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Following is the speech delivered by the Financial Secretary, Mr John C Tsang, at the HKIB Annual Banking Conference 2013 at the Hong Kong Convention and Exhibition Centre this morning (September 9):
Patrick (Fung), distinguished guests, ladies and gentlemen,
Good morning.
I am pleased to join you all this morning. I would like, first of all, to extend my congratulations to the Hong Kong Institute of Bankers (HKIB), which is celebrating its 50th anniversary this year. I wish to extend also my personal gratitude to all of you who have been involved with this august institution for the many achievements that you have made since 1963.
After receiving my invitation to this conference earlier, I did a little research and reminded myself of the progress of Hong Kong's banking industry over the past half-century. Allow me to share with you some telling facts and figures. Naturally, banking business is somewhat more sophisticated and complex now than they were back in the 1960s, but the data is still relevant to us today.
For example, as of the end of 1963, 87 banking licences were approved in Hong Kong, and only 48 of them were authorised to deal in foreign exchange. Today, we have more than 200 authorised institutions, of which 156 are licensed banks.
Total deposits in 1963 reached HK$5.4 billion while loans and advances to commerce and industry were just over HK$3.6 billion. Today we don't talk in terms of billions, we talk in terms of trillions. The total asset size of our banking sector exceeds HK$15 trillion. Customer deposits have reached HK$8.6 trillion, and total loans and advances exceed HK$6 trillion.
Back in 1963, offshore Renminbi banking would have been virtually inconceivable. Today, it represents one of the brightest opportunities for the banking industry, not just in Hong Kong but also around the world with Hong Kong as the premier offshore centre for Renminbi business and the focal point for Mainland China's currency liberalisation.
I am sure that some of you out there can think of some more interesting factoids that tell the story of Hong Kong's banking industry evolution, and I would love to hear from you.
No doubt the industry has transformed and grown rapidly in recent decades. At the same time, some important factors supporting the financial services sector have remained unchanged. Hong Kong's competitive advantages continue to be our effective rule of law, free flows of capital, free flows of information, and a well-regulated and highly liquid market.
These underline our success in gaining international acceptance, and in becoming a true international player in the global financial market. These are what I consider constants in the winning formula for our banking sector and for Hong Kong. This, I can assure you, will not change.
In terms of a new winning formula, we must combine our tried and trusted constants with the variables of 21st century global finance. Given our externally oriented economy, Hong Kong is not immune to global shocks, economic downturns, and risks threatening financial stability.
The external environment remains challenging, and the global economy is still burdened by uncertainty, especially in the traditional advanced economies.
Recent heightened expectation of a tapering of bond purchases by the US Fed has prompted market volatility. This may indicate that their exit strategy from quantitative easing policies may not necessarily run smoothly. There are still lingering uncertainties concerning the Euro debt situation and the imbalances in some emerging markets. Abe's three arrows have yet to show sustained impetus to Japan's revival. Geopolitics is another variable that has impacted hugely on financial markets since the turn of the century. The ongoing crisis in Syria is the most recent example while general instability in the oil-rich Middle East continues to affect energy prices and broader market sentiment.
These were some of the topics of interest that were discussed at the G20 Summit in St Petersburg last week.
The banking industry depends first and foremost on trust and confidence. Today, almost five years after the collapse of US investment bank Lehman Brothers, trust and confidence is still slowly being restored to the financial sector.
Fortunately for us in Hong Kong, we are on firm ground in the trust and confidence department. Our city is known for its banking expertise and experience. The Hong Kong Monetary Authority (HKMA) works with the industry to monitor our banks' management of liquidity and credit risks, funding strategy, mortgage lending, Mainland-related business, and other important supervisory areas.
This year, we have implemented in Hong Kong the first phase of Basel III capital standards, and the associated disclosure requirements. Locally incorporated banks have demonstrated strong capital adequacy ratios, averaging 16.6 per cent, well above the international minimum requirement of 8 per cent. This reinforces the strength of our banking sector.
We are also committed to implementing G20 commitments on over-the-counter (OTC) derivative regulatory reform. The Government introduced an amendment bill into the legislature in July this year to impose a mandatory obligation on reporting, clearing and trading of specified over-the-counter derivative transactions. In the interim period, the HKMA requires licensed banks to report specified OTC derivative transactions to the trade depository it has set up since August.
While Hong Kong's credit metrics will continue to be supported by our high-income economy, we must be vigilant to any possible deterioration of the operating environment. The HKMA is watching this carefully, and has taken a series of prudential measures to safeguard stability in the Hong Kong banking sector.
Banks are expected to uphold their credit underwriting standards in all circumstances, and to ensure that sufficient capital and liquidity are maintained to support their business growth in a stable and sustainable manner. This firm regulatory insistence is necessary for managing systemic risks, and for creating a safer and healthier banking system. In a nutshell, the HKMA has an important part to play in the new winning formula for banking and financial services development.
To ensure that Hong Kong remains a trusted centre for financial transactions, we must not lose sight of the international concern on money laundering activities.
We have in place a set of vigorous due diligence and record-keeping requirements under our anti-money laundering legislation in Hong Kong. It should be enforced and implemented by financial institutions to prevent suspicious attempts to launder money or finance terrorism through our banking system.
The global financial crisis has clearly revealed that market sentiment is a fragile thing that can easily be tarnished by one or two cases of bank failures or mis-governance. I believe that our financial market regulatory reforms, whether on the prudential or conduct side, are vital for our continued success in attracting both individual and institutional investors to put their money in our banks and in our market.
