Insurance business comes of age

Secretary for Financial Services & the Treasury Prof KC Chan

The global insurance industry is not the only one in seeing ongoing regulatory changes. In this new landscape, actuaries are being called upon by their employers and clients, as well as by the regulators, to take on greater responsibilities in risk management.

 

Under Hong Kong laws, the Insurance Authority counts on appointed actuaries to help ensure the robustness of the regulatory regime. They have a statutory duty to alert the Insurance Authority if they are aware of any material risk, default or failure, etc, of the insurer. The Actuarial Society of Hong Kong has also been working closely with the Insurance Authority in many regulatory initiatives being undertaken.

 

Besides risk management, actuaries also help determine profitability of insurance products. They play an important role in driving product innovation in various stages of the value chain, all the way from product development, underwriting and contract development to policy administration and distribution.

 

I agree with the points made earlier about the changing investment landscape, the low interest rate and the equity volatility and so on. They are issues affecting the regulators and we are looking to you for answers. 

 

Sustained development of the actuarial profession underpins further growth of the insurance sector as actuaries play a central role when we explore new opportunities. These include meeting the increasing demand for long term insurance products, such as annuities, the development of personalised products enabled by the adoption of financial technology (Fintech), as well as opportunities arising from further regional integration. In our part of the world, we are quite excited and interested in the Belt & Road Initiative, which seeks to further regional integration as well as trade and investment flows in this region.

 

HK, Asia insured

As one of the most open and established insurance centres in the world, Hong Kong is ready to take on many of these new opportunities. As at end March 2016, we had 157 insurers, including 14 of the world’s top 20 insurers, authorised to carry out insurance business in Hong Kong. Among them, 86 were incorporated in Hong Kong and the remaining 71 were incorporated in 22 other countries.

 

In 2014, Hong Kong ranked top in Asia in terms of insurance density. For the past six years, we have consistently recorded double-digit year-on-year growth in the total gross premium income. According to the provisional statistics of the Hong Kong insurance industry for 2015, the total gross premium income amounted to $366 billion (US$47 billion), representing a year-on-year increase of 10.9%.

 

Beyond Hong Kong, the Asian market as a whole is also driving global insurance growth. Munich Re, a leading reinsurer, projected that Asia will account for 40% of the global insurance market by 2020. Five of the top 10 primary growth markets will also be in Asia Pacific.

 

Among drivers of market growth, demographic change is the most imminent issue affecting the insurance industry. It is forecast that Asia will account for 62% of the aged population globally by 2050. The need for pensions and old age protection will stimulate demand for insurance coverage. Health care reform is also on the agenda of several Asia-Pacific countries. This will incentivise insurers to develop a wider variety of medical and health insurance products and better position themselves in formulating their marketing and pricing strategies. A good grasp of economic, demographic and social processes that underlie actuarial models and projections is much needed indeed.

 

Going to the regional market, we believe Hong Kong is an ideal hub for developing regional insurance business in Asia. Just to share a little bit of the figures, in 2015, office premiums derived from new policies issued to Mainland visitors amounted to $31.6 billion, representing 24.2% of the total new office premiums for individual business.

 

Renminbi (RMB) insurance business represented 7% of the total new long-term business. As of end 2015, there were more than 215,000 RMB-denominated insurance policies sold with total cumulative premiums of over RMB56 billion. Thirteen insurers have obtained the approval from the People’s Bank of China to participate in the Mainland’s interbank bond market. The ability to access the Mainland’s interbank bond market provides the relevant insurers with a wider choice of investment instruments to match their RMB denominated liabilities.

 

Cross-boundary business

To further develop our RMB insurance market, we are also encouraging Mainland insurers to cede reinsurance in RMB in Hong Kong. By doing so, they can limit their exposure to currency risk associated with conventional cross-border reinsurance transactions denominated in foreign currency.

 

The agreement signed under CEPA, our free trade agreement with Mainland China, in December 2014 included statements supporting two-way cross-border RMB reinsurance from Guangdong insurers to Hong Kong reinsurers, and from Hong Kong insurers to Mainland reinsurers. The initiative was further extended to all Mainland insurers in the new CEPA agreement signed last November.

 

We believe there are vast opportunities brought about by projects under the Belt & Road Initiative. It offers companies opportunities to tap into new markets and explore the tremendous potential of the Mainland, ASEAN countries and many other economies along the Belt & Road. Home to 30% of world GDP; 35% of world trade and 63% of world population, the region needs the right infrastructure to support further economic development. Infrastructure development is, therefore, a priority in the Belt & Road Initiative, and clearly in the mandate of the Asian Infrastructure Investment Bank. Increase in the number and value of infrastructural projects will no doubt drive demands for insurance.

 

Hong Kong has a mature insurance market with experience and knowledge in insuring major infrastructure projects, along with talented professionals and an established legal structure. We are well placed to become the insurance and risk management centre for investments under the Belt & Road Initiative. Furthermore, as Mainland enterprises are seeking to “go global”, they will find it advantageous to establish captive insurance companies in Hong Kong to make insurance arrangements and manage risks for their overseas businesses.

 

To further explore opportunities through Hong Kong under the Belt & Road Initiative, the HKSAR Government will be hosting a Belt & Road Summit next month with the support of the National Development and Reform Commission, the Ministry of Commerce, the People’s Bank of China and the Ministry of Foreign Affairs. The Summit underlines the important roles played by Hong Kong in the national development strategy.

 

There are other changes taking place in the market, also in the region. For example, the wealth management industry. As the region is accumulating wealth and individuals are seeking to manage their wealth, we see that Hong Kong provides a great opportunity for wealth management business, and insurance, of course, forms an integral part of the asset and wealth management market. According to our Securities & Futures Commission, the total combined fund management business in Hong Kong achieved a record high of $17.6 trillion in 2014, and the insurance sector alone reported more than $450 billion of assets under management, representing a year-on-year increase of 24%.

 

Gov’t support

To help the industry meet the demands for wealth management industry, the Government supported the set-up of the Private Wealth Management Association in 2013. The Association has launched an Enhanced Competency Framework and developed a professional qualification for certified private wealth management professionals. To date, there are already over 1,500 certified professionals who have completed the programme and examination requirements.

 

And also, we have reformed our trust laws in late 2013 to enhance our status as an international asset management centre. The new regime gives us a competitive edge over other major common law jurisdictions by enabling settlors to establish perpetual trusts. 

 

Another initiative I want to mention is that we have allocated $100 million to take forward a three-year pilot programme to enhance talent training for the insurance and asset management sectors. When we talked to the insurance industry, we asked about the top thing they needed on their agenda and they asked us to help train practitioners and get more graduates into the profession. We then put forward the initiative to see how we can help by encouraging companies to take on interns and by supporting the creation of educational courses for the industry. We hope to start the programme rolling in the latter half of this year.

 

Technology embraced

A word about Fintech. As I have mentioned, a number of emerging forces are creating pressure not only on the insurance industry but also on the banking sector and financial institutions as a whole. The emergence of online aggregators and entry of technology providers may well displace traditional distribution channels and render insurance products increasingly commoditised. Insurers’ ability to benchmark against competitors will become more important as customers gain ability to comparison-shop. And with increased margin pressure, insurers will also need to increase their size by expanding in scope or scale.

