This is my first working day as the Chief Executive of the HKMA. I have been with the HKMA for 26 years since it was established, and I know the place and colleagues pretty well. But coming to work today is quite different, because I will be shouldering much greater responsibility in the coming years. I will keep a humble mind and work closely with my colleagues in coping with every challenge in the future. In this inSight article, my first one since assuming office, I will share with you some of my views on the work of the HKMA in the period ahead.
Over the past years, the HKMA has built a lot of buffers in our monetary and financial systems to prepare for rainy days. Indeed, the monetary and financial systems of Hong Kong proved highly resilient in the face of regional and global financial crises. Yet, in this ever-changing financial market and far more complex macro environment, we must stay vigilant and should not let our guard down. Apart from unpredictable “black swan” events, we have to get well prepared for challenges and uncertainties from various sources. The more obvious ones in the foreseeable future include the following:
- The US-China trade conflict and negotiations have dragged on for more than a year with no end in sight. Even with a trade deal, the unsettling relationship between the two largest economies in the world might become a new normal. Meanwhile, global economic fundamentals have been weakening. It remains to be seen if growth momentum in the US is sustainable, while economic growth in Europe and Japan remains lackluster. Together with the uncertainties surrounding Brexit, the outlook for advanced economies is far from promising. And, emerging market economies can hardly be immune from such a volatile environment.
- Mainland China’s economic development is at a critical stage as its economic transformation, structural reform and opening-up are entering deep-water zone. This is a necessary process to ensure its long-term healthy economic development, but its economic growth will be under pressure inevitably.
- Major central banks in the world are changing course on their monetary policies. Most notably, the US Federal Reserve (Fed) has announced an early end to its balance sheet reduction programme, and its interest rate direction has been changed from increasing to declining within a year. There are also mixed views on the future interest rate path within the Fed. At the same time, the European Central Bank cut rates in September and restarted its quantitative easing (QE) programme to buy bonds. A protracted period of QE will lead to imbalances in financial markets and jack up asset prices. What’s more, in the event of another major financial crisis, the room for central banks to cope with the crisis through monetary policies would be much limited.
- Amid the weakening global economy, in particular as a result of the US-China trade war, as well as the social incidents in Hong Kong in recent months, our economy is facing serious downside risks. The financial burden on corporates, especially small-and-medium sized enterprises (SMEs), is increasing, and there are also signs of adjustment in property prices and transaction volumes.
Notwithstanding the challenging and complex environment, we don’t need to be overly pessimistic and worrying. As the old saying goes, “every cloud has a silver lining”. Indeed, the various financial reforms put forward by international organisations in recent years have substantially enhanced financial stability. The Mainland economy is going to maintain rapid growth trajectory for an extended period, and Hong Kong’s core competitiveness remains strong. That said, as the HKMA is shouldering the important responsibility of maintaining financial stability, we must get well prepared and put in place contingency plans for various situations so that we can respond swiftly in the event of a market turmoil.
Monetary stability is the bedrock of Hong Kong’s financial stability. The Linked Exchange Rate system (LERS), which has been in place since 1983 and undergone refinements to its operations, has helped Hong Kong weather numerous challenges and shocks, clearly demonstrating its important role as the anchor of Hong Kong’s economic and financial system. Having been involved in the work of the LERS throughout my career in the HKMA, I firmly believe that the LERS is the most appropriate monetary system for Hong Kong. We see no need and have no intention of changing this well-established system. Going forward, we will continue to closely monitor market developments to ensure currency stability and the orderly operation of the money market under the existing mechanism of the LERS.
Banking stability is crucial to Hong Kong’s financial system and economic activities. Our banking sector is sound and robust. Its resilience has been further enhanced following the implementation of a series of countercyclical macro-prudential measures on property mortgages in the past decade. In the coming years, we will strive to raise the overall competitiveness of Hong Kong’s banking sector while maintaining its stability. We will also continue to implement new regulations in accordance with international standards, and work with banks to put in place appropriate risk management controls and a sound corporate culture.
While ensuring effective supervision, we also need to properly address two issues which draw more public attention currently. The first one is the impact of economic downturn on some corporates, especially SMEs, which may have a more pressing need for financing and liquidity. We will maintain close liaison with the banking and commercial sectors with a view to helping corporates tide over the difficulties, without compromising financial stability. The second one is about the property market. We will closely monitor cyclical changes in the property market and introduce appropriate macro-prudential measures in a timely manner with the aim of maintaining the stability of Hong Kong’s banking system.
For the financial sector and the HKMA alike, the rapid advancement of technology is another major trend that will bring both challenges and opportunities. We have already seen the application of artificial intelligence, big data, cloud computing and blockchain in the financial sector, including banks. Technology firms are also accelerating their forays into the field of finance. We embrace FinTech, because it can increase the efficiency and capability of banks, enabling banks to provide tailor-made services to customers and enhancing banks’ services through competition. Under a risk-based approach, we will proactively support and facilitate the development of a FinTech ecosystem in Hong Kong. We look forward to the launch of eight virtual banks soon and seeing how they would bring brand-new banking experience to the people in Hong Kong.
Having said that, technology also poses new challenges for regulators. The most notable ones are cyber and data security issues associated with the advent of innovative information technology and data services. These developments mean that we will need to engage with the industry, and make use of technology to improve our supervisory capabilities. On the one hand, the HKMA will strengthen the collaboration between banks and technology companies in fostering a more diversified ecosystem for regulatory technology, or RegTech, which will help reduce compliance costs with the aid of technology. On the other hand, we will study the use of supervisory technology, or SupTech, to enhance the efficiency and effectiveness of our supervisory work.
Diversifying the universe of our financial services is the key to maintaining Hong Kong’s position as a leading international financial centre. Leveraging on our unique advantage presented by the Mainland’s ongoing financial liberalisation and the development of the Greater Bay Area, the HKMA will seize every opportunity to strengthen Hong Kong’s status and function as the global hub for offshore renminbi business, and proactively raise Hong Kong’s profile as a platform for infrastructure financing, green finance, private equity and risk management. In this context, we will work with the relevant Government bureaux to ensure the relevant laws and tax regimes are conducive to attracting more major international and Mainland institutions to Hong Kong, thereby bringing more long-term funds and creating more jobs in the city. In collaboration with the banking industry, we will also enhance talent development to further strengthen the “soft power” of Hong Kong as an international financial centre.
As far as the Exchange Fund is concerned, abiding by the established principle of “capital preservation first, long-term growth next”, our investment management team will continue to manage risks prudently and deploy appropriate measures in response to changes in the external investment environment, with a view to maintaining monetary and financial stability. At the same time, we will step up investment diversification through the Long-Term Growth Portfolio in order to diversify risks and strive for more stable and higher long-term returns.
Hong Kong stands at a historic crossroads at this moment. While the path ahead may be filled with challenges, every challenge is also an opportunity. As long as the people of Hong Kong can maintain our trademark resilience and ingenuity, I believe we can ride out the present difficulties. My colleagues and I will continue to discharge our duties with dedication and professionalism and do our best to maintain financial stability.
Eddie Yue
Chief Executive
Hong Kong Monetary Authority
2 October 2019
