Hong Kong’s Financial System: Robust and Advancing


28 Aug 2020

Hong Kong’s Financial System: Robust and Advancing

Edmond Lau, Senior Executive Director, Hong Kong Monetary Authority

(Opening Keynote Speech at the Asian Banker Conference Finance China 2020)

1. Greetings

Good morning everyone, I'm Edmond Lau, Senior Executive Director of the Hong Kong Monetary Authority. I'd like to thank Asian Banker for inviting me to speak at Finance China 2020. Hong Kong has faced many challenges in the past year: social unrest, COVID 19, escalating US-China tension. Yet, thanks to our sound fundamentals, Hong Kong’s financial and monetary systems have demonstrated strong resilience. Today, I’d like to take this opportunity to update you on how Hong Kong has moved on amid these challenges, and strengthened its value proposition to both Mainland China and the rest of the world.

2. Hong Kong’s resilience

As I mentioned just now, despite all the challenges in the past year, Hong Kong exhibited resilience as it did in all previous financial crises. Our financial market continued to perform strongly.

The HKD market has been very stable and functioning orderly in accordance with the design of the Currency Board. The HKD exchange rate has remained in the strong half of the convertibility zone under the Linked Exchange Rate System in recent months. Due to strong equity related inflows, the strong side CUs have been triggered repeatedly resulting in an accumulated inflow of close to US$14 billion into the Hong Kong dollar since April this year. Total amount of banking deposits also rose in both last year and this year. All these point to the fact that there have not been significant fund outflows from either the HKD or the banking system.

On the capital market side, the stock market remains one of the most active markets in the world in both primary and secondary market activities. In the first seven months of this year, over 80 companies were listed in Hong Kong, raising over HK$130 billion. We have also seen continuous inflow into the Hong Kong stock market through the Stock Connect. In early July this year, the average daily turnover in our stock market reached some HK$220 billion, which surpassed Japan by 40% and was 5.5 times and 2.7 times that of the Australian and South Korean market respectively.

Of course, we should not read too much into short-term data. But the figures do give a glimpse of the attractions of Hong Kong’s financial market for investors. We expect the buoyant capital market activities to continue in the months ahead, with a pipeline of IPOs, including some major ones such as the Ant Group, planned to take place later this year.

I can also say with confidence that our banks are in very good shape on all measures of global banking standards - with strong Capital Adequacy Ratio at 20.1%, high Liquidity Coverage Ratio at 160.4% and a low NPL ratio of 0.6%. These figures are all above international standards and compare favourably against our peers. Our banks therefore entered the recent crisis of Covid-19 from a position of strength and could provide the much needed relief to their customers.

3. Hong Kong’s unique position as Asia’s top international financial centre and the dominant gateway to Mainland of China

In the face of the upcoming challenges arising from the risk of escalating tension between the two largest economies in the world, some investors have expressed concern about the role of Hong Kong as an international financial centre. While we should be on full alert to the risks and challenges ahead, let’s not forget that the factors that have made Hong Kong an international financial hub remain unchanged and will continue to underpin our competitive position against the headwinds. These include, for example, a simple and low tax regime, a familiar common law system, an independent judiciary, a balanced and progressive regulatory environment, and last but not least, a dominant gateway to China opportunities.

In particular, Hong Kong’s unique role as a dominant gateway to China opportunities remains extremely attractive to global investors and this has not changed at all even during the recent episodes of social unrest or global trade tension. The growing use and popularity of various Connect Schemes by foreign investors is a good testimony to that. For example, the Stock Connect scheme now accounts for 68% of all A-shares trading by overseas investors and over 50% of the Chinese bonds in the CIBM market are acquired through the Bond Connect. This gateway role is likely to be strengthened further when the Wealth Management Connect scheme is formally launched and more Chinese bonds are included into the global bond indexes.

International investors prefer to go via the Hong Kong platform even if they could invest in the Mainland market directly through the QFII or RQFII schemes. For instance, in the first five months of 2020, Bond Connect accounted for more than half of the overall bond trading turnover by foreign investors, which already exceeded the turnover under the QFII and RQFII schemes. This is because Hong Kong can offer international investors easy and transparent access to the Mainland market while allowing them to operate under a familiar legal and regulatory framework as well as market practices.

