HK IS COMING BACK: FS

27-9-2022

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The world has become considerably more challenging, more complicated, for most of us since I last spoke to you, in 2018. A pandemic on an unprecedented scale, soaring geopolitical tensions, rising inflation and interest rates affect us all.

     

Last week, the US Federal Reserve raised interest rates once again by 75 basis points, the fifth rate hike in this year. With inflation still much higher than the target, the market expects interest rates in the US to rise further by around 1%, or even more, for this year alone. Elsewhere, like in the UK and Europe, interest rates are also on the rise.

     

The implications for the Hong Kong economy in the short term are self-explanatory: with rising cost of capital, tightening monetary conditions and a worsening external environment, our engines for growth, including exports, consumption and investment, will inevitably be affected. We reckon that Hong Kong will probably see a negative economic growth this year.

     

Despite the gloomy economic outlook, our banking and financial system has remained highly robust and enviably stable. As bankers, you will certainly laugh off rumours surrounding the stability of the Hong Kong dollar exchange rate. Carry trades arising from interest rate differentials are within the design and expectations of the Linked Exchange Rate System (LERS). It is indeed nothing new. We all experienced a similar situation during the last interest rate normalisation cycle in the US from 2015 to 2018. That caused no concern on our LERS at all.

The whole Government is keenly aware of the challenges facing Hong Kong and our economy, which are essentially brought about by the COVID-19 pandemic. At the heart of this is our connectivity with the Mainland and the world, which is dear to Hong Kong’s competitiveness. Since this new-term Government has assumed office, our goal is to create maximum space for activities to resume and to re-establish business connections, without compromising defences against the pandemic and the health of our residents.

Guided by science, backed by data and evidence, prompt decisions of this Government to adjust our anti-epidemic policies are leading us towards normality and revitalisation. They surely include the newly in force and much welcomed “0+3” arrangement for arrivals announced last Friday. We know the community is expecting more. We are striving to navigate Hong Kong out of the adverse impact of the pandemic in a safe and sustainable manner as quickly as practically possible.

Above all, we know that connectivity is our lifeline, one of our most distinctive advantages. And this is why I am confident that as short-term difficulties are overcome, Hong Kong’s long-term prospects remain tremendously promising.

HK remains competitive

Hong Kong's longstanding success, and our remarkable resilience, is rooted in the “one country, two systems” principle. And we will continue to be guided by it. Indeed, while here in Hong Kong for our 25th anniversary celebration, President Xi Jinping reaffirmed that the principle will remain at the heart of our progress and must be adhered to in the long run.

That reassuring affirmation also re-emphasises Hong Kong’s role as a connector and premier services platform bridging the Mainland and the world. That Hong Kong is part of China with internationally aligned regulatory regimes; that we are where East meets West and understand different cultures; and that we are strategically positioned in Asia with a deep pool of talent, high efficiency as well as rich and sumptuous connections, have all made us distinct.

With the full backing of the central government, Hong Kong’s status as an international financial, shipping and trading centre will only be strengthened. It ensures that we will capitalise on the enormous opportunities presented by the National 14th Five-Year Plan, the Guangdong-Hong Kong-Macao Greater Bay Area development, and the continuing opening up of the Mainland’s financial markets.

So when there are doubts, with good intentions or otherwise, that Hong Kong is giving way to our competitive neighbour as a financial centre, we should not lose confidence. Hong Kong is coming back. We will always maintain this place as a unique, outstanding financial centre in the world because of the unflinching support from the central government and our irreplaceable role in connecting the Mainland and the world. Because of the sophistication and deep liquidity of Hong Kong’s financial markets established over the years. And because of our strong competitiveness driven by the industry’s creativity, dexterity and commitment to excellence, and our attractiveness to talent from all over the world.

Enhancing financial centre status

Looking to the future, we could envisage a number of strategic directions that Hong Kong should pursue in strengthening our status as China’s international financial centre.

One pivotal aspect of this is to promote innovation and diversified development of our financial markets. Since 2018, we have implemented a series of reforms to turn Hong Kong into a deeper and broader fundraising platform. We have done much to facilitate the listing of emerging and innovative companies with weighted voting structures, secondary listing of China concept stocks, the listing of special purpose acquisition companies, etc. We have relaxed restrictions for investing in real estate investment trusts (REITs) and rolled out subsidy schemes to encourage the listing of REITs. Our bond market development has achieved remarkable success, with Hong Kong being Asia’s number one in terms of arrangement of international bonds. We will undertake more reforms and facilitation to help our financial markets thrive and prosper.

With China’s growing economic strength and renminbi increasingly used and accepted in trade, investment and payments, Hong Kong, as our country’s and the world’s offshore RMB centre, will play a more important role in RMB internationalisation. In contributing to this process, Hong Kong will seek to enhance offshore RMB liquidity, enrich our offshore RMB ecosystem by offering more diverse services and RMB-denominated and risk management tools, and upgrade our market infrastructure.

