Rule of law upheld in markets

November 11, 2022

Financial Secretary Paul Chan

Hong Kong Legal Week is part of a continuing, and growing, series of major events designed to tell the world that Hong Kong is back. Back in business, back in the business of creating opportunity, of reconnecting with the world, and at all levels and sectors, from business and finance, from innovation to technology, sport and culture and, all this week, law.


Rule of Law’s Importance to Hong Kong as an international financial centre


Speaking of law, I believe the distinguished panellists and speakers today have already shared valuable insights about the relationship between the rule of law and our resounding business success. But do allow me to share my humble thoughts on this issue as well.


The common law system, an independent judiciary, and the powers of final adjudication vested in Hong Kong’s Court of Final Appeal (CFA) are among the defining features of the uniqueness of Hong Kong under the “one country, two systems” principle. Together with our tradition of respect for the rule of law, they have been crucial elements of our world-class business environment. At the celebrations of the 25th anniversary of Hong Kong’s return to the motherland, President Xi Jinping told a world audience that the “one country, two systems” principle will be adhered to in the long run. He emphasised that the central government fully supports Hong Kong in its effort to maintain its distinctive status and edges, as well as our open business environment and connectivity with the world. President Xi expressly referred to Hong Kong’s common law system in this regard.


Our firm commitment to the rule of law is indeed the cornerstone of the trust and confidence of investors and businesses in doing business here. That courts independently exercise adjudication powers, free from any interference as constitutionally guaranteed in the Basic Law, ensures that there would be a fair, objective and impartial legal process for enforcing the law and rules. In fact, meritorious judicial processes in Hong Kong are well recognised by the local and international community at large. Our courts continue to make reference to case laws from all jurisdictions throughout the common law world, and judges and other members of the judiciary may be recruited from other common law jurisdictions. In particular, eminent jurists from other common law jurisdictions are appointed to the CFA as non-permanent judges. The right to access justice and judicial remedies is also constitutionally guaranteed. For those who are in lack of means, we provide legal aid to them.


Together with a deep pool of local and international legal talent and expertise in arbitration, as well as regulations and practices that align with high international standards, they have constituted a friendly and trusted framework for businesses and investors.


Our trusted legal system is all the more important for Hong Kong to function as an international financial centre (IFC). Take our securities market for example. Hong Kong’s equity market is vibrant, active, highly liquid, efficient and transparent, attracting investors from all over the world. According to the figures as at the end of 2021, the market capitalisation of Hong Kong’s stock market was over $42 trillion, around 15 times of our gross domestic product. Close to two thirds of the daily transactions on our market are conducted by international institutions.


The rule of law in Hong Kong has instilled trust and confidence among financial market participants and investors from all over the world. We set clear rules for our markets, stringent requirements on our participants, maintain high transparency of the functioning of the markets, and ensure that policies and practices are implemented in a consistent and predictable manner.


Every day, we monitor closely the markets, focusing on whether they are functioning orderly and properly, and whether there are systematic risks, irregularities and vulnerabilities that will threaten Hong Kong’s financial stability. We analyse in-depth the performance of our market. For example, factors causing its volatility; its performance vis-à-vis markets in the region and the global markets; any irregular short-selling activities, any concentration risks in the players, any concerted efforts in market manipulation, etc. We also look at the futures market and the derivatives market, and analyse the information in the trade repository system from time to time. We closely monitor the clearing houses, licensed corporations and mutual funds to ensure that they are financially sound and resilient.


In short, the Government and the financial regulators never intervene in the market lightly. But we do not tolerate irregularities. Prompt and decisive actions would be taken against suspected criminal acts and syndicates. I trust you have heard this in the news, including those in the past couple of days.


