Speech by FS at Hong Kong Association of Banks Distinguished Speaker Luncheon (English only)(with photo/video)

     Following is the speech delivered by the Financial Secretary, Mr John C Tsang, at the Hong Kong Association of Banks Distinguished Speaker Luncheon this afternoon (November 26):

Anita (Fung), distinguished guests, ladies and gentlemen,

     Good afternoon.

     It is my great pleasure to join you all today. I would like to thank the Hong Kong Association of Banks for hosting this lunch, and allowing me the chance to share with you how I perceive the latest global economic situation and some of the measures that we are taking forward to deal with the challenges and exploit the opportunities.

     I would like to begin with a quote from one of my all-time favourite actors, Robin Williams.

     In the film "Dead Poets Society", the teacher John Keating, played by Robin Williams, says, and I quote, "There is a time for daring and there's a time for caution, and a wise man understands which is called for." End quote.

     This struck me as appropriate for today's occasion, not just because we are in a room full of wise men - and women, of course - but also because the global economy has reached a precarious point, where sentiments of both caution and daring often coexist.

     Since the onset of the global financial crisis four years ago, financial markets have been on a roller-coaster ride of highs and lows - with the occasional vertical loop thrown in. The interconnected nature of global finance has pushed and pulled markets up and down while remaining, more or less, on track. Today, we are witnessing a critical phase of the global recovery. Different regions are moving at different speeds, and often in opposite directions.

     The evolving Eurozone sovereign debt crisis and the fragile US economic fundamentals are posing strong headwinds to global economic growth. Reflecting the challenging outlook, the IMF last month revised downward its global economic growth forecast to 3.3 per cent this year and 3.6 per cent next year.

     We are somewhat encouraged by recent signs of unity in Europe on how to deal with the Eurozone crisis. In September, the European Central Bank formally announced its new bond-purchasing programme. There has also been some progress by the European Union on creating a banking union. As a result, market sentiment has become a little more stable in the region, and borrowing costs for Spain and Italy have come down.

     Despite these positive developments, European leaders still have much to do to achieve fiscal sustainability in the Eurozone. No doubt, painstaking reforms and much political resolve will be needed to create the conditions for a better functioning economic and monetary union. This is likely to be a long and complex process.

     In the meantime, Europe is facing a double-dip recession. Earlier this month, the European Commission forecast that GDP in the 17-member Eurozone economy would contract by 0.4 per cent this year compared to 2011. Unemployment across the Eurozone is at a record high of almost 12 per cent. This is at least partly due to austerity measures that are intended to help reduce debt and revive the region's economy.

     Over in the US, the situation is a little more encouraging. The US housing and job markets have shown some signs of improvement. The economic recovery, however, continues to proceed at a frustratingly slow pace. The US Federal Reserve rolled out QE3 with open-ended purchase of US$40 billion of mortgage debt a month until the outlook for the labour market improves substantially. While the long-term impact of QE3 in shoring up the US economy and job market remains to be seen, the US fiscal cliff of spending cuts and tax increases, which could push the US back into recession, is looming large once again.

     I am sure that you will agree that this is the time for caution.

     Fortunately, thanks to Hong Kong's robust financial regulatory regime and cautious measures taken by all of you, our markets are able to cope with the stormy external environment. Our banking system is on sound footing. Banks in Hong Kong are well capitalised, with a total capital adequacy ratio of around 16 per cent and a tier-one capital ratio of 13 per cent. These ratios are well above the current international minimum requirements and should enable banks to meet without a great deal of difficulty the more stringent standards under the new Basel III Accord.

     Financial institutions operating in Hong Kong also have limited direct exposure to the highly indebted peripheral Eurozone countries. The direct risk exposure of our banks to the more vulnerable European economies of Portugal, Ireland, Italy, Greece and Spain, the so-called PIIGS, is limited. Together they account for less than 0.4 per cent of the total assets of the banking sector.

     Given the rapid pace of development in international financial markets, it is important to make sure that our regulatory framework is able to swiftly cope with any new or unexpected challenges. With this in mind, the Government is working with our financial regulators to keep abreast of financial developments globally. Together, we have introduced a series of initiatives to keep up with the latest international standards and trends.

     Hong Kong is well prepared for the new Basel III Accord, which will take effect from January next year as agreed by the Basel Committee on Banking Supervision. This would not have been possible without the significant contribution of the Hong Kong Association of Banks.

     Most of the jurisdictions in the region, including Australia, Mainland China, India and Singapore, have issued rules to implement the Basel III Accord, from January 1, 2013. Japanese banks will also comply with the Accord from March 1, 2013, when their next fiscal cycle begins.

     While new banking regulations often result in some extra costs to banks, and I understand well this is a concern, they are also vital in safeguarding the stability and integrity of our financial system. And this is of paramount consideration to us in the implementation of this Accord.

