.
National 13th Five-Year Plan
I cannot leave this important subject without touching on Hong Kong's strategic positioning for the National 13th Five-Year Plan, which will cover 2016-2020.
Together with the market, we should give further thought as to how our international financial platform could better support Mainland enterprises "going global". For instance, Mainland enterprises could further leverage our platform to raise international capital by issuing renminbi bonds and listings; to carry out cross-border renminbi trade settlement to manage their foreign exchange risks; to establish a corporate treasury centre for conducting their global treasury functions; and to make best use of our risk-management tools such as setting up captive insurers and hedging through currency and commodity futures in our market.
We welcome Mainland enterprises to set up their regional and global treasury centres in Hong Kong to manage their overseas operations. They could make full use of our merger and acquisition service platform to invest overseas. They could conduct exchanges and hedging of foreign currency through our world-class financial infrastructure.
We are well placed to provide value-added services for meeting their investment and funding needs, managing their exposure and implementing risk management strategies. At present, we are examining ways to further strengthen our competitiveness in attracting Mainland enterprises, and indeed multinational corporations, to manage their global treasury activities and renminbi liquidity in Hong Kong.
As Mainland enterprises increasingly participate in the global markets, they will have to face unfamiliar risks such as exchange-rate movements, factor price fluctuations for raw materials, and other operational risks. We could so position ourselves to provide one-stop service in managing such risks.
We are inviting Mainland enterprises to form captive insurers in Hong Kong to service their offshore operations through self-insurance. In addition, our Exchange has launched renminbi currency futures trading to provide another channel for Mainland enterprises to hedge their currency risk. With the acquisition of the London Metal Exchange, our Exchange is introducing Asian time-zone price-discovery and clearing for commodity futures and expanding the Mainland participant base.
As many Mainland enterprises are already conducting their financial activities in Hong Kong, they would enjoy greater synergy by operating their treasury centre and risk-management functions here. This would be mutually beneficial for both places. For the Mainland, its enterprises could access world-class risk-management services in Hong Kong for their offshore business as they "go global". For Hong Kong, our financial market will be broadened and deepened.
The long list of stability measures, regulatory reforms, initiatives to develop new business, plans to upgrade market infrastructure and proposals to nurture human capital can never be successful without the advice and active participation from market players.
Allow me to take this opportunity to express my sincere appreciation for inputs from the market which are essential for shaping many policy initiatives and legislative proposals over the years. We will continue to count on your support to enhance our attractiveness to the "Three Is".
Permanent Secretary for Financial Services & the Treasury (Financial Services) Au King-chi gave this address at the Hong Kong Securities & Investment Institute's Professional Development Seminar.