 

At the same time, the emergence of the concept of “connected insurance” i.e. the use of connected devices along the insurance value chain will enable insurers to personalise insurance and proactively manage clients’ risks. Customers’ data is becoming increasingly important and easily accessible. Big data modelling can help actuaries to better estimate life expectancy, monitor and predict disease outbreaks. It is clear that more and more innovative Fintech ideas and solutions will emerge.

 

Hong Kong has all the necessary ingredients to develop and embrace Fintech, through leveraging our role as an international financial centre, the highly developed information and communication infrastructure, and ample finance and entrepreneurship talent. The Government will continue our efforts to promote our strengths as a Fintech hub.

 

I am glad to note that the Hong Kong insurance industry has also been embracing Fintech. Some Hong Kong life insurers have made use of wearable devices and mobile apps to launch health and lifestyle management programmes that encourage healthier lifestyles. Three major insurers in Hong Kong have signed up with an international networking and marketing platform to help insurance agents and financial planners manage their social media presence. There are also insurers who have formulated comprehensive digital strategies and invested in research laboratories for the application of Fintech in insurance business.

 

We welcome all these initiatives and will work with the insurance industry and the Fintech community in their development of more innovative insurance products and services.

 

Our regulatory framework needs to be technology-neutral as well as technology-conducive. We encourage the industry to make use of the dedicated platform set up under the Office of the Commissioner of Insurance to better understand regulatory requirements for a balanced and sustainable approach in developing Fintech in the insurance business.

 

There is no dispute that the regulatory regime needs to be updated in tandem to meet new challenges. In Hong Kong, we are setting up a new independent Insurance Authority to enhance policyholder protection and provide a modern and more conducive environment for sustainable development of the industry. The establishment of a new regulator will bring in a more accountable framework for promoting compliance and transparency in regulation.

 

Last but not least, it is encouraging to note that we are moving towards a risk-based capital framework, which allows insurers to develop a more risk-sensitive capital framework, enables Hong Kong to better align with international standards, and creates more job opportunities for the actuarial profession. 

 

Secretary for Financial Services & the Treasury Prof KC Chan made these remarks at the International Actuarial Association Life Section Colloquium 2016.

via Moroccan Trader Insurance business comes of age

Advertisements

Shifting economy with inno-tech

Financial Secretary John Tsang

Beyond the time of day, what about timing in general? How do we grasp that hovering moment between endings and beginnings? The turning of a stock market, or perhaps the ebbing or flowing of a business boom or opportunity? The shift in fortune of an industry, a company or an individual?

 

And for that, for prudent decision-making in general, we need all the information that we can get. Solid, up-to-date information. And where do we find that?

 

About 70 years ago, celebrated economist Frederick Hayek turned the argument for rational planning on its head, arguing that knowledge is dispersed, that information is imperfect. Not to worry, he added, because price communicates information and co-ordinates the decisions of countless individuals and companies.

 

His insight is no less relevant today. As mere mortals, like most of us here, our dispersed knowledge and imperfect information are now balanced by the emergence of big data, as Sanjeev has just mentioned, which has enabled us to capture even more insights and ideas than ever before.

 

Big-data analytics are a key component of Fintech. The application and development of Fintech has created a whole new world of possibilities for traditional financial institutions, such as banks, as well as telecommunication companies, e-commerce enterprises and some start-ups. Fintech is also a central tool among Thomson Reuters’ customer-centred offerings.

 

Intelligent information – on emerging risks, on changing consumer sentiment, evolving market trends and more – helps major financial institutions customise their products and solutions for their customers. It also helps them to formulate strategies for developing new products, managing risks as well as improving operational efficiency.

 

The opening of this new office, here in in the heart of Hong Kong, speaks convincingly of Thomson Reuters, its strategic vision, its belief in Hong Kong and the region that surrounds us.

 

It’s a commitment to using Hong Kong as a regional hub for information exchange. A commitment to Hong Kong’s professional talent. A commitment, as well, to boosting and expanding its customer base here in Hong Kong.

 

Your corporate vision, I am pleased to note, reflects that of the Hong Kong Government. As I have made clear in my Budget delivered in February this year, innovation and technology development is a policy priority for us. And we are rolling out a variety of initiatives to complement industry efforts in driving innovation.

 

That includes Fintech. Among other things, we shall establish a dedicated team, under InvestHK, to help Fintech start-ups, to help investors and R&D institutions establish their presence here in our city.

 

Cyberport will kickstart the next generation of Fintech start-ups and talent. And our financial regulators will set up offices to enhance communication with the Fintech community.

 

The breakthroughs in innovative technologies, together with the shifting of the global economic centre of gravity to the East, have forged what I called a “new economic order” and that is sweeping through the global economy. And if we hope to remain relevant, if we hope to seize the opportunities of this new economic order, we need to embrace innovation.

 

We need, as well, to remain faithful to the spirit of Hayek, generating, communicating, and understanding information.

 

Taking advantage of our stock market, and our financial services professionals – at smart companies like Thomson Reuters – Hong Kong will thrive in this century of innovation and technology. And of that, I am confident.

 

However imperfect my information may be.

 

Financial Secretary John Tsang gave these remarks at the inauguration ceremony for Thomson Reuters’ new consolidated office.

via Moroccan Trader Shifting economy with inno-tech

CE issues statement

The Chief Executive today issued the following statement in response to the Airport Authority’s report submitted to the Government on the handling of unattended baggage at the airport on March 27 and 28.

 

It states:

 

“On airport security, the report pointed out that, after its discovery in the departure hall, the cabin baggage concerned passed explosive trace detection; the ownership of the baggage was verified; before entering the departure restricted area, the baggage underwent security screening, which met the requirement of the International Civil Aviation Organisation before its return to the owner; and, according to the requirements of relevant authorities of the destination country of the flight, the cabin baggage was also security screened at the boarding gate before the owner boarded the aircraft.

 

“I also noted the report (para. 3.6) pointed out the Airport Authority has established procedures to handle lost property. There are precedents of providing courtesy delivery of found property, after undergoing necessary security screening, from the landside to its established owner in the Airport Restricted Area. The report pointed out that 517 courtesy deliveries of items were recorded from March 2015 to March 2016.”

 

Mr Leung reiterated that neither he nor his family exercised any privilege or breached airport security requirements during the incident.

via Moroccan Trader CE issues statement

HK has what Asia needs

Financial Secretary John Tsang

For 2016, economies around the world will continue to face substantial headwinds and downward pressure. Sluggish global demand will remain a key constraint to Asia’s economic development in the short term.

But no doubt – the shifting of the global economic centre of gravity to the East will continue. In its recent report released in early April, while the IMF (International Monetary Fund) has lowered its forecast of global growth in 2016 to 3.2%, it also indicated that emerging and developing Asia will contribute about 60% of the world’s GDP growth this year. And that trend will continue, with growth expected to average 6.3% a year in the next five years, markedly higher than the 3.7% predicted for the world over the same period.

I can see that domestic demand will be playing a more major role in the continued development in Asian economies. Last year, Asia’s population came in at about 3.7 billion people, home to about half the world’s population. The region’s purchasing power is huge, given the expanding middle class as well as a growing appetite for high-end goods and services.

Urbanisation, still at an early stage in many Asian economies, will propel investment through infrastructure construction and home building, while the services sector’s expansion will accelerate.

In addition, there is a strong foundation for a regional division of labour given the vast differences in comparative advantages within Asia.

Southeast Asian economies are agriculture-rich, while central Asia and some ASEAN countries are abundant in minerals. Wages and skill levels differ markedly in the region, from advanced economies, such as Japan and Korea to low-income countries like Cambodia and Bangladesh. 

