Briefing on the work of Hong Kong Monetary Authority
Banking stability and supervision
Mr CHAN Chun-ying noted that while the classified loan ratio (“CLR”) remained low at 0.81% in 2016, the figure might not reflect the asset quality of the banking industry as many loans in 2016 involved carry trade of Renminbi (“RMB”) which were of relatively high asset quality. He sought HKMA’s views on the trend of CLR in 2017 given that most RMB carry trade in Hong Kong should have already unwound in 2016.
DCE(B)/HKMA advised that CLR had remained at low levels in the past few years while HKMA had required banks to enhance their management of credit risks. He said that while it was difficult to predict the movement of CLR, HKMA had been monitoring changes in special mention loans (“SML”) which could serve as a leading indicator of CLR. He pointed out that there was no significant increase in SML in recent years.
Mr CHAN Chun-ying enquired whether HKMA would consider relaxing regulatory requirements on banks in the light of likely measures to be introduced by the new US administration. CE/HKMA advised that the details of measures to be implemented by the new US administration remained unknown. He further explained that the regulatory regimes for the financial services sector in the US and Hong Kong were different. In Hong Kong, HKMA adopted a risk-based approach (“RBA”) in banking supervision. As some regulatory requirements of the US were not applicable to Hong Kong, it was envisaged that the direct impact on Hong Kong’s regulatory regime arising from any relaxation of the US banking regulation would be limited. – 10 – Action Provision of basic banking services
The Exchange Fund
Mr CHAN Chun-ying enquired about measures to enhance the investment performance of EF, including whether HKMA would consider increasing EF’s investment in alternative assets held under the Long-Term Growth Portfolio (“LTGP”), which enjoyed a relatively high annualized internal rate of return in recent years.
CE/HKMA responded that the investment environment had been heavily distorted by the ultra-low interest rates and quantitative easing by some major economies in recent years. The process of US interest rate normalisation had begun and would affect capital flows and asset markets. When the US interest rates returned to more normal levels, interest income on bonds and cash would be higher, which should be a positive factor to EF’s investment return in the medium term. In terms of investment diversification, he said that given the statutory objective of EF to maintain monetary and financial stability, it was important for EF’s investment in alternative assets to increase in a measured manner because these assets were of lower liquidity. In the past few years, as part of its efforts in investment diversification, HKMA had been steadily increasing its investment in alternative assets under LTGP, with the market value of LTGP assets amounting to more than HK$170 billion and the outstanding investment commitments over HK$130 billion at the end of 2016. Going forward, HKMA would continue to expand investments under LTGP, especially given the placement of the Future Fund.
Briefing by the Secretary for Financial Services and the Treasury on the Chief Executive’s 2017 Policy Address
Financial Services Development Council and development of the financial services industry
Mr CHAN Chun-ying enquired about the resources to be provided to the Financial Services Development Council (“FSDC”), including whether the Administration would resubmit its proposal to the Legislative Council (“LegCo”) to create a non-civil service position of Executive Director in FSDC (“the staffing proposal”). He also sought details of the work in promoting and enhancing the development of Hong Kong’s offshore RMB business, and the progress in mutual recognition of funds with other jurisdictions.
SFST responded that the Government had all along been supportive of the work of FSDC. Although the Government had withdrawn the staffing proposal for the time being having regard to the views of some members of the Establishment Subcommittee, FSTB would continue to deploy its resources to support FSDC’s work. He added that FSDC would collaborate with the Hong Kong Trade Development Council (“HKTDC”) leveraging the latter’s solid promotional experience and extensive network in the Mainland and overseas with a view to organizing events and campaigns (e.g. road shows) to promote Hong Kong’s financial markets and financial services industry. As regards the development of Hong Kong’s offshore RMB business, SFST advised that while FSTB and HKMA would be responsible for formulating the relevant policy and enforcing the regulatory requirements, FSDC and HKTDC would help carry out relevant promotional and publicity activities. On the promotion of funds business, the relevant authorities would continue to seek to enter into agreements on mutual recognition of funds with other jurisdictions so as to broaden the market access of Hong Kong’s fund business.
Hong Kong’s participation in the Asian Infrastructure Investment Bank
Mr CHAN Chun-ying and Mr WU Chi-wai sought details of Hong Kong’s participation in AIIB, including the progress in joining and Hong Kong’s role in AIIB, whether Hong Kong could become the corporate treasury centre (“CTC”) of AIIB and whether dwindling in RMB liquidity pool in the recent months would have impacts on in Hong Kong’s role in AIIB. Mr WU further enquired about the Administration’s strategies in seeking AIIB’s agreement to set up its CTC and financing centre in Hong Kong in view of the keen competition faced by Hong Kong.
