Monday, 26 October 2015

Economy to grow about 3%

Financial Secretary John Tsang

As an externally oriented economy, we are highly susceptible to global uncertainties. And with that in mind, I am forecasting a modest growth of Hong Kong's economy in the range of 2% to 3% this year.

 

In spite of all the recent turmoil in global financial markets, the local markets are continuing to operate in a smooth and orderly fashion. I take comfort in that, and have not seen any liquidity problem in our banking system. For that, we can thank the virtues of our regulatory framework, built on the rule of law and benchmarked against the highest international standards.

 

On Basel III, the rules made under the Banking Ordinance providing for capital buffers, liquidity standards and disclosure requirements, have begun operation this year. I'm glad to see that our banking system remains strongly capitalised, with a total ratio of 17.5% as of June this year, doubling minimum international requirements.

 

Although the case for stricter banking regulation is well argued, especially during turbulent times, I fully understand that it will add to the operating costs of banks, and is naturally a concern to you all. The Government will seek to facilitate the market in this regard as far as possible.

 

For banks' compliance with Basel III's capital requirements, we are preparing legislative amendments that will clarify the tax treatment of regulatory capital securities. Capital instruments complying with Basel III requirements, that is to say, Additional Tier 1 and Tier 2 instruments, will be provided with debt-like treatment for profits-tax assessment under the Inland Revenue Ordinance.

 

Accordingly, related transactions will be exempt from stamp duty. I hope this greater tax certainty will lessen your compliance burden. I count on the Association's support when the relevant legislative proposals are introduced into the Legislative Council later on in this legislative session.

 

We are also planning to introduce a bill next month to enhance the Deposit Protection Scheme, providing better protection for our depositors. Our intent is to adopt a gross payout approach in determining compensation in case the Scheme is triggered; this will achieve faster, and more effective, payouts.

 

While we have, fortunately, never needed to trigger the scheme, this legislative proposal should help to boost the confidence of depositors and further enhance the stability of the banking sector. For banks, there is the prospect of saving IT and compliance costs, because data and other relevant requirements will be streamlined under the gross approach.

 

Anti-money laundering (AML) is no less vital to the stability and integrity of our financial system. AML and KYC ("know your customers") are now buzzwords in your daily operations. Indeed, our AML laws and relevant regulatory framework follow the requirements of FATF, the Financial Action Task Force.

 

I can imagine the effort that is required in internal risk assessments, due diligence and risk-mitigation controls. But since banks are the first line of defence against the illicit flow of funds, I look to you to ensure compliance with AML requirements, including those covering cross-border transactions. There is no place for dirty money in Hong Kong. Your vigilance is of paramount importance in protecting Hong Kong's reputation as a well-regulated and clean financial centre.

 

We are working hard in meeting other evolving global regulatory requirements as well, including AEOI, the automatic exchange of information; BEPS, Base Erosion and Profit Shifting Project; and the regulatory framework for the over-the-counter (OTC) derivatives. In addition, we are preparing a legislative proposal to establish a resolution regime for Hong Kong's financial institutions.

 

These regulatory measures are not meant to stifle the market. They constitute the essential fortress that protects the market, enabling it to rise and thrive.

 

Beyond vigilance and caution, Hong Kong's winning formula includes our well-demonstrated entrepreneurial spirit, well-honed business acumen, as well as the sheer audacity that powered our ventures into so many new markets before. The business community of Hong Kong always knows exactly where the opportunities are.

 

The visionary and ambitious concepts of the Silk Road Economic Belt and the 21st Century Maritime Silk Road, spearheaded by President Xi, will present the world, and I think Hong Kong economy, with an abundance of business opportunities in an unprecedented way. Indeed, I believe the initiative has the potential to become the world economy's driving force in this 21st century.

 

And we, Hong Kong, are in a privileged position to tap these opportunities. Spearheaded by our "one country, two systems" framework and unparalleled proximity to and knowledge of the Mainland, the banking sector can both contribute to, and benefit from, the development of the "Belt & Road" initiative.

 

The "Belt & Road" initiative was created to expand transcontinental connectivity, to promote economic, political and cultural co-operation from Asia through Africa and on to Europe. And we can expect exuberant demand in infrastructural investment as well as the wholesale upgrading of connections among the 60-plus markets along the two economic corridors.

 

Hong Kong indeed has the expertise, the experience and the connections to be the fund-raising hub and professional services go-to intermediary for the "Belt & Road" initiative.