South Asia’s huge young population could, potentially, become a rich source of labour, complementing Asian economies that are, or will soon be, confronting population ageing.

Together, they can help one another, forming an efficient, region-wide supply-chain. There is ample room for Asian economies to co-operate, to boost productivity growth for the entire region.

To unlock this enormous potential, however, Asian economies must boost productivity and continue to move up the value chain. They must also forge closer economic collaboration to increase trade flow and capitalise on the promises of an expanded and integrated Asian market.

The Chinese Mainland, of course, remains a prominent growth engine for the regional as well as the global economy. The Central People’s Government’s 13th Five-Year Plan, made public only last month, targets innovation-driven economic growth of at least 6.5% a year between 2016 and 2020. For the first quarter of 2016, the Mainland’s economy has expanded 6.7%.

The Five-year Plan also pledges to boost the liberalisation of the country’s financial sector, allowing more foreign investors to tap opportunities in the Mainland, while encouraging Mainland companies to continue “going global”. Their foreign direct investment will promote growth, in Asia and also throughout the world.
 

Competitive edge
Looking to Hong Kong, I believe that with our enviable location at the heart of Asia, and our extensive economic and cultural connections with the Asian economies, we are indeed well positioned to profit from Asia’s long-term ascendancy.

Our many compelling advantages, from our favourable business environment underpinned by the rule of law, the open market and level-playing field for business, to our simple and low tax regime, serve the business world well. 

This is why, year after year, the Heritage Foundation, the Cato Institute as well as the Fraser Institute name Hong Kong the world’s freest economy. We are also the world’s second-most competitive economy, according to the International Institute for Management Development. In its annual world competitiveness rating, the Institute placed Hong Kong first, overall, in both government and business efficiency. 

And Hong Kong’s status as a global financial and business hub owes much to our pool of talented professionals. Much, as well, to our transparent regulatory regimes, which are well aligned with international practices. 

Last year, funds for IPOs raised in Hong Kong totalled US$34 billion, topping the world. And our fund-management business accounted US$2.3 trillion in 2014. Good reasons why Hong Kong has become Asia’s premier asset management as well as fund raising centre.

In 2014, Hong Kong ranked second globally, in both FDI inflow and outflow. That reflects our role as an investment conduit between the Mainland and overseas economies.

The flow, of course, is two-way, with Mainland enterprises taking good advantages of Hong Kong for their global investments. This is why Hong Kong is home to some 8,000 Mainland as well as overseas companies.

Some observers, including a few international credit rating agencies, argue that since much of our financial achievements are tied to the Mainland’s economic development, Hong Kong will soon have to face the sobering consequences of the Mainland’s economic slowdown.

I don’t see it that way. As the Mainland’s economy continues to transform from investment-led growth to consumption-led growth, and as it continues to take forward its financial reforms and the internationalisation of the renminbi, it is not difficult to conclude that even stronger demand for quality services, in the financial services sector and beyond, will be created. And Hong Kong is ready to satisfy that rising demand.

We are the world’s largest offshore renminbi business centre. The demand for renminbi trade settlement and related financial services will continue to grow, and continue to reward Hong Kong – the businesses in Hong Kong.

And there is more. The grand and visionary Belt & Road Initiative will present many more exciting opportunities to Hong Kong. With our world-class financial infrastructure, and our competitive edge in financial and professional services, we are well-positioned to serve as a fund-raising and financial management centre for the infrastructure-driven initiative.

I have asked the Hong Kong Monetary Authority to set up a designated office to pool together the efforts of investors, banks and the financial services sector. The office will enable them to offer comprehensive financial services for the infrastructure projects that will drive the Belt & Road Initiative.

Hong Kong, of course, is a dynamic presence beyond the Mainland. And from our track record, I have no doubt that we shall continue to be sensitive to new opportunities, and respond to the fast-changing needs of our clients and our customers from all over the world.

Indeed, we shall continue to expand our trading and commercial networks throughout the region. We are, for example, negotiating a free-trade agreement with ASEAN, hoping to conclude these negotiations this year.

Hong Kong has what it takes and Hong Kong has what Asia needs, to play a pivotal role in facilitating trade and financial services in this 21st century. Or, to echo the discussion today, we have the skills, we have the strengths and the determination to “tame tigers and dance with dragons”.

 

Financial Secretary John Tsang made these remarks at the FT-Nikkei Asia300 Forum.

via Moroccan Trader HK has what Asia needs

Gov’t supports int’l schools

Chief Secretary Carrie Lam

Established in 1865, Malvern is renowned for being innovative and helping students achieve their aspirations. Malvern has nurtured many alumni with phenomenal achievements, including CS Lewis and two renowned Nobel Prize winners, Francis W Aston and James Meade. I notice that there are some old Malvernians joining this ceremony with us today. I am sure that they are all very proud of their alma mater, and are here to witness and celebrate the extension of the 150-year heritage of Malvern to Hong Kong.

 

The Hong Kong Special Administrative Region (HKSAR) Government is committed to developing a vibrant international school sector to underpin our position as Asia’s world city and an international hub. In Hong Kong, provision of international school places not only provides parents and students with more choices. It is also pivotal to providing a business-friendly environment and upholding the competitiveness of the city by maintaining our attractiveness to talents with school-age children. As the Chairperson of the International Business Committee, I am regularly in touch with members representing international business chambers, and I am happy to note that, with our efforts in the past few years, shortage in international school places is no longer topping their agenda.

 

In this regard, a total of five vacant school premises and three greenfield sites, including this school site in Tai Po, have been allocated since 2013 for international school development under a competitive bidding process. We expect the provision of additional international school places to gradually materialise in the coming few years, with a projected number of around 4,200 additional school places available between the 2016/17 and 2018/19 school years. In respect of this site in Tai Po, Malvern is going to set up its first campus in Hong Kong and provide quality education to some 960 primary and secondary students progressively from the 2018/19 school year. We believe that with the Government’s efforts and school sponsoring bodies’ enthusiasm, it should be easier for expatriates to secure an international school place for their children in Hong Kong in the years to come.

 

The Hong Kong SAR Government will continue to monitor the demand and supply situation of international school places in the territory. Further to the last consultancy study completed in end-2012, the Education Bureau has commissioned a new round of study to update the latest provision and to project the supply and demand in the next few years. The study is expected to be completed by the middle of this year. The Hong Kong SAR Government will continue to maintain dialogue with the international schools community, the business sector and the international community in Hong Kong in this regard.

 

International schools are important partners of the HKSAR Government in supporting the international community in Hong Kong. I would hence encourage Malvern and other international schools to accord priority to admitting non-local students and facilitate their admission, as some of them may come to Hong Kong in the middle of a school year. As an integral part of our community, I also encourage international schools to take part in the many youth development and social innovation projects to better our city. This would in turn provide opportunities for students to be exposed to local culture and feel a sense of belonging to our vibrant city, as well as strengthen their sense of global citizenship.

 

Chief Secretary Carrie Lam gave these remarks at the foundation stone laying ceremony for Malvern College Hong Kong.

via Moroccan Trader Gov’t supports int’l schools

Employment under watch

Financial Secretary John Tsang

Facing immense challenges, global economic growth is expected to remain slow and patchy in 2016. In its forecast released early this month, the International Monetary Fund (IMF) lowered the global economic growth rate for this year to 3.2%, on par with last year’s 3.1%.

