Speech at Panel on Financial Affairs

Macroeconomic conditions

Mr CHAN Chun-ying pointed out that while the US interest rate normalisation and tax reform might have negative impact on the local asset prices, the persistently weak US dollar to which the Hong Kong dollar was pegged might support the local asset prices and exert upward pressure on inflation. Against the above background, he sought the Administration’s view on the movement in asset prices and inflation rate of Hong Kong in the coming year. Mr Holden CHOW also expressed concern on the US tax reform, in particular its impact on international capital flows.

FS said that the global economy was expected to maintain moderate expansion in the near term. The Government would monitor the global economic developments and stay vigilant to various uncertainties in the external environment. In addition, the Government would continue to enhance Hong Kong’s competitiveness through diversifying the economy. On the development of the innovation and technology industries, the Government would focus on promoting four key areas where Hong Kong had strength, namely artificial intelligence, financial technologies, smart city and biochemical technologies. The Government would also promote the use of innovation and technology in enhancing the competitiveness of various industries. Moreover, Hong Kong would continue to leverage its unique advantages to capitalize on the opportunities in the Mainland economic development and opening up, in particular those arising from the Belt and Road Initiative, the development of the Guangdong-Hong Kong-Macao Bay Area (“Bay Area”) and various initiatives of the National 13th Five-Year Plan.

On the normalization of the US interest rate, FS said that the five US rate hikes since December 2015 had cumulated to an increase of 125 basis points. The Federal Reserve and the financial markets generally expected that the US would further increase interest rates by three times in 2018. FS cautioned that under the Linked Exchange Rate System, the local interest rates would eventually rise and this might impact on the local asset market. He added that the US tax reform might trigger shifts in global capital flows and responses from other major economies in the form of changes in their own tax systems. The Government would closely monitor these developments and their impacts on the global economy as well as the Hong Kong economy, and would consider appropriate policies and measures where necessary.


Managing the public finance

Mr CHAN Chun-ying noted that the Government would strive to achieve fiscal balance over a period of time instead of every year. He also noted that as of November 2017, the fiscal reserves were equivalent to 25 months of government expenditure. He enquired about the principles adopted by the Government in managing public finance and whether FS would consider setting a target on the level of the fiscal reserves so that the Government could make use of the annual surplus in a more flexible manner.

FS said that it would be more practicable to achieve fiscal balance over a period of time (e.g. an economic cycle) and the Government also needed to maintain sufficient reserves for implementing countercyclical measures during an economic downturn. As regards the fiscal reserves, FS said that the Government would make use of the annual surplus flexibly according to needs and the economic condition, and did not intend to set a target level. FS cautioned that setting a target level on the fiscal reserves arbitrarily might also attract criticism from international credit rating agencies.


Tax related issues

Mr CHAN Chun-ying opined that the Administration should consider introducing vacant residential property tax in Hong Kong in order to widen the tax base and raise government revenue.

FS advised that one of the priorities of this Government was to introduce tax initiatives to promote economic development of Hong Kong. Agreeing that the current tax base was narrow, the Government would examine the pros and cons of introducing vacant residential property tax and capital gains tax on properties very carefully.


Use of budget surplus

In view of the abundant fiscal surpluses available, Mr CHAN Chun-ying suggested that the Administration should consider establishing a sovereign fund for making diversified and long-term investments with a view to providing the Government with more resources and room to cope with the future challenges.

FS said that part of the fiscal reserves was currently placed with the Long-Term Growth Portfolio (“LTGP”) of the Exchange Fund managed by HKMA as long-term investments. The sum of such long-term investments had reached more than HK$100 billion, and the Government was exploring with HKMA the feasibility of further increasing the amount of such long-term investments gradually having regard to relevant factors including market conditions and investment opportunities. He added that the investment return of LTGP had been satisfactory, with annualized internal rate of return exceeding 10% since inception.