Following is the speech by the Secretary for Financial Services and the Treasury, Mr Frederick Ma, on the Luncheon of Hong Kong Investment Funds Association today (April 30)(English only):
Maintain Our Edge - Hong Kong as a Leading Fund Management Centre in Asia
Dr Au, ladies and gentlemen,
Thank you very much for such a warm welcome. I am delighted to join all of you today. This is an excellent opportunity for me to see some old friends and contacts in the industry and of course I treasure the opportunity to exchange views with you, because you are a very important group of players in the financial services industry. Dr Au mentioned about the securitisation bond. Quite frankly, without the support from some of you, I am sure the launch would not be as successful as it was. I'd also like to take this opportunity to thank all my colleagues for putting the deal together and I can assure you that we have spent many long hours in the office to put the deal together particularly as you can imagine, we have to deal with an army of lawyers. I know there are some lawyers in this room so I just mention it. It was quite an interesting exercise because this is the first securitisation deal so there were a lot of legal issues to deal with but we are grateful to our Department of Justice colleagues as well as the Counsel representing the banks. We were able to work out all the legal impediments and launch the deal successfully to the institutional investors as well as the retail investors.
Back to the subject of fund management, my topic today is "Maintain our edge - Hong Kong as a leading fund management centre in Asia". As we all know, Hong Kong is the leading fund management centre in Asia although some countries would like to compete for that status.
I believe Hong Kong is doing well in more than just maintaining our position as a leading fund management centre in Asia. The aggregate net asset value of all authorised unit trusts and mutual funds by the end of last year amounted to over $4,100 billion. This is a rise of 56% compared to 2002. Funds authorised in Hong Kong continue to show a strong international flavour, as we continue to attract overseas funds for management in Hong Kong. We also see an increasing number of international fund houses landing here. The Mainland's Social Security Fund has been approved to invest outside the Mainland. I would not be surprised that other organisations such as insurance companies will follow the same footstep. These would mean more opportunities for the fund managers.
Looking into the future, I would like to speak on two aspects that are key to maintaining our position as a leading fund management centre in Asia: market development and market confidence.
I am sure that you will agree with me that the prospects for fund management and asset management services in Asia are tremendous. We have witnessed the impact of the steady growth of the Mainland economy and the market recovery in other Asian countries. The demand for asset management is only set to grow in the long run. Hence in his Policy Address this January, the Chief Executive emphasised that Hong Kong is well placed to further develop as a world class asset management centre. The government is looking into various ways to maintain our edge and capture the opportunities ahead. As fund managers, you are very well qualified to share your insights with us on how we can press ahead on this front.
One important initiative of the government is to increase the breadth and depth of our bond market. To this end, I am pleased that we have recently offered the first government securitisation bond in Hong Kong. It is the first securitisation bond offering available to retail investors. As we all know the result by today, you know the market response is very favourable, very positive. Various publicity programmes have been launched to enhance investors' awareness of the nature of bond products as a low-risk, stable yield investment option, and of both the risks and rewards involved. While it would take some time for the bond market to mature, the recent government issuance is an important step to promote understanding and general acceptance of bonds as a component of a well-diversified investment portfolio.
The government will continue to lead by example. However, I hope more private sector corporations will also consider issuing more Hong Kong dollar bonds in capital financing. The process of securitisation in government and public sector corporations also needs your support, by providing quality intermediary service, educating the public on the nature of the products, and perhaps buying bonds to enrich your portfolios.
I would like to move on to another key aspect - market confidence, which is an important factor for market development.
Hong Kong has so far escaped the major scandals shaking other world capital markets, be it relating to equity research or the mutual fund market timing issues. There is no room for complacency however, and you are keenly aware that market sentiment, locally and internationally, is fragile. Just one or two cases of fund mismanagement scandal could shake investor confidence, which would take years to recover.
Quality regulation is one of the keys to maintaining market confidence. The Hong Kong Government's philosophy has always been that regulation should be effective and enforced fairly, but at the same time not excessive in order to facilitate market development. This balance is easier said than done, but having a shared purpose is always a good start. The Securities and Futures Commission (SFC) follows this general policy in its regulation of intermediaries and products. For instance, the SFC has issued a consultation on the regulatory framework for addressing analysts' conflict of interests, which has taken into account concerns of the local industry. I welcome this effort, which should help strengthen market confidence in the conduct of our intermediaries in the securities and fund management industry.
On the regulation of products, the SFC also reviews and updates its codes and guidelines regularly in order to keep pace with market development. The regulatory balance is again a fine art to master - hedge funds provide a good example. Hedge funds are becoming increasingly popular in Hong Kong and the region. There is an impressive growth record - up to March, 2004, a total of 10 hedge funds have been authorised by the SFC, compared to four a year ago. No doubt hedge funds have a legitimate place in the Hong Kong market as an investment option for investors. In fact, we are one of the few jurisdictions in the region allowing offering of hedge funds to retail investors. At the same time, as regulator the SFC has to ensure that adequate structural safeguards and proper disclosure mechanisms are in place so that investors understand the nature of the products and the risks before they make their investment decisions. To this end, I understand the SFC will review the Hedge Fund Guidelines issued two years ago in order to keep pace with the latest development of this specialised investment product.
On the part of the government, we will continue to strike a reasonable balance between the need to promote market development and the need to protect investors, in particular small investors. It is equally important to recognise that the prime responsibility for fit and proper conduct lies with those who do the business, not those who regulate. Fund managers can also help promote good corporate governance through exercising in due diligence their proxy voting duty in protecting minority shareholders and preserving share value. In the end, we count on you in upholding market quality. I was advised by the SFC that the commission has kept a close watch of the developments relating to mutual fund trading malpractice internationally and has on a preliminary basis sought information from the industry as well as global regulatory partners for a better assessment of the local implications. I hope you will continue to work with the commission in enhancing the quality of regulation and confidence in our market, so as to maintain Hong Kong as a leading fund management centre in Asia.
I have been warned never to end a speech talking about regulation, as I may not receive any more invitations to speak in future. So I'd better speak on something that is not regulatory related.
As you know, I wear two hats as the Secretary for Financial Services and the Treasury. One is to promote the financial services sector, another to keep tight hold of the government's purse strings. Wearing these two hats is another fine art to perfect, particularly under a fiscal environment where the government has little scope to offer any cuts on existing revenue in order to encourage further development of our financial markets. Sorry if I seem to disappoint you at this point.
But I believe Hong Kong already has a good story to tell - a simple, stable and already very low tax regime, with different concessions offered over the years to help the securities and fund management industry, for instance by exempting certain mutual funds, unit trusts or similar collective investment schemes from profits tax. I would like to take this opportunity to update you on two initiatives that we are pursuing.
First, the government has been discussing with market participants the detailed arrangements and the necessary legislative amendments to exempt offshore funds from exposure to profits tax. Here I wish to thank many of you for tendering us your advice, which we are now studying carefully. Second, the Financial Secretary has stated in this year's Budget that we will review the levy of estate duty. We will study how best an adjustment of estate duty should be effected in order to attract funds from the rest of the world. We welcome views from the industry on these proposals, as well as on other initiatives that can further strengthen our fund management industry. The government has an open mind, though you will appreciate we have a fine balancing act in all fiscal initiatives.
Ladies and gentlemen, I think I have spoken enough about the importance of market development and market confidence to our fund management industry, and that the government is committed to listen and to facilitate. I am most happy to take questions. Thank you very much.
Ends/Friday, April 30, 2004