 

While having a rather sound nature of recovery, the US economy is only expected to maintain modest growth as the exports and industrial production are dictated by a strong US dollar and sluggish global demand. At its meeting in March, the US Federal Reserve Board decided to keep the US interest rate unchanged and signalled a slower pace of interest rate rises for this year. Nevertheless, there are still uncertainties as to the pace of the interest hikes which depends on economic data. What is certain is that the marked divergent policies among major central banks have complicated the international monetary environment, making it difficult to keep track of exchange rates and capital flows, thus risking the stability of global financial markets.

 

With the Eurozone persistently beset by high unemployment rates and elevated debt levels, the European Central Bank set forth further quantitative easing measures in March to counter deflation risks. We shall keep watch on whether issues such as the refugee influx and Britain’s possible exit from the European Union would further affect the already tepid recovery process.

 

As for Japan, its negative interest rate policy has yet to take effect and its economy even went into a quarter on quarter contraction in the fourth quarter last year. In the face of structural problems such as an ageing population and high government debts, Japan’s economic outlook is expected to remain dim in the short term. With the plunge in crude oil and commodity prices, the economies of some emerging markets, including Brazil and Russia, will also suffer further setbacks.

 

Despite the downward pressure that comes along with the weak external environment, the Mainland economy is growing at a rate higher than those of other developed economies. It will continue to be the major driver of the global economy.  The Mainland economy recorded year-on-year growth of 6.7% for the first quarter. I believe the Central Government will provide adequate policy manoeuvres and headroom to achieve the growth target of 6.5 to 7% for the whole year.

 

Local economic situation

As an externally oriented, small and open economy, Hong Kong is susceptible to changes in the external environment. Being dragged by the weak demand in overseas markets, the volume of total exports of goods in the first two months of this year has dropped by 4% year on year. Along with a 14% year-on-year decline in the numbers of our inbound tourists over the same period, total retail sales have tumbled by 12%.

 

The labour market is largely stable at present, with the wages and payroll sustaining growth in real terms. However, we all note that the latest unemployment rate announced yesterday slightly rose by 0.1 percentage points to 3.4%, with retail, accommodation and food services sectors experiencing more noticeable rises.

 

The unemployment rate in Hong Kong had been staying at 3.3% or lower for over two years, and the rebound of 0.1 percentage points in this quarter is an important signal from the market. I shall closely monitor the pressure on the employment market that might be caused by the fall in labour demand in the related industries and, in particular, by the weakened retail sales. Inflation is expected to remain moderate. The underlying inflation rate for this year will ease from 3% last year to 2%.

 

As for the property market, it faces pressure for adjustment as a result of the normalisation of the US interest rate policy, slackened economic growth and additional supply of residential flats. Trading in the market has turned quiet since last July. Property prices fell for five consecutive months since last October, with a cumulative drop of about 11% as at February 2016. Market data shows that the downtrend continued in March.

 

Property prices are still out of tune with the economic situation and affordability. The overall property prices as at February this year soared 58% over the peak in 1997, and the ratio of mortgage payment to household income stood at 62% in the fourth quarter last year, higher than the long-term average of 46%. We shall continue to closely monitor the property market and ensure its healthy and stable development.

 

On the whole, I forecast that our economy will grow by only 1 to 2% in real terms in 2016, which is lower than last year’s 2.4%. In preparing this year’s Budget, I anticipated a difficult year ahead for both the local economy and the labour market. I have therefore allocated in the Budget $38.8 billion for tax and short-term relief measures to help enterprises, especially those of small and medium size, to get through difficult times, and to safeguard the jobs of workers. Measures such as reducing tax, increasing tax allowances and waiving rates can ease the burden of citizens and help stimulate local consumption. The package of measures, together with other spending initiatives, will have a fiscal stimulus effect of boosting Gross Domestic Product for this year by 1.1%. This is indeed a great and timely boost to our economy amid a year fraught with challenges.

 

Recently, there were international credit rating agencies downgrading Hong Kong’s rating outlook to negative out of concern over China’s economic outlook and Hong Kong’s close linkage with the Mainland. I would like to reiterate that Hong Kong has sound economic fundamentals, a robust financial regulatory regime, a resilient banking system and a healthy fiscal position. We certainly have the capability, the experience and the determination to rise to the challenges brought about by economic cycles. The IMF Staff Report released in January has fully affirmed our economic and financial strengths.

 

In fact, the structural rebalancing in the Mainland’s economy from labour-intensive production to high value-added production, coupled with the transformation of its mode of economic development from investment to consumption, will create more business opportunities for service-oriented economies like Hong Kong.

 

Sustaining competitive edge

Apart from addressing the issue of cyclical economic adjustment and the needs of individual industries in the short term, I have also proposed in the Budget measures to foster the sustainable economic development of Hong Kong in keeping with the new economic order.

 

The latest breakthroughs in technologies have brought about paradigm shifts in traditional business modalities. Hong Kong abounds with world-class research and development (R&D) personnel in various fields, underpinned by advanced technology and equipment. We are well equipped to promote the application and production of innovative technologies and develop high value-added industries.

 

I have in my Budget proposed an array of measures which include an allocation of $8.2 billion to construct purpose-built buildings in Tseung Kwan O Industrial Estate for furthering the development of advanced manufacturing industries, as well as the introduction and enhancement of various funding schemes to encourage universities and industries to pursue commercialisation of R&D results.

 

Hong Kong is an international financial centre. We shall endeavour to create a favourable environment to attract financial institutions and professionals to develop Fintech in Hong Kong and help enhance the efficiency and quality of our financial services. We shall also strive for further diversification of local industries. To this end, we shall continue to facilitate the robust growth of start-ups in various areas such as financing, incubation and office space, and support the development of the fashion industry and the film sector as well as arts and sports.

 

With the global economic gravity shifting towards the East, emerging markets have been playing an increasingly influential role. We must seize this opportunity to find new markets by making good use of Hong Kong’s advantages in trading and logistics, business and professional services, financial services, tourism and creative industries.

 

The Hong Kong Monetary Authority has been working on the establishment of the Infrastructure Financing Facilitation Office, which will provide a platform for pooling the efforts of investors, banks and the financial sector, to facilitate the provision of comprehensive financial services for infrastructure projects in emerging markets.

 

We shall continue to widen our commercial and trading networks and promote the development of high value-added logistics and e-commerce through various trade and taxation agreements. The Government launched a public consultation exercise on the implementation of “single window” last week. We look forward to the early implementation of the initiative.

 

Improving livelihood

With our ageing population and the continuous growth in demand for social services, the Government will actively respond to the needs of the community and allocate resources for the enhancement of public services. Total government expenditure will reach $490 billion in 2016-17, an increase of 14% over 2015-16 or more than doubled when compared with a decade ago. The rate of increase is much higher than the rate of our economic growth.

 

The estimated recurrent expenditure on education, health and social welfare accounts for 60% of government recurrent expenditure. Compared with 10 years ago, the expenditure of the three areas has increased by 80% and among which social welfare spending has more than doubled. This shows the Government’s commitment to improving people’s livelihood and adhering to the principle of allocating public resources where justified and needed.