Green and sustainable finance is equally promising. Our prowess as an international financial centre is well poised to help in matching international capital and quality green projects. Green and sustainable debt issued in Hong Kong, including bonds and loans, quadrupled, year on year, reaching US$56.6 billion in 2021, coming first in Asia. In many ways, we are setting the benchmark for green finances: for instance, we were the first Asian government to issue 30-year and 20-year green bonds denominated in US dollars and Euro respectively. Less than a year ago, the Shenzhen Municipal People’s Government became the first Mainland local government to issue offshore RMB green bonds in Hong Kong.

We also want more multinational corporations to set up corporate treasury centres in Hong Kong to manage their intra-group financing. We have already introduced half tax rate concessions for corporate treasury activities. We are actively seeking to sign comprehensive double taxation agreements with more jurisdictions, to attract more Mainland and overseas enterprises to set up regional headquarters in Hong Kong.

As Asia’s prime asset and wealth management centre, Hong Kong is keen on grasping the opportunities ahead. We currently manage more than US$4.5 trillion of assets, with two-thirds coming from outside Hong Kong. We are also the largest hedge fund centre and the second largest private equity centre in Asia. More tax concessions are in the pipeline for attracting the establishment of family offices here.

Hong Kong will also step up our role as a risk management centre. Such schemes as Swap Connect and Mainland government bond futures would provide risk management tools for international investors accessing the Mainland financial markets through the Connect schemes. And for insurance, we have provided tax concessions for selected insurance business, such as marine and specialty insurance, as well as captive insurers set up in Hong Kong.

Embracing financial digital switch

Finally, fintech. COVID has spurred innovation in our fast-developing fintech sector and accelerated financial digital transformation, something which we must embrace.

The popularity of FPS (Faster Payment System) and electronic payment tools is rising. The number of FPS registrations reached 10.9 million at the end of this August, representing an increase of 23% or two million registrations compared to a year ago. And with the help of the Consumption Voucher Scheme, the numbers of consumer accounts and merchant accounts in electronic payment tools have jumped by more than eight million and 150,000 respectively.

I am also pleased to note that around 60% of the banks are already using artificial intelligence and machine learning in a wide range of areas. These include customer-facing services, internal processes and risk management. Many banking processes have also been digitalised, from account opening, payment and lending to product sales. There are now 24 conventional and virtual banks offering remote account-opening services, a significant jump from nine banks just three years ago.

We are pushing digital transformation of the banking industry to new frontiers. The Monetary Authority is building the Commercial Data Interchange (CDI) to enhance Hong Kong’s data infrastructure and spur innovation. CDI is now in the pilot launch stage, involving eight pairs of banks and data providers. One goal of CDI is to facilitate small to medium enterprises to gain access to more convenient financing services.

We also believe that central bank digital currencies (CBDCs) have great potential. On the wholesale front, the authority is working closely with the Bank for International Settlements Hong Kong Centre and three peer central banks on the mBridge project, exploring the use of CBDCs to expedite cross-boundary payments. Of the 15 potential use cases identified earlier, the use case of international trade settlement has entered pilot testing since Q3 this year.

On the retail CBDC front, the authority embarked on Project e-HKD in June last year, and has examined the prospect of issuing e-HKD from both technical and policy perspectives. Despite the well-developed retail payment landscape of Hong Kong, the authority has decided to start work to pave the way for the possible launch of e-HKD in the future, in light of the rapidly digitalising marketplace.

Ladies and gentlemen, for each of the strategic directions I mentioned above, we maintain high hopes. But we need a strong pool of talent to support those great endeavours.

Attracting talent, enterprises

COVID may have hampered our attraction and retention of talent. But as we will soon re-connect with the world fully, talent will return and we are determined to roll out measures to attract more to come, for Hong Kong is ultimately an ideal place for them. We have world-standard international school education. Our tax regime is highly competitive. We offer a rich cultural life, with numerous stellar performing arts groups and orchestras and, of course, world-class museums. Our scenic country parks are beautiful, stunning and refreshing. We have more than 200 Michelin restaurants with a rich diversity of cuisines. Life in Hong Kong is never boring at all!

And there are huge development opportunities that Hong Kong is given exclusive or priority access to by the central government, such as the Greater Bay Area development, the various Connect schemes and pilot projects in the continuing opening up of the Mainland financial market, the internationalisation of RMB and servicing the increasingly affluent Mainland population .

Rest assured, we will do more and roll out bold measures to attract talent and enterprises.

Three weeks from tomorrow, the Chief Executive will deliver his Policy Address - the first of the new-term Government. We are determined that it will mark the beginning of a new era, that it will take the Hong Kong economy, and community, to greater prosperity. That it will lead Hong Kong to prevail in trying times of fierce competition.

In realising that commitment, we count on the continuing support of the Hong Kong Institute of Bankers and your membership of more than 14,000 individuals and nearly 100 corporations. Each and every one of you is essential to the prosperous future there for Hong Kong. There for all of us.

Financial Secretary Paul Chan gave these remarks at the Hong Kong Institute of Bankers Annual Banking Conference 2022 on September 27.


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