SFST responded that Hong Kong had been officially invited to join AIIB as a non-sovereign member. The admission process was in progress and was envisaged to be completed in the first half of 2017. The Government would continue to discuss with AIIB to seek its agreement to set up a sub-office in Hong Kong, as well as to leverage Hong Kong’s capital markets, the supply of asset management professionals and development of financial products to support the operation of AIIB in various aspects. While noting that Hong Kong faced keen competition in this regard, SFST considered that Hong Kong had a competitive edge owing to its proximity to the Mainland and strengths in the financial services sector. He added that the recent decline in Hong Kong’s offshore RMB liquidity pool would have little impact as the majority of AIIB’s lending was denominated in the US dollar.
Development in Fintech
Mr CHAN Chun-ying stressed that the Administration had to relax the existing regulatory requirements on entities and foster a conducive environment for fintech development. For instance, the Administration should attract overseas talents, provide tax incentives, affordable office premises and loans for fintech start-ups.
SFST said that the Government was mindful of the need to enhance human capital and foster a conducive environment for fintech development in Hong Kong. He pointed out that the Government had rolled out a number of measures to promote the development of fintech, and would continue to liaise with regulators and the financial services industry on the matter. To enable banks to conduct pilot trials of their new fintech solutions, HKMA had introduced FSS. Moreover, the Hong Kong Applied Science and Technology Research Institute had been commissioned to conduct a research on the subject of distributed ledger technology (i.e. blockchain). In addition, Cyberport had launched in 2016 its dedicated fintech co-working space, the Smart-Space FinTech, for fintech start-ups. As understood, a number of overseas fintech start-ups had started business in Hong Kong. SFST further remarked that many new fintech solutions were still at the “proof of concept” stage, and much more research would be required for such solutions before putting them into practical use. Nevertheless, the Government would share its experience with other jurisdictions as appropriate. 34. SFST supplemented that substantial progress had been made in the area of electronic payment. The Payment Systems and Stored Value Facilities Ordinance (Cap. 584) commenced full operation in November 2016 and HKMA had granted a number of store value facilities licences. HKMA would refine the regulatory regime as necessary. It was envisaged that further developments in electronic payment would help Hong Kong become a cashless society.
Budget of the Securities and Futures Commission for the financial year 2017-2018
Manpower strength and regulatory work of the Securities and Futures Commission
Mr CHAN Chun-ying noted that SFC’s budget included a provision for an annual pay adjustment of around 4.5% and sought justifications for the provision.
C/SFC explained that the pay adjustment rate of 4.5% was only an estimate and had been worked out with reference to the results of an externally conducted pay trend survey in the financial services sector. The actual rate of adjustment would be deliberated by SFC’s Remuneration Committee and then decided by the Board of SFC having regard to all relevant factors.
Cyber security of the Securities and Futures Commission
Mr CHAN Chun-ying enquired about SFC’s plan to increase resources for enhancing its cyber security. CEO/SFC said that SFC would increase expenditure on information and system services in 2017-2018 which would include upgrading software and implementing new measures to enhance system security. He added that SFC attached great importance to improving cyber security in the securities industry. Apart from organizing workshops for the industry, SFC was working on a proposal to introduce cyber security baseline requirements in the Code of Conduct .
Noting that SFC had ring-fenced $3,000 million for possible acquisition of office premises, Mr CHAN Chun-ying enquired whether SFC would need to seek the approval of LegCo for purchasing the office premises. The Chairman remarked that SFC should also consider acquiring office premises in non-prime locations.
C/SFC advised that SFC was a statutory body whose estimates of income and expenditure (i.e. the budget) required the approval from the Financial Secretary (“FS”) under the Securities and Futures Ordinance (Cap. 571) (“SFO”). In line with the existing practice, SFC would brief the Panel on Financial Affairs (“FA Panel”) on the proposed budget before FS’ approval. SFC’s decision to – 23 – Action acquire office premises would be reflected in its budget and LegCo Members could express views on the matter when FA Panel was briefed on SFC’s proposed budget. C/SFC assured members that SFC would carefully consider any acquisition of office premises bearing in mind cost-effectiveness, and would consider all options including non-prime locations.
Consultation on the proposed enhancements to the Stock Exchange of Hong Kong Limited’s decision-making and governance structure for listing regulation
Mr CHAN Chun-ying pointed out that SFC’s refined proposals after taking into account the views received during the consultation might still be controversial. He suggested that SFC should conduct another public consultation on the refined proposals. C/SFC responded that SFC intended to provide a preliminary summary of the views received at the FA Panel meeting in April 2017. SFC and HKEX required more time to study the submissions in detail and to formulate any revised proposals and map out the way forward.