Offering an environment familiar to and trusted by international investors, Hong Kong has also performed well as the main bridge between the capital markets of the Mainland and the rest of the world. Over the years, various Connect schemes have come into operation, including Stock Connect, Bond Connect, ETF Connect, and the mutual recognition of funds. The average trading volume of the Stock Connect transactions in the first 10 months of 2022 was over RMB130 billion a day. As a matter of fact, international investors can access the Mainland securities market direct under the regime of qualified foreign institutional investors, or QFII, but by far the most popular route they choose is via the Northbound Stock Connect, which accounts for 72% of international investment into the Mainland securities market. And that is a rising number each year, indicating that Hong Kong is a familiar and trusted place which international investors like to use to capture the Mainland opportunities.


More opportunities of Hong Kong as an IFC


Looking to the future, there is a wide-ranging development potential for Hong Kong as an IFC. Allow me to share a few updates.


Capitalising on our unique connectivity and well-trusted position, Hong Kong is also actively helping with renminbi internationalisation. Many emerging economies - like those in the Middle East as they told me during my visit earlier - have increasingly received RMB as its share in the world’s trade settlement grows. They need to find a way to invest with their RMB. Besides, under the current geopolitical situation, they also have a strong desire to diversify their investment to this part of the world.


At the moment, Hong Kong counts the largest pool of RMB liquidity in the world outside the Mainland, amounting to nearly RMB1 trillion as at August this year. Hong Kong’s banks handle over 70% of global offshore RMB payments. We are enriching our RMB ecosystem by rolling out more RMB-denominated investment and risk management products, upgrading our market infrastructure, and broadening the various Connect schemes to provide ever better mutual access between the capital markets of the Mainland and the rest of the world.


The Connect schemes are seeing a major milestone with the announcement of three initiatives by the China Securities Regulatory Commission earlier in September. 


The first one is broadening the scope of Stock Connect to overseas companies that are primary listed in Hong Kong. This will enable overseas companies to tap both international capital as well as the huge Mainland capital, which will enhance the liquidity of such stocks, and consequently provide better support to their valuation.


The second one is setting up a RMB securities’ trading counter under Stock Connect. This will provide additional investment choices for Mainland investors and at the same time further the internationalisation of RMB.


The third one is introducing Mainland government bond futures in Hong Kong. Together with the MSCI China A50 Connect Index futures contract rolled out last year and the interest rate Swap Connect announced in July this year, we are offering offshore risk management tools for investors when they participate in the Mainland equity and bond markets. And this is important for Hong Kong’s ambition to develop into a risk management centre for global investors. 


Finally on fintech. Embracing virtual assets (VAs) as a conduit of financial innovations and opportunities that they can bring, we are also minded on the risks on financial stability, consumer protection, as well as money laundering and terrorist financing. As set out in our policy statement on the development of VAs in Hong Kong released last week, the Hong Kong Special Administrative Region Government is committed to providing a facilitating environment for promoting sustainable and responsible development of the VA sector in Hong Kong. We will put in place balanced regulation and guardrails, including the latest effort of introducing a licensing regime for VA service providers. Our announcement has received overwhelming support, not just from the Hong Kong VA service providers but also international VA innovators. Since our initiative will help them promote the credibility of the service providers, thereby enhancing investors’ and users’ trust and confidence in this fast growing market. The crux to all these endeavours is, again, the clarity, certainty and consistency of our regulatory regime, for which we have much confidence in line with our fine traditions of the rule of law.


Closing remarks


There is much more to Hong Kong’s success and growth as an IFC - whether in the area of asset management, corporate treasury, risk management and bonds, the opportunities are just boundless. But all in all, the key word to these is trust. Trust in our financial regulatory system that is clear and consistent; in our conversant role in connecting with the Mainland and the world; and, more importantly, in our rule of law and common law system. Rest assured we will do our utmost to uphold it, for you, and for the promising future of Hong Kong.


Financial Secretary Paul Chan gave this speech at the Rule of Law Congress: Rule of Law & Justice for All under Hong Kong Legal Week 2022 on November 11.

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