Briefing by the Financial Secretary on Hong Kong’s latest overall economic situation
Impact of the proposed National Security Law
Mr CHAN Chun-ying noted that FS, the Secretary for Financial Services and the Treasury, and the Chief Executive of the Hong Kong Monetary Authority (“HKMA”) had dispelled rumours relating to possible sanctions by the US Government in light of the proposed NSL, in particular the possible impact on the Linked Exchange Rate System (“LERS”) and the free flow of capital. He enquired about the Administration’s further actions to refute such rumours.
As regards capital and foreign exchange controls, FS highlighted to Members that Article 112 of the Basic Law stipulated that no foreign exchange control policies shall be applied in the Hong Kong Special Administrative Region, the Hong Kong dollar shall be freely convertible, markets for foreign exchange, gold, securities, futures and the like shall continue, and the free flow of capital within, into and out of Hong Kong shall be safeguarded. That was the case and would continue to remain the case in Hong Kong. Indeed, HKMA and the banking sector also did not observe any noticeable capital outflow from Hong Kong recently.
As for LERS, FS said that it was introduced in Hong Kong in 1983 while the US-Hong Kong Policy Act was enacted by the US Congress in 1992. Therefore, LERS had no correlation with the US-Hong Kong Policy Act, and the continuous implementation of LERS in Hong Kong was not subject to US’ consent. LERS had proven to be a strong anchor amid countless challenges over time, and the mechanism was underpinned by Hong Kong’s strong foreign reserves position of over US$440 billion, which was more than two times of Hong Kong’s monetary base. Moreover, the Hong Kong banking system remained healthy and strong, with the capital adequacy ratio and liquidity ratio stood at about 20% and 160% respectively vis-à-vis the global standard of 8% and requirement of 100%. Also the classified loan ratio stayed at a low level of 0.6% which reflected a very high quality of the banking asset. The total level of deposits in the Hong Kong banking system was over HK$13 trillion, among which close to HK$7 trillion was Hong Kong dollar deposits. Meanwhile, Hong Kong dollar loans and advances to customers amounted to some HK$6.1 trillion. FS further stressed that the Administration and financial regulators had been closely monitoring the operation in financial markets (including reviewing and analyzing the daily transactions and short-selling positions of stocks, futures, derivatives and options, as well as transactions in foreign exchange) and had not observed any irregularities up to the moment. Furthermore, the financial regulators would endeavour to ensure the dissemination of accurate information by banks and brokerage firms, and would continue to take regular and special supervisory checks on their regulatees. In addition, the HKMA had put in place a swap arrangement with the People’s Bank of China (“PBoC”), which was a one-way arrangement allowing HKMA to swap in US dollar from PBoC using Hong Kong dollar if any such need arouse. With the support of the Central Government and Hong Kong’s own financial resources, the Administration was determined and had the confidence and capability to defend LERS.
Pointing out that the revised real GDP growth forecast of -4% to -7% for 2020 was made in April 2020 and had not taken into account the effect of possible sanctions by the US Government arising from the proposed NSL, Mr CHAN Chun-ying asked if the Administration would consider reviewing the economic forecasts for 2020.
FS advised that when updating the real GDP growth forecast at end of April 2020, the Administration had already taken into consideration the uncertainties surrounding the development of the COVID-19 pandemic as well as the austere global economic situation. The Administration considered it prudent to maintain the current forecast of -4% to -7% real GDP growth rate for 2020 in the meantime, but would keep in view the latest development on the proposed NSL and actions that might be taken by the US Government.
Measures to revive the local economy and support enterprises to combat the coronavirus disease-2019 pandemic
Mr CHAN Chun-ying enquired if the Administration would consider implementing an economic reform making reference to the reform in South Korea after the financial tsunami in 2008 in order to create more employment opportunities for local professionals and workers. FS responded that the Administration would continue to promote and facilitate diversification of the Hong Kong economy.
Development of Financial Technologies in Hong Kong
Challenges in the development of Fintech
Referring to the statement made by the Secretary of State of the US to the US Congress on 27 May 2020 that Hong Kong did not continue to warrant treatment under the US laws in the same manner as the laws were applied to Hong Kong before July 1997 because Hong Kong no longer maintained a high degree of autonomy from China, Mr CHAN Chun-ying was concerned that Hong Kong would face difficulties in the import of high-tech products from the US vital for Fintech development. He enquired whether the Administration had assessed if Hong Kong could obtain suitable substitutes from other jurisdictions. Ir Dr LO Wai-kwok also expressed concern about the potential adverse impacts arising from the recent tension between China and the US on the development of Fintech in Hong Kong, and enquired whether the Administration had sought the industry’s views on the matter.
DS(FS) responded that the Administration would closely monitor the development on the international trade front. Generally speaking, Fintech companies and start-ups tended to apply existing technologies like artificial intelligence and blockchain in developing their products and solutions. As existing technologies should have multiple sources, it was not envisaged that Hong Kong’s Fintech development would be significantly affected as a result. He added that Fintech development was mainly driven by market demand, and substantial Fintech adoption was already witnessed in the private sector in recent years.
Promoting Fintech development in Hong Kong
Referring to PBoC’s plan of launching the Digital Currency Electronic Payment (“DCEP”) (a type of Central Bank Digital Currency (“CBDC”)), Mr CHAN Chun-ying enquired about the progress of developing CBDC in Hong Kong.
Executive Director (Financial Infrastructure), Hong Kong Monetary Authority responded that DCEP, which was to be introduced at the retail level in the Mainland, was still at a trial stage. HKMA would focus on the application of CBDC for cross-border payments, and was conducting Project Inthanon-LionRock with the Bank of Thailand in taking forward the development.