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Speech by PSFS at 5th Annual Borrowers and Investors Forum (English only) (with photo)

     Following is the speech by the Permanent Secretary for Financial Services and the Treasury (Financial Services), Miss Au King-chi, at the 5th Annual Borrowers and Investors Forum on "Initiatives to promote Asset Management and RMB business in Hong Kong" today (March 6):

Distinguished guests, ladies and gentlemen,

     I am very pleased to join you at this Forum. A warm welcome to you all, and especially to our friends who have travelled long distances to be here.

     This is indeed a timely gathering for money matters. Earlier this week, Forbes magazine published its annual list of the world's wealthiest people. The number of billionaires from the Asia Pacific region on the list this year has risen to 444, just 24 fewer than in Europe. And, with International Women's Day this Saturday, I should also mention that a record number of 172 women are on this year's Rich List. Although, in the interest of full disclosure, I should also tell you that my name is not among them!

     Another keen talking point here recently has been the Budget Speech, which our Financial Secretary delivered just last week. The Budget for the year covers some of the key topics of this Forum. In the next few minutes, I will share with you several of the Government's financial services initiatives, in particular on asset management and offshore Renminbi (RMB) business.

     The financial services industry contributes about 16 per cent of our GDP. Its per capita value added is about HK$1.4 million, higher than any other single industry. The Government is fully committed to developing financial services at each and every opportunity. As we are a global financial centre, that means maintaining a highly open marketplace, refining our robust regulatory regime, updating infrastructure support and nurturing new financial talent. We must hold true to our core values, including the rule of law, judicial independence and free flows of information and ideas disseminated by a free media in an open society. This is Hong Kong and these are our strengths.

     Despite increasing uncertainty and complexity in the global financial markets and challenges in some emerging markets, we continue to see promising opportunities in Asia, with Mainland China as the main driving force for economic growth in our region. As wealth creation picks up in Asia and the recovery gathers pace in Europe and the US, investors are also looking for investment options beyond our region.

     We must all, Hong Kong and our neighbours in Asia, be prepared for the ebbs and flows of global finance and its impact on this region.

Development of asset management business in Hong Kong

     Asset management has become increasingly prominent in the international financial landscape, and more so for Hong Kong. The accumulation of wealth and foreign exchange reserves in Mainland China and in many parts of Asia has generated strong demand for world-class asset management services. Hong Kong offers an international platform for funds to explore investment opportunities in the region and to attract Asian capital.

     Last year, 995 companies were licensed to conduct asset management business in Hong Kong. That represents an increase of 6.4 per cent compared to 2012. We aim to continue attracting more funds of various types to domicile and operate in Hong Kong to broaden the variety and scope of our fund business. At the end of 2012, the combined fund management business had reached a record high of US$1.6 trillion, the highest in Asia. At the end of last year, of all the unit trusts and mutual funds authorised in Hong Kong, more than 1,400 were from overseas, representing over 75 per cent of the total. And as to the source of funds, more than 60 per cent were from overseas at the end of 2012.

     To meet the challenges ahead, the Hong Kong Government works hard to sharpen the competitive edge of our financial services industry, which brings me back to initiatives announced in the Budget last week.

Enriching product diversity

Exchange-traded funds (ETFs)

     Among other things, we have proposed waiving the stamp duty for the trading of all exchange-traded funds. This follows the successful introduction in 2010 of stamp duty waivers for ETFs that track indices comprising not more than 40 per cent of Hong Kong stocks. Since then, the number of such ETFs listed in Hong Kong has increased from 69 to 116 at the end of last year. The daily average turnover has increased from HK$2.4 billion to HK$3.7 billion, making Hong Kong one of the largest ETF markets in the Asia Pacific region. By extending the stamp duty concession to all ETFs, Hong Kong will become a more attractive place for the development, management and trading of ETFs. It will promote the city's development as a regional ETF hub. As mentioned in the Budget, we plan to introduce the necessary legislative amendments in the next legislative year for implementation of this proposal.