It’s also important to remember that Hong Kong is a dominant gateway as well as an international financial centre at the same time. This proposition is testified by the latest decision of MSCI to move their futures contracts partnership arrangements to Hong Kong. According to their CEO, they did it because we offer a large customer base of international, regional and Chinese investors as well as deep liquidity. As a matter of fact, Hong Kong continues to lead in a full spectrum of financial market activities: banking, asset management, equity, debt and FX market. We are home to over three quarters of the World’s top 100 banks. We are Asia’s largest international asset management centre. According to the BIS triennial survey on FX transactions, we are the world’s third largest USD trading centre, only after London and New York. And last year, despite so many difficulties confronting us, we continued to beat other financial centres to be on top of the global IPO league table.

4. Strengthening gateway function with new initiatives

There is, of course, no room for complacency. Going forward, we will continue to strengthen our value proposition to the investors around the world. I mentioned earlier Hong Kong's key function as the gateway to Mainland China. Foreign investors have always been and will remain keen to access the Mainland market via Hong Kong. This function will be further enhanced by the Greater Bay Area (GBA) initiative. The GBA is a combined economic zone covering the most wealthy and technologically advanced Guangdong region of China, with a total population over 72 million and a combined GDP of US$ 1.6 trillion. Its size is even bigger than some G20 countries like Australia.

The near term benefits of the GBA will come from the launch of cross-border initiatives that expand Hong Kong firms’ access to the Mainland market such as Wealth Management Connect, which allows GBA investors to invest in wealth management products offered in Hong Kong and vice versa.

In the longer term, closer collaboration within the GBA, and the transformation of the GBA from “the world’s factory” into a hub of technology and innovation with a high concentration of wealth, will create new economic opportunities, synergies and demand for financial services. These developments will facilitate Hong Kong firms’ expansion into the Mainland.

We are also making strenuous efforts to develop Hong Kong into an international asset management centre for the region. In this connection, I am pleased to update you that a new legal regime governing Limited Partnership Fund (LPF) will take effect from 31 August 2020, i.e. next Monday following the recent enactment of the Limited Partnership Fund Ordinance. The new regime provides a modernized, user-friendly legal framework for private investment funds including private equity (PE), venture capital, infrastructure funds, etc. to set up and operate in Hong Kong.

Another related and exciting development is the Government’s endeavor to enhance the competitiveness of Hong Kong’s PE platform on the tax front. Last year, the Government extended the fund-level profits tax exemption to cover both onshore and offshore private funds including PE funds. As announced by the Financial Secretary in his budget this year, the Government is now working to introduce a highly competitive tax concession scheme for carried interest which will take retrospective effect from financial year 2020-21.

No discussion of new initiatives would be complete without mentioning green finance initiatives. Hong Kong has recently put a lot of effort into developing itself as a green finance hub. Green investors can now leverage Hong Kong's gateway to obtain internationally recognised assessment of green investment opportunities in China.

In promoting Green and Sustainable Banking, the HKMA has adopted a three-phase approach: first, to develop a common framework to assess the “Greenness Baseline” of individual banks to establish how “green” they are; second, to engage with and consult the industry to develop our supervisory expectations; and third, to focus on implementation, monitoring and evaluation.

The current focus is the development of the common assessment framework. A Working Group with representatives from 22 banks was formed for the framework development. We also joined hands with local regulators and policymakers to launch the Cross-Agency Steering Group on Green and Sustainable Finance in May 2020, demonstrating our joint commitment to tackle climate and environmental risks and drive a common goal on sustainability.

Meanwhile, the Hong Kong Government is also leading by example with its HK$100 billion (US$12.8 billion) Government Green Bond Programme. The HKMA is now helping the Government to launch a regular GB issuance programme, which targets to issue a total of US$8.5 billion of GB over the next five years.

5. Closing

I hope my sharing today gives you a better understanding of Hong Kong’s latest situation. No doubt there are still many challenges ahead, but let us not forget that there are also plenty of opportunities too and that Hong Kong has stood the test of time as an international financial centre, riding through various storms and difficulties in the past. I am confident that Hong Kong will overcome these challenges and emerge as a more vibrant international financial centre.

Thank you.

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Last revision date : 28 August 2020