There have been suggestions from time to time that the Hong Kong market is over-regulated. There are concerns that some of the new regulatory requirements would bring about compliance challenges and additional expenditure. I can assure you, however, that we are always consciously mindful of striking a proper balance between providing the right level of protection to investors and imposing the right dosage of compliance requirements to practitioners.
As a truly international market place, we must maintain, and in fact constantly enhance, the quality of our market with measures that would incentivise market innovations and upgrade our regime in light of evolving challenges in the international arena. There is no substitute for strong resolve and collective hard work. We must work hand in hand with market participants, and it is only when we are able to uphold market discipline fearlessly, providing predictability as well as consistency, that we earn both favour and respect from the international business community.
Of course, in addition to upholding trust and confidence in our financial sector, our new winning formula contains new ground and fresh business opportunities that will place our economy and financial sector on a stronger, more sustainable and more balanced growth path.
In particular, as China's global financial centre, Hong Kong has a key role to play in the internationalisation of the Renminbi. With open capital markets, transparent regulation and international connectivity, our city is the Central Government's preferred testing ground for currency liberalisation, and our banks do play a significant role in the international offshore Renminbi business.
Since 2004, when the first phase of offshore Renminbi banking services was launched in Hong Kong, the scope of our Renminbi business has expanded and diversified rapidly, notably with the introduction of Renminbi bond issuance in 2007 and offshore Renminbi trade settlement in 2009.
More opportunities continue to knock at our door. In March this year, Mainland regulators announced the revised RQFII (Renminbi Qualified Foreign Institutional Investor) rules to include Hong Kong subsidiaries of Mainland commercial banks and insurance companies, as well as financial institutions which are registered and have major operations in Hong Kong. The investment restrictions of RQFII funds have also been relaxed to allow institutions to design the types of products in accordance with market conditions.
I am encouraged by the announcement in June by the Ministry of Finance regarding its issuance plan of Renminbi sovereign bonds totalling RMB23 billion in Hong Kong this year.
Also, in June the Treasury Markets Association of Hong Kong launched the CNH Hong Kong Interbank Offered Rate fixing. This supports the growth of the Renminbi market by providing a benchmark for the pricing of loan facilities. It also facilitates the development of a variety of Renminbi interest rate products.
In addition, more overseas banks are using Renminbi correspondent banking accounts provided by two banks in Hong Kong, with more than 1,600 such accounts opened at present, up geometrically from only 180 in 2010. At the same time, more than 200 banks now participate in the Renminbi clearing platform in Hong Kong. Over 180 of these represent branches and subsidiaries of foreign banks and overseas presence of Mainland banks.
All this activity gives banks in Hong Kong a foot-in-the-door advantage, a first mover advantage, in the process of Renminbi internationalisation.
On a separate front, the Mainland and Hong Kong CEPA (Closer Economic Partnership Arrangement) gives WTO (World Trade Organization) plus concessionary advantages to Hong Kong service providers, including financial services. Just last month, I signed the 10th supplement to CEPA together with Vice Minister of Commerce Gao Yan.
Supplement X to CEPA provides for a series of new measures to enhance cross-boundary economic and trade co-operation. These include allowing qualified Hong Kong-funded financial institutions, including banks in Hong Kong, to set up one full-licensed joint venture securities company in Shanghai, Guangdong Province and Shenzhen in accordance with relevant Mainland requirements.
Supplement X also allows qualified Hong Kong-funded banks and financial institutions to set up joint venture fund management companies on the Mainland.
I encourage our banking sector to take full advantage of these opportunities that are exclusive to Hong Kong.
Turning to one of our key income earning areas - fund and asset management business.
According to a recent SFC (Securities and Futures Commission) survey, combined fund management business in Hong Kong reached a record high of HK$12.6 trillion in 2012, representing year-on-year growth of almost 40 per cent.
We must continue to consolidate Hong Kong's leading role as the asset management centre in the Asia-Pacific region.
Before the summer break, we secured the passage of two important bills by the legislature, one to improve the Islamic finance platform and the other to update our trust laws.
For Islamic finance, we now have a competitive tax framework for Islamic bonds, or sukuk. Sukuk now enjoys equal treatment to conventional bonds in Hong Kong in terms of tax and stamp duty. It is an important step forward in strengthening our Islamic finance business in Hong Kong.
Also, the trust law amendments will offer a modern and accessible regulatory framework for trusts governed by Hong Kong law. It will sharpen the efficiency as well as competitiveness of our trust services industry.
In addition, the regulators are facilitating the private wealth management industry to set up a Private Wealth Management Association and to devise an enhanced competency framework for practitioners specialising in this area. I look forward to the establishment of this Association because it will help strengthen the competitiveness of our private wealth management industry.
Ladies and gentlemen, Hong Kong's banking industry has grown by leaps and bounds over the past half century. The Hong Kong Institute of Bankers has been part of this success story every step of the way. In particular, the Institute has helped maintain our city's good reputation in terms of trust and confidence. More than ever, high-quality, well-trained financial talent must be part of the new winning formula. The Government and financial regulators will continue to work with the Institute and its members to maintain this competitive edge.
Thank you for this opportunity for me to meet with you all today and to talk about some of the opportunities for our banking sector and financial services industry.
I wish you all a fruitful Annual Banking Conference, and I wish also the Hong Kong Institute of Bankers a prosperous 50th anniversary.
Thank you very much and have a good day.
Ends/Monday, September 9, 2013
Issued at HKT 12:03
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