Debt market

     The equity market aside, the Hong Kong debt market is characterised by increasingly vibrant activities. Though the peg did prompt enterprises to raise funds in the more mature US dollar bond market, the size of outstanding Hong Kong dollar debts has grown nearly 10 per cent from a year ago to over HK$1.4 trillion at the end of last year. The majority of Hong Kong dollar non-public debt issuance was attributable to overseas issuers and authorised institutions, which were mostly international banks. Multinational corporations such as McDonald's, Volkswagen and Caterpillar also chose to raise funds through our debt market. We welcome more issuers leveraging our multi-currency liquidity pools for debt financing. Meanwhile, we shall continue our efforts to develop the Government Bond Programme to help deepen the local bond market. For instance, we have proposed in this year's Budget another iBond issue of up to HK$10 billion with a maturity of three years.

Need to introduce an alternative fund vehicle

     There is growing popularity among the fund industry to use open-ended fund companies to set up investment funds. Together with the Securities and Futures Commission (SFC), we are formulating legislative proposals for a regulatory framework to facilitate the introduction of these companies in Hong Kong. This new market choice will help attract more funds to use Hong Kong as their investment platform. As mentioned in the Budget, we are preparing to launch a market consultation later this month.

Tax exemption for private equity funds

     Hong Kong ranks second in Asia after Mainland China in the management of private equity funds, accounting for around 20 per cent of Asia's total and reaching US$94 billion as at end September last year. To attract more private equity funds to domicile in Hong Kong, we are working on legislative amendments to extend profits tax exemption for offshore funds. The proposed amendments aim to include transactions in private companies which are incorporated or registered outside Hong Kong and do not hold Hong Kong properties nor carry out business in Hong Kong. This will allow private equity funds to enjoy the same tax exemption as offshore funds. We aim to introduce the legislative amendments in the third quarter of 2014.

Real estate investment trusts (REITs)

     We recognise the importance of real estate investment trusts in our continued development as an international asset management centre. The SFC has recently launched a consultation on proposals to amend the Code on REITs to introduce flexibility in the investment scope. For example, it is proposed to allow REITs to invest in properties under development or engage in property development activities. We look forward to the SFC's consultation conclusions on measures to strike a reasonable balance between protecting investors' interests and fostering our long-term development of the REIT market.

     The initiatives I have outlined for the development of open-ended fund companies and the REIT market echo the relevant recommendations put forward by the Financial Services Development Council established last year. The Council provides a high-level platform for market practitioners to share their insight on market development priorities. This would help shape our policy agenda and bring our initiatives closer to the market.

Mutual recognition of funds with Mainland China

     We are keenly interested in the early implementation of the mutual recognition of funds between Mainland China and Hong Kong. I am pleased that the Mainland authorities and the SFC have reached consensus on the principles and mode of operation for the arrangement. We understand that the arrangement is undergoing formal approval procedures with the State Council. Under the agreement, we expect that qualified funds domiciled in, and operating from, Hong Kong would enjoy the status of "recognised Hong Kong funds" in the Mainland. Likewise, qualified Mainland funds would enjoy the status of "recognised Mainland funds" in Hong Kong. These recognised funds could then obtain authorisation on the basis of a streamlined process and be sold directly in the other's market. No doubt, this will create new opportunities for the fund industry and investors in both places, achieving a "win-win" result. For Hong Kong in particular, the arrangement can expand the distribution network for our fund industry; attract more funds to domicile in Hong Kong; and promote the development of the associated professional sectors engaged in the product origination, investment management and sales of funds.

Development of offshore RMB business in Hong Kong

     Mutual recognition of funds would also be an important boost to Hong Kong's further development of a leading offshore centre for Renminbi (RMB) business. Last month marked the 10th anniversary of the launch of offshore RMB business in Hong Kong. The past decade has been a remarkable period of financial collaboration between Hong Kong and the Central Government to liberalise the Mainland China currency. The onset of the global financial crisis in 2008 also shifted the global economic attention towards emerging markets in Asia. The National 12th Five-Year Plan, adopted by the Central Government in 2011, also stated support for Hong Kong's development as on offshore RMB business centre. Amid rapid wealth creation across the boundary, both individuals and companies in the Mainland are looking for investment options beyond Asia. These market dynamics create new business opportunities for RMB and asset management businesses in Hong Kong.

     Back in February 2004, banks in Hong Kong began offering services including RMB deposit-taking, currency exchange, remittance and credit card services for personal customers. Since then, and with the full support of the Central Government, we have launched the first offshore RMB bond market in 2007. This was followed by offshore RMB trade settlement in 2009, and further to cross-border direct investment in RMB and the RMB Qualified Foreign Institutional Investors scheme launched in 2011. Through cross-border trade, direct investments and portfolio investments, Hong Kong is linking up the offshore and onshore RMB markets, and promoting the healthy circulation of RMB funds between Mainland China and overseas markets.