 

There are concerns in the community about the large amount of expenditure on infrastructure works. Infrastructure developments, which are one-off in nature, are important long-term investments that can help strengthen Hong Kong’s competitiveness and spur our economic growth. Apart from strategic infrastructure to improve transportation and develop new areas, many infrastructure works are closely related to people’s livelihood, including those related to culture, education, environmental protection, healthcare, sports and district work. We shall establish a multi-disciplinary office to conduct a comprehensive review of the guidelines on public works and to scrutinise closely the cost estimates of major new projects to ensure the proper use of public funds.

 

Public finances

In preparing this year’s Budget, I have been mindful of making forward planning for meeting the long-term needs of Hong Kong, to ensure that the expenditure on important policy areas can be met in the event of economic downturn in the future.  I have set up the Housing Reserve to implement the Public Housing Construction Programme, established the Future Fund as long-term savings, and set aside provisions for the 10-year hospital development plan.

 

The Government’s medium-range forecast has projected that Hong Kong’s economy will achieve an average growth of 3% per annum in real terms from 2017 to 2020, lower than the trend growth of 3.4% over the past 10 years. An ageing population will have far-reaching implications on public expenditure. The shrinking labour force in Hong Kong from around 2018 will affect our economic development and slow down growth of government revenue. A structural deficit is bound to emerge when expenditure growth keeps outpacing revenue growth.

 

It is of utmost importance to ensure our public finances remain healthy, allowing us more room and flexibility to gear up for economic adversity ahead. We shall continue to adopt a three-pronged strategy by containing expenditure, preserving the revenue base and making long-term planning to maintain our fiscal health.

 

We initiated a three-year plan as from last year to contain expenditure by encouraging policy bureaus and departments to achieve more efficient use of resources through re-engineering and re-prioritising. Our aim is to conduct a timely review of expenditure in various areas, thereby containing government expenditure growth, rather than reducing spending.

 

In 2016-17, the second year of implementing the plan, we shall save $2.7 billion in recurrent expenditure. In the same year, however, there will be an increase of $21.8 billion in government recurrent expenditure over last year’s revised estimate, which is more than eight times the amount saved. This shows that our efforts to contain expenditure have by no means stifled the reasonable growth in expenditure. Furthermore, the resources saved have all been re-allocated to policy bureaus for enhancing existing services and launching new ones.

 

As announced in my Budget at the end of February, the revised estimate for the Government’s surplus for 2015-16 is $30 billion. According to the latest figures, the actual government revenue and expenditure are lower than the corresponding revised estimates by about $7 billion and $1 billion respectively, and the Finance Committee (FC) of this Council approved after the announcement of the Budget the $10 billion provision for public-private partnership programmes for the Hospital Authority (HA). As a result, the latest estimated surplus for last year has been revised to about $14 billion. As that allocation to the HA has been charged to the 2015-16 account, the expenditure for 2016-17 will decrease and the surplus will increase accordingly.

 

Nearly 2,200 amendments have been proposed by Members this year. The number has been reduced to 407. Yet discussions on individual items will take time, and voting alone will require over 10 hours. The Government will make every effort to support this Council in scrutinising the Budget for its early passage.

 

I note that some Members have requested the Government to submit some of the funding proposals included in the draft Estimates separately to the FC for consideration.

 

Over the years, many new funding proposals, including both recurrent and non-recurrent expenditure items, have been included into the draft Estimates for scrutiny by the Legislative Council (LegCo) in the context of the Budget in accordance with sections 5 and 6 of the Public Finance Ordinance. With an aim of improving the efficiency of deliberations, we have submitted some of the less controversial funding proposals for LegCo’s scrutiny in the context of the Budget.

 

For key new funding proposals included in the draft Estimates, policy bureaus will set them out clearly under the respective heads and subheads of expenditure, provide appropriate descriptions in the controlling officer’s reports, and consult relevant LegCo panels at a suitable juncture. Members may also request the bureaus to provide detailed information on these funding proposals at the special FC meetings.

 

The funds on account totalling $90.5 billion previously authorised by this Council are sufficient to meet the overall government expenditure up to the end of May. If we fail to secure the passage of the Budget by the end of May, government departments and the public sector will begin to see resources running out in early June, making it difficult to maintain the delivery of public services. Also, the practical and pressing initiatives for relieving people’s hardship would not be implemented in a timely manner.

 

I earnestly seek Members’ support for the early passage of the Appropriation Bill 2016 in the overall interests of the community so that these initiatives can be implemented as soon as possible.

 

Financial Secretary John Tsang made these remarks at the Second Reading debate on the Appropriation Bill 2016 in the Legislative Council.

via Moroccan Trader Employment under watch

HK can rise to fiscal challenges

Financial Secretary John Tsang

Hong Kong’s strengths as an economy are clear and compelling. In February this year, the Washington-based Heritage Foundation named Hong Kong the world’s freest economy – for 22 years in a row, citing, among other things, our “vibrant commercial interactions and entrepreneurial growth”.

 

Hong Kong’s success is built on the rule of law, as well as our persistent adherence in upholding economic freedom. That means a level playing field for business, wherever you come from, and an effective intellectual property protection regime. 

 

No less vital, of course, is our extensive business network, our sound financial infrastructure, robust regulatory regime, free flow of capital and free flow of information, a well-educated and resourceful workforce and an abundance of international talents. Our simple and low tax regime is another big plus for enterprises as well as investors worldwide.

 

Recognisable strengths

Our favourable business environment and strengths as an international financial and commercial hub have been well appreciated and recognised. It is evident from the fact that Hong Kong ranked second in global foreign direct investment in 2015, according to the United Nations World Investment Report, with record amounts of inflows and outflows at US$103 billion and US$143 billion respectively. It is evident also from the fact that nearly 8,000 overseas and Mainland companies keep their offices here in Hong Kong. And more of them are coming here every year.

 

The success of these businesses and investments counts on the systems that we have put in place, counts on the high level of liquidity in our financial markets, and counts on our transparent regulations which are in line with international standards.

 

Many multinational corporations also pick Hong Kong for our diversified and world-class financial services, ranging from financing through to the issuance of bonds and loan syndication, investment services for mergers and acquisitions, as well as corporate treasury management services.

 

Hong Kong’s development as an international financial centre has been further enhanced by the Mainland’s economic reform in the past decades, and the latter’s rapid, and often dramatic, growth into the world’s second biggest economy.

 

During this period of phenomenal growth in the Mainland, expansion of the private sector in the Mainland and the opening up of the market to foreign investments have created massive opportunities for all sectors of Hong Kong, in particular the financial services sector, in assuming the unique role of being able to direct capital between China and the rest of the world.

 

Since the fast-growing Mainland enterprises see the need to raise more capital for further expansion and to “go-out” and invest in international markets, they turn to Hong Kong – and they turn to our stock exchange. And this is one of the reasons why Hong Kong topped the world last year in equity funds raised through IPOs.

 

The fast development of offshore renminbi business in Hong Kong has further consolidated our position as an international financial centre of China, as well as of Asia. Starting from basic deposit-taking, currency exchange, remittance and credit-card services some 12 years ago, our offerings have now expanded to include listed and unlisted investment funds, insurance products, currency futures, real estate investment trusts, shares and derivative products and more.

 

China opportunity

Hong Kong currently boasts the largest offshore renminbi liquidity pool, of some RMB1 trillion, and is the world’s largest offshore market for renminbi investment products. Last year, the daily turnover in our Renminbi Real Time Gross Settlement system reached RMB950 billion. Today, our banking system handles some three-quarters of cross-border renminbi transactions in the world.