     On another front, the liquidity glut is having potentially destabilising effects on global macroeconomic activity, creating asset price gyrations, higher inflation and exchange rate volatility.

     The knock-on effects of QE3 on emerging markets and economies with better growth prospects can be significant. If past experience of QE1 and QE2 is any indication, QE3 may result in higher global commodity prices as well as greater volatility in exchange rates and cross-border capital flows.

     The heightened volatility of capital flows is evident here. The Hong Kong dollar has strengthened to the limit of its convertibility zone in recent weeks. Since October 20, the Convertibility Undertaking by the Hong Kong Monetary Authority (HKMA) has been triggered 10 times. In compliance with the Undertaking, the HKMA has, upon request, purchased a total of some US$4.2 billion in accordance with the Currency Board mechanism. This has helped maintain the stability of the exchange rate of the Hong Kong dollar.

     In addition, hot money inflows increase the risks of inflation and asset market exuberance for Hong Kong.

     In particular, we are concerned about the recent developments in the local property market. There are also potential systemic risks to our financial and macroeconomic stability.

     Since the announcement of QE3 in mid-September, the HKMA has promptly rolled out additional measures to tighten mortgage lending. The aim is to strengthen our banks' credit risk management and safeguard the stability of our banking system. In October, we introduced the Buyer's Stamp Duty and enhanced the Special Stamp Duty to curb property speculation. These are effective counter-cyclical, demand-side tools to alleviate the imbalance in the housing market.

     I wish to stress that these are unprecedented measures for unprecedented circumstances. They are by no means a first step in departing from the free market principles which we have staunchly supported for decades and will continue to uphold in future. These exceptional measures are necessary because the market is beginning to show early signs of not operating properly. They are necessary to help prevent the risk of an asset bubble escalating and potentially posing a serious threat to the stability of our financial system, and ultimately our economy. We must take the necessary precaution now.

     Generally speaking, the prudent approach and cautious measures taken by the Government and the banking sector have helped Hong Kong to safely navigate the rough seas of the global economic downturn of the past few years. Other economies have not been so fortunate. Our unemployment rate remains low. Our domestic sector remains strong. Despite a difficult export market, our economy expanded 1.3 per cent in the third quarter of this year compared to the same period last year. This is relatively low in contrast to our trend rate, but at least we have been able to manage reasonable development in our domestic sector in the past year.

     I believe that there is also some room to be daring.

     With no quick fix in sight for markets in the US and Europe, which are two of our largest trading partners, Hong Kong's external trading environment will remain challenging. Yet, there are abundant opportunities from Mainland China's ongoing economic and financial transformation. One such opportunity is our city's position as the premier offshore centre for business using the Mainland currency, the Renminbi.

     As the Mainland economy continues to gain greater international prominence, we expect the use of Renminbi in cross-border transactions to expand, thereby increasing the demand for offshore Renminbi financial services and Renminbi-denominated products.

     Hong Kong is China's global financial centre. We also have many distinct advantages including free capital flows, transparent regulation and international financial connectivity - including a full-fledged Renminbi Real Time Gross Settlement system. All these will continue to support our city's further development as a global offshore centre for Renminbi business.

     Hong Kong hosts by far the largest pool of Renminbi liquidity outside the Mainland. Since August, banks in Hong Kong have been able to offer a full range of Renminbi services to personal customers who are non-Hong Kong residents. We expect this new initiative to open up business opportunities for the private banking and wealth management sectors.

     I am also pleased to see the steady development of the "dim-sum" bond market in Hong Kong. Renminbi bond issuance in Hong Kong amounted to RMB108 billion in 2011, more than triple the amount in 2010. In the first nine months of this year, Renminbi bonds with a total value of close to RMB94 billion were issued.

     Renminbi trade settlement is another area that has seen good progress. Following the launch of the scheme just three years ago, the volume handled by banks in Hong Kong has exceeded a cumulative total of RMB4 trillion. At present, about 90 per cent of all Mainland trade using Renminbi is settled in Hong Kong.

     In June, the Central Government announced a series of measures to deepen and broaden offshore Renminbi business in Hong Kong. We must harness the opportunities to further develop Hong Kong as the leading offshore centre for Renminbi business and also to facilitate the ongoing trend of Renminbi internationalisation.

     Ladies and gentlemen, our banks represent the beating heart of Hong Kong's financial centre. We are encouraged by the success of our banks in weathering the global financial crisis. Yet, we must be mindful that the global economy is not yet out of the woods.

     Meanwhile, we look to the wisdom and support of our bankers to help us successfully navigate some potentially choppy financial waters ahead.

     Thank you very much.

Ends/Monday, November 26, 2012
Issued at HKT 15:33