     We are leveraging Hong Kong's advantages and contacts as a global financial centre to promote RMB as an internationally accepted currency for trade, investment and ultimately as an international reserve currency.

     RMB financial intermediation activities in Hong Kong are becoming increasingly active. The circulation of RMB funds between Hong Kong and the Mainland forms a dynamic pool of offshore liquidity. This development is progressing with vigour. The interactions between RMB supply and demand and the price discovery process are becoming more mature. With the largest and most active pool of RMB funds outside Mainland China, Hong Kong is best placed to launch RMB interbank rate fixing. In June last year, the Treasury Markets Association launched the CNH Hong Kong Interbank Offered Rate fixing. It facilitates the pricing of RMB loan facilities and various offshore RMB interest rate derivatives, thus helping market participants manage their risks. Its application in overseas contracts is also an attraction which will further enhance our position as the global hub for offshore RMB business.

     In the space of just 10 years, Hong Kong has anchored RMB deposits and outstanding RMB certificates of deposit totalling more than RMB1 trillion, accounting for 70 per cent of the global offshore pool of RMB liquidity. Compared with 2010, RMB trade settlement conducted through Hong Kong banks increased 400 times and reached RMB490 billion in January 2014. In the same period, the outstanding size of the offshore RMB bond and loan market increased 10 and 60 times and reached RMB328 billion and RMB120 billion respectively. And the average daily turnover on our RMB Real Time Gross Settlement system increased nearly 100 times to RMB600 billion.
      There is, however, no room for complacency. We shall keep upgrading our RMB market infrastructure to meet the evolving need of users, in order to stay ahead of other offshore RMB platforms. We shall continue our efforts with the Mainland authorities to promote the two-way flow of capital and investment products between the Mainland and Hong Kong, which will in turn facilitate the internationalisation of RMB and broaden and deepen our market. We shall also continue to develop our RMB business links with overseas financial centres, with a view to strengthening our wholesale platform in the global market.

Developing Islamic finance in Hong Kong

     Another recent development involves Islamic finance. In July last year, we enacted new tax laws to provide a market-friendly taxation framework for Islamic bonds, or sukuk. The aim is to enhance Hong Kong's competitiveness in developing a sukuk market. Next, we are seeking to accommodate the issuance of sukuk under the Government Bond Programme. We expect the inaugural issuance of sukuk by the Government will help establish a pricing benchmark for other sukuk issuers, and thus encourage more issuers to use our platforms to raise funds through sukuk.

Improving our regulatory framework

     We have to keep our regulatory framework updated to meet evolving market needs. For instance, we have recently completed a trust law reform to enhance the competitiveness of our trust services industry. The new measures came into operation last December to attract more settlors to set up trusts in Hong Kong. This has been welcomed by local trustees and asset managers. Settlors are now able to establish perpetual trusts in Hong Kong, which is a measure currently not available in most major common law jurisdictions.

     I must mention the new Companies Ordinance which has commenced operation on Monday (March 3). The modernised legal framework for companies in Hong Kong will enhance corporate governance, facilitate business and ensure better regulation, thereby strengthening our competitiveness as a corporate domicile centre.

Nurturing financial talent

     Last, but by no means least, is the nurturing of top-quality financial talent. With support from the Hong Kong Monetary Authority and the industry, the Private Wealth Management Association was established last September. One of its objectives is to ensure high-quality private wealth management. The Association has been working with the industry to launch an enhanced competency framework for the industry later this year.

     We recognise the importance of professional and skilled personnel for the sustainable development of our financial services industry. As announced in the Budget, we will consult the financial services industry and study ways to support talent training. We would welcome your views on this front.

Concluding remarks

     Ladies and gentlemen, allow me to conclude my remarks with a sincere invitation to financial institutions from Asia and beyond to leverage Hong Kong's unique advantage as China's global financial centre. We also look forward to working more closely with market players from across Asia to make the most of the exciting opportunities for our region's borrowers and investors.

     I wish you all a successful Forum, and for those coming from overseas, an enjoyable stay in Hong Kong.

     Thank you.

Ends/Thursday, March 6, 2014
Issued at HKT 11:39


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