 

As China's international financial centre and the world's major financial capital, we can do it all, providing the full range of services from public offerings and loan syndication to private equity funds and fund-raising through Islamic finance, for example.

 

And as more and more multinational corporations and Mainland enterprises see the benefits of centralising their treasury functions both onshore and offshore, Hong Kong is well placed to handle it for them. We have, after all, a mature market infrastructure and a wealth of professional talent.

 

In this regard, we are working to provide greater incentives for multinationals and Mainland companies looking to establish corporate treasury centres here in Hong Kong. That would include interest deduction as well as tax concessions.

 

At the same time, the Renminbi will continue to play a crucial role in Hong Kong. We are, and we seek to remain, the world's largest offshore Renminbi business centre.

 

While the recent changes in the Renminbi exchange rate regime may have raised some eyebrows, the Mainland's commitment to sustain the structural reform, to internationalise the currency and to open up the capital markets remains staunch and unswerving.

 

There have been some notable breakthroughs this year. The People's Bank of China, for example, allowed offshore banks to conduct repo transactions in China's interbank bond market, expanded the range of foreign-exchange transactions that can be done onshore for Renminbi position squaring, and relaxed the rules on two-way Renminbi cash pooling for multinationals. These measures can only expand the cross-border circulation and use of the Renminbi.

 

And that's not all. The Hong Kong-Shanghai Stock Connect, which was launched last November, and the Mutual Recognition of Funds Scheme, in effect launched since July this year, are unprecedented. These and other initiatives open up additional channels for the use of Renminbi funds. They also present the industry with significant opportunities to develop a wider range of products and services.

 

Technology is another game changer. You are experiencing that first-hand, I am sure. Internet banking and mobile banking are post-millennium products and they are fundamentally reshaping consumer behaviour and the business landscape.

 

The further application of advanced technological innovations in the financial services industry has helped foster new modes of financial services, and, in many ways, enhanced the operational efficiency of financial institutions.

 

Confronting tomorrow's challenges with Fintech and other new technologies, the Government's focus seeks to nurture an environment that can accommodate innovation, in a risk-controlled way. In short, we seek to maximise common industry good while ensuring the protection of consumers.

 

To ensure Fintech's development, I have set up a steering group on Fintech in April to look into how best to foster a Fintech-friendly environment in facilitating the operation of our financial services industry. The Steering Group is collaborating with regulatory authorities, and tapping experts from the banking and other financial services sectors, as well as academia and our R&D institutions.

 

Meanwhile, the Bill to prescribe a licensing and supervisory framework for stored-value facilities and retail payment systems will be put to vote in the Legislative Council soon. Once it's up and running, I look forward to seeing more innovative payment solutions, bringing convenience to consumers while stimulating e-commerce, which will no doubt become the business modality of choice for the future.

 

Ladies and gentlemen, all the exciting opportunities and innovations I have mentioned just now would not be captured or materialised in a fruitful manner without the right people, the right talents. People like yourselves. People who possess the competence and, at the same time, the right values.

 

Banks must cultivate a culture that emphasises customer interests in the face of profit maximisation and excessive risk-taking. And it is crucial that these values are inculcated from top management down to the front lines.

 

In this regard, I welcome the Hong Kong Monetary Authority's initiative to commission a study with experts on the corporate governance of banks. Their job is to look into what independent non-executive directors of banks can do to help nurture good governance and culture in banks.

 

The launch of the Enhanced Competency Framework has made a good start in strengthening the professional competence of industry practitioners. And I am delighted to see another such framework, to be launched in 2016, focused on anti-financial crime and compliance.

 

Besides quality, our talent pool cries out for quantity as well. We need a bigger financial talent pool, a sustainable one covering not only front-line positions but also intermediary and back office roles as well. In my Budget earlier this year, I announced the allocatation of $100 million to launch a three-year pilot programme. That initiative will help expand our talent pool in the financial services industry. It will also improve professional standards in the asset and wealth management sector as well as the insurance industry.

 

The programme will feature career talks and internship placements for university students, enabling them to better understand the work and the prospects of various industry roles. I look forward to your Association's continuing support in building another great generation of talent for our financial services industry. For Hong Kong.

 

I am confident that working together we can create the optimal environment to help you manage today's challenges while seizing the promises of tomorrow.

 

Financial Secretary John Tsang gave these remarks at the Hong Kong Association of Banks luncheon on October 26.

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