 

Some observers, including a few international credit rating agencies, argue that since much of our financial achievements are tied to the Mainland’s economic development, Hong Kong will soon have to face the sobering consequences of the Mainland’s economic slowdown.

 

I don’t see it that way. As I have mentioned before, Hong Kong’s singular role as China’s international financial centre, and the close linkage between the economies of Hong Kong and the Mainland, would continue to present us with enormous opportunities. It isn’t “China risk”; I call it “China opportunity”.

 

China has continued on its global path in the past year and its economy has become freer, has become more open and better connected.

 

Economic challenges

Amid the weak global demand and the weak macro-economic environment, economies around the world will face substantial headwinds and downward pressure in 2016. The Mainland is no exception. But as I see it, the Mainland still has many policy levers that it can pull for the purpose of guiding the economy to continue moving forward on the right track.

 

Apart from the host of monetary measures that it can deploy, the Central Government is also adapting a more proactive fiscal policy, putting forward a larger deficit budget in 2016 than last year, with a view to supporting the enterprises and stabilising growth. The large fiscal reserves of the Mainland will provide ample room for further manoeuvre.

 

The Mainland has now become the second-largest economy in the world, and it is only reasonable that it will grow at a slower pace, following the double-digit spurt in the past 30 years or so. After all, a growth target of 6.5% to 7% in 2016 is not exactly depressing news, in particular when many developed economies are still recovering slowly while others are struggling with recession.

 

Hong Kong will have its fair share of difficulty amid the weak global macro-economic environment, but I am confident that we can weather the storm. As the IMF has concluded in its Staff Report released in January this year, Hong Kong’s sound economic fundamentals, our robust financial regulatory regime, resilient financial and banking sectors, as well as our strong fiscal position, will continue to enable the economy to embrace the challenges ahead.

 

Looking ahead, Hong Kong’s success will continue to depend on how quickly, and how deftly, we respond to the changing demands and needs in serving our clients and customers from all over the world. And from our track record, I have no doubt that we can continue to be sensitive and responsive to outside opportunities, and maintain the healthy habit of moving a step, or two, ahead of the competition.

 

As the Mainland’s economy continues to transform from investment-led growth to consumption-led growth, it will create demand for quality services, in finance and beyond. For our financial services industry, that means a transition from capital raising to investment and wealth management. It means, as well, moving to risk management and the gradual liberalisation of two-way capital flow in and out of the Mainland.

 

The launch of the Shanghai-Hong Kong Stock Connect in late 2014 and the introduction of the Mainland-Hong Kong Mutual Recognition of Funds Arrangement last year, have raised the mutual access between the Mainland and Hong Kong capital markets to another level.

 

There will also be an exciting future for our RMB business. The decision last year by the IMF to include renminbi in its SDR basket of currencies has reaffirmed the status of the renminbi as a significant commonly traded currency. With renminbi becoming more widely accepted by international markets, the demand for renminbi trade settlement, financing and fund management will increase. So will the business opportunities for banks and the financial services in Hong Kong.

 

Our asset-management sector will also continue to benefit from economic growth and wealth creation in the Mainland, as well as its increasing financial market liberalisation.

 

While there are many positive things that we can look forward to, we ask ourselves constantly what we need to do if we are to maintain our position as a major international financial centre for the days to come. After all, Hong Kong’s economic strength lies not only in our close relationship with the Mainland, but also in our extensive commercial network with both developed as well as emerging economies. To me, there are three aspects: embracing new technology, finding new markets, and nurturing the right talents.

 

Embracing new tech

First of all, enhancing new technologies. Burgeoning technological advancement, particularly in information and communication technologies, has forged a more globalised economy with more interconnected markets as well as heightened competition.

 

Technology is quickly finding its way in finance. The application and development of Fintech has created a whole new world of possibilities for banks, for insurance companies and for other traditional financial institutions as well as telecommunication companies, e-commerce enterprises and start-ups. Some studies have predicted that global investment in Fintech will surge from US$12 billion in 2014 to more than US$46 billion in 2020.

 

In my Budget this year, I announced a range of measures to develop Fintech in Hong Kong, to boost Fintech R&D as well as to attract Fintech start-ups to come to Hong Kong. A dedicated team will be established under Invest Hong Kong to assist start-ups, investors and R&D institutions looking to establish a presence here in our city.

 

We shall be rolling out programmes at Cyberport in nurturing talent, enhancing communication with financial institutions and the Fintech community, and driving the development of technology with financial services potential, from cyber security to blockchain.

 

The point of it all is to ensure that, in the pervasive digital age that is transforming our world and everything else in it, Hong Kong remains a major international financial centre.

 

New markets

Secondly, finding new markets. Emerging markets now play a much more important and influential role as the global economic centre of gravity shifts towards the East. Our financial services providers need to expand their ties with the rest of the world and expand the scope of services for these diversified markets.

 

And further opportunities will emerge alongside the Belt & Road initiative. And I know that our financial services industry has all it takes to benefit fully from this.

 

Our multi-currency capital markets will prove attractive to enterprises looking to finance infrastructure projects.

 

I have asked the Hong Kong Monetary Authority to set up an office to facilitate infrastructure project financing, pooling together the efforts of investors, banks and the financial services sector. Working collectively, they can offer comprehensive financial services for any number and any type of infrastructure projects anywhere in the world.

 

We are also discussing with relevant authorities Hong Kong’s involvement in the Asian Infrastructure Investment Bank (AIIB), the key financial institution supporting infrastructural development along the Belt & Road. The AIIB will soon consider the applications from Hong Kong and other economies to join the Bank. I am sure the AIIB will be looking to take good advantage of our expertise in capital market financing, asset management and dispute resolution services.

 

Nurturing talent

Finally, nurturing the right talents. Human capital is the fundamental driver of a knowledge economy like ours. Indeed, we have a financial services workforce of a quarter of a million people. That accounts for over 6% of the city’s workforce and contributes nearly 17% of our GDP.

 

We need, of course, to continue to develop talent – people with the right skill set. In this regard, the industry has been doing its part, investing considerable resources into grooming the next generation of financial professionals.

 

As for Government, we are establishing a HK$100 million, three-year programme to enhance professional training. Responding to industry feedback, it will focus first on the insurance and asset and wealth management sectors, beginning in the second half of this year.

 

We owe our financial centre prowess to many factors, from our close links with the Mainland and the rest of the world, to our endless adaptability and the continuous refinement of our system and product offerings.

 

We owe it, as well, to our human resources. The financial services industry is not there just for the 1%. We have for sure high-flying investment bankers and private bankers who belong to that elite group anywhere in the world. But we also count on insurance underwriters, compliance professionals and fund administrators, all of whom take pride in doing their jobs well.

 

Their success is our success. A dynamic financial services industry expands opportunities for just about every other industry and sector in Hong Kong. World-class financial services attract Mainland and overseas companies to our city.

 

That means good money, and good jobs, for our workforce. Opportunities for the entire community.

 

The good citizens contributing to the building of our society reward us all. We shall do all we can to ensure that our generation leaves Hong Kong more beautiful, and more bountiful, for the enjoyment of generations to come.

 

Financial Secretary John Tsang gave these remarks at “Project Citizens Forum: What Makes Hong Kong an International Financial Centre?” 

via Moroccan Trader HK can rise to fiscal challenges

Gov’t committed to ICT

Chief Executive CY Leung

The Internet is, arguably, the single most important breakthrough in communication in the last century. According to Internet Live Stats, a website that tracks live information technology statistics, every 10 seconds the world sends nearly 25 million emails, makes 540,000 searches and views 1.2 million videos through the most popular search engine and video site.

 

Real-time information, live entertainment, instant connectivity, perhaps more than any other communication tool in history, the Internet has revolutionised our social, economic, cultural and even political life.

 

Consider this: In 1995, less than 1% of the world’s population had an Internet connection. Today, about 40% – some 3.4 billion people – use the Internet. Last year, a study found that mobile Internet generated around US$700 billion a year in revenue in the 13 countries that make up about 70% of global GDP. This is projected to grow to US$1.55 trillion by next year. Mobile Internet also created employment for about three million people in those 13 countries.

 

Competitiveness of the Hong Kong economy, and indeed economies around the world, depends on our capability in harnessing the Internet’s potential. Information technology not only drives growth of the digital economy, but also catalyses innovation. Nowadays, the world’s most successful enterprises, including the companies you represent, are beneficiaries of innovation and technology. Say, for example, supply chain technologies that improve productivity and product quality, or online sales that transform the buying experience of consumers.

 

In China’s 13th Five-Year-Plan, innovation and technology have taken centre stage in national development. China encourages “mass entrepreneurship and innovation” in consumption, manufacturing processes, industries, investment, funding and many other aspects. Indeed, the strategic policies “Internet Plus” and “Made in China 2025” are underpinned by innovation.

 

Hong Kong is perfectly positioned to ride on the tide of “re-industrialisation” – to develop high value-added innovation and technology industries. We are blessed with first-class technological infrastructure. Our mobile subscription rate is among the highest in the world, counting more than two mobile devices per person on average. Our Internet connection speed is among the world’s fastest, and our household broadband penetration rate exceeds 80%.

 

This good base is bolstered by the systems in place that have long made Hong Kong an international business centre. I am talking about our sound legal system, robust intellectual property protection regime, free flow of information and our university research talent. All these create a favourable environment in which innovation and technology can flourish.

 

Under the “one country, two systems” arrangement, Hong Kong “super-connects” the Mainland of China and the rest of the world. We are part of China and at the same time an international city with a separate social and economic system. This enables us to enjoy the comparative advantages of both “one country” and “two systems”. Being close to Shenzhen, a city that is an hour’s drive from here and one that has a population of 20 million, with the highest GDP per capita on the Mainland and the Greater Pearl River Delta Region, which is one of the most important industrial bases in the country, Hong Kong can reap the benefits of regional collaboration and, in particular, the remarkable industrial productivity of our neighbour cities.

 

On this note, I am pleased to witness, in a short while, the signing of a Memorandum of Understanding between the Mainland’s Smart City Development Alliance and Hong Kong’s Smart City Consortium. I have no doubt many fruitful exchanges will come along between the two places.

 

We welcome companies and organisations, from the Mainland of China, and other parts of the world, to set up offices and R&D operations here in Hong Kong, to take full advantage of our world-class infrastructure and our dynamic business environment. We are, indeed, a welcoming society, one that has open borders, and more importantly, open minds. We welcome competition as much as we welcome collaboration.

 

As I said at the Science & Technology Innovation Summit last December, 2015 was a banner year for science, innovation and technology in Hong Kong. Among the many notable advances was the establishment of the Innovation & Technology Bureau. Led by Secretary Nick Yang, the bureau spearheads the long-term development of innovation and technology in Hong Kong. The Academy of Sciences of Hong Kong set up last December will serve to co-ordinate and expand Hong Kong’s co-operative network with scientists, entrepreneurs and institutions from all over the world.

 

This year, we will continue our efforts in full swing. We are enhancing our competitiveness in the global digital economy, in areas ranging from mobile Internet applications, e-commerce and Internet of Things.

 

There is more. As I pledged in the annual Policy Address made public three months ago, we are building Hong Kong as a smart city. The Government will soon begin a consultancy study to create a smart-city blueprint for Hong Kong, encompassing transport, commerce, healthcare, the environment and so forth. The study will also identify suitable standards to ensure that we stay connected with other smart cities around the world.

 

Five years ago, the Hong Kong Government set up a Public Sector Information portal to release data sets. These are in digital format and are machine-readable. We now make available more than 6,000 data sets from government departments, public bodies and commercial organisations.

 

Responding to the global trend in big-data analytics, our Innovation & Technology Bureau will examine ways to make more effective use of big-data analytics in formulating policy and improving public services. Our on-going open-data initiative will be strengthened. The private sector, including start-ups, can make use of the data sets in developing new products and applications.

 

I am pleased to note that entrepreneurship in Hong Kong is picking up, and picking up quickly. The numbers of start-ups, incubators, accelerators and co-working spaces are on the rise. Deal-flows and the amount of venture funds secured by our start-up community also increased notably.

 

To accelerate this encouraging momentum, the Government will set up a $2 billion Innovation & Technology Venture Fund, investing in local technology start-ups together with private-venture capital funds. Cyberport, our flagship ICT industry support body, will also set up a $200 million Macro-Fund for investment in its ICT start-ups.

 

As Hong Kong presses ahead with innovation and technology, I am confident that the Internet Economy Summit will keep our city and participants from other economies at the forefront of global development. I thank you again for your support, and we very much hope to make this a flagship event for the world’s digital economy.

 

Chief Executive CY Leung gave these remarks at the opening ceremony of the Internet Economy Summit.

via Moroccan Trader Gov’t committed to ICT

HK primed to become Fintech hub

Secretary for Financial Services & the Treasury Prof KC Chan

Hong Kong and Russia have just signed a comprehensive agreement for the avoidance of double taxation, which is good for investors in both economies. We are pursuing other agreements such as the investment promotion and protection agreement and the free trade agreement with Russia.

 

In Hong Kong, the principal regulator of our securities market is the Securities & Futures Commission (SFC), a statutory body funded mainly by a levy on all trading. It is responsible for day-to-day supervision of intermediaries, with investigative, remedial and disciplinary powers independent of the Government.

 

Regulated by the SFC, the Hong Kong Exchanges & Clearing Limited operates the only stock exchange and futures exchange in Hong Kong, and is the front-line regulator of the companies listed in Hong Kong.

 

Good corporate governance

In the Hong Kong market, we emphasise good corporate governance, which is secured through a transparent audit and disclosure regime. The responsibility of the Government is to ensure that the regulatory framework can best enhance financial stability, investor protection and promote market development. This is achieved through formulation of policies and introduction of legislation that takes into account global needs, local circumstances and the co-ordination of various stakeholders in the process.

 

In simple words, in formulating policies, the Government and the regulators must be open to new ideas, and continuously monitoring the effect of existing regulations on the market development, and strike a proper balance between investor protection and market development.

 

The framework has been serving the market well. Hong Kong’s stock market was the seventh largest in the world and the third largest in Asia. Our financial sector is also acknowledged by the Financial Sector Assessment Programme of the International Monetary Fund as one of the largest and most developed in the world.

 

Given the size and complexity of the securities market, we need to constantly review the relevant regulatory regimes, streamline procedures and enhance market efficiency and quality. For example, only recently in last month, the Government asked the SFC and the HKEX to conduct a joint public consultation exercise on enhancing the regulatory structure in respect of listing matters.

 

The reason for this review is not prompted by any incident. It is simply that we want to respond to, one, some market concerns about the quality of newly listed companies, and second, an increased perception of market risks mainly in the overall macro economy and also in China’s economy. We want to make sure that we have reviewed our listing procedures to enhance market quality and to streamline procedures for better efficiency.

 

Mainland connectivity

The Government clearly has a strong hand in the market development. Let me give you two examples. The introduction of renminbi (RMB) products and linkages between the Hong Kong market and the Mainland market. Today, Hong Kong is home to the largest offshore RMB liquidity pool and Hong Kong banks process over 70% of offshore RMB trade settlements.

 

On developing the connectivity between the two markets, the most recent major milestones include the Shanghai-Hong Kong Stock Connect launched in 2014, and the Mutual Recognition of Funds arrangement implemented last year. In each case new initiatives are preceded by government-to-government, regulator-to-regulator and industry-to-industry dialogues between Hong Kong and our Mainland counterparts, with inputs from the industry being considered during the process.

 

Fund management

Another example is the fund management industry in Hong Kong. This is very important to us. We have got the largest fund management sector in Asia and we are keen to promote the fund management industry further. So in the last couple of years, the Government and the regulators have launched numerous initiatives to attract more funds to domicile here and develop Hong Kong into a comprehensive fund service centre.

 

We have waived all stamp duty on the transfer of exchange-traded funds last year. We have also introduced profits tax exemption for offshore funds, and more recently extended to the private equity sector. We are also going to introduce the open-ended fund company as an alternative fund vehicle to provide investment managers with more options when they set up their funds.

 

Many of these initiatives are the result of the Government consulting the industry, like how we went to the industry to ask for ideas for attracting more funds to domicile in Hong Kong, in terms of fund structures and tax incentives for example. We do not satisfy the industry on every one of their requests – say we are very cautious on giving tax incentives – but by and large we are very open to industry requests and would try to satisfy their needs.

 

Fintech development

Another topic that has generated much interest in our market is the development of Fintech, financial technology. As an international financial centre, Hong Kong is an ideal place for Fintech companies to flourish. The market participants in Hong Kong have come to us saying that a lot of changes in legislation need to be done to accommodate Fintech. Our response is that we have to look at the situation carefully. We must continue to protect investors and we must examine what needs to be done in our legislation. We did make some changes, for example we passed the legislation in Hong Kong last year to introduce a regulatory regime to cover stored value facilities and retail payment systems.

 

We introduced this because we realise that without changing the existing laws, it would be very difficult for e-payment to flourish in Hong Kong. It does not, however, mean that every business model under Fintech calls for changes in legislation. Some innovations touch on on-boarding, Know-Your-Customer processes and privacy issues and often only require clarifications of the existing regulations from the regulators.

 

Open dialogue

The Hong Kong Government and our financial regulators are ready to engage in open dialogues on new and evolving business models that can offer consumers novel experiences in managing their finances and provide financial institutions with tools to improve their operational efficiency. To further facilitate the dialogue with the industry, our banking, securities and insurance regulators have established their respective dedicated liaison platforms to enhance communication between regulators and the Fintech community. Our goal is to ensure that an appropriate balance between market innovation and investors’ protection can be reached in response to these new business proposals.

 

The topic of our session today is “What the market expects from regulators, and regulators expect from the market”. In Hong Kong, the relationship between the Government and the regulators on one hand, and the market participants on the other, has always been a bilateral one, based on open dialogue.

 

In this respect, back to what I have said at the beginning about encouraging more financial co-operation between the Hong Kong market and the Russian market, I also believe that the efforts call for open dialogue between market participants in your market and our market, as well as regulators in the two markets.

 

Secretary for Financial Services & the Treasury Prof KC Chan gave these remarks at the Moscow Exchange Forum 2016 in Moscow.

 

via Moroccan Trader HK primed to become Fintech hub

HK faces pension challenges

Chief Secretary Carrie Lam

There could be no better time for this gathering of experts and practitioners in the pension industry to take place in Hong Kong. For the first time since the establishment of the Hong Kong Special Administrative Region on July 1, 1997, that is almost 19 years ago, the HKSAR Government has embarked upon a major public discussion on this very important topic.

 

The fact that we are doing this is a clear recognition of the challenges to be brought about by a rapidly ageing population and a strong reflection of the Government’s commitment to tackle the issue head-on with a view to providing better support for our old people.

 

At the moment, we are halfway through a six-month public consultation on retirement protection launched last December by the high-level Commission on Poverty which I chair. And forums like this are invaluable as we consider various options to enhance retirement protection for the elderly.

 

Universal benefits

The first question is affordability. As I have acknowledged in engaging advocates for a universal scheme, I said I can understand their well intentions to provide a grant to all elderly above the age of 65 irrespective of means. I have listened to their justifying this universal scheme on the basis of recognising the elderly’s contributions to society when they were young and the psychological comfort of “right and entitlement”.

 

The fact is the HKSAR Government does provide universal benefits to the elderly, such as the heavily subsidised hospital care, the non-means-tested Old Age Allowance, the $2 transport concession scheme and the $2,000 medical voucher per year for the elderly to receive care from the private sector.

 

But a universal pension at a monthly grant of $3,230 would require an immediate outlay of $22.6 billion and incur an additional aggregate cost of $2,395 billion over the next 50 years. To finance this outlay, the Government inevitably has to raise taxes and the quantum of such increases must pay due attention to their impact on Hong Kong’s economic competitiveness and hence growth. Also, raising taxes does not necessarily guarantee increase in revenue if the resultant tax rates have become prohibitively high. Worse still, Hong Kong would lose her appeal and attraction as a place for investment.

 

Financial sustainability

The second question is sustainability. Policymakers could not be short-sighted. Officials have a duty to ensure that new measures introduced to improve livelihood are sustainable in fiscal terms. In early 2014, the results of a study commissioned by the Financial Secretary on Hong Kong’s long-term fiscal planning were released.

 

Given the ageing of our population, the study concluded that even without any service enhancement, a structural deficit will occur in 2029-30, and by 2041-42 our fiscal reserve will be completely depleted. By then, increases in taxes may be inevitable. If we were to introduce a universal pension scheme with a total cost of $2,395 billion over a 50-year period, the dire fiscal situation would be aggravated.

 

As a former Treasury official and the former Director of Social Welfare in Hong Kong, I have first-hand experience or trauma of the pain in cutting back welfare benefits in the aftermath of the Asian financial crisis in the first few years after the establishment of the Hong Kong Special Administrative Region. In those days, unemployment was as high as over 8% and fiscal deficits occurred in successive years, wiping out a significant proportion of our fiscal reserves. As responsible officials, we have to devise policies and measures in retirement protection which have a better chance of sustainability in the longer run.

 

Encouraging self-reliance

The third question is equity. Our 2014 poverty situation analysis produced by our economist and statistician colleagues clearly indicate that despite the existing social security schemes, notably the new Old Age Living Allowance introduced by this term of the HKSAR Government in 2013, some old people were still confronted with financial difficulties.

 

In line with the Chief Executive’s philosophy, we should help those able-bodied people to be self-reliant while public resources should be spent on assisting those in need. If one cared to promote equity and uphold justice in Hong Kong, and tried to narrow the wealth gap, the obvious question to ask is whether providing each elderly person a standard monthly payment regardless of means is more just and fair than targeting public resources towards those in need.

 

Multi-pillar approach

The fourth question is comprehensive protection. The four-pillar retirement protection system we practise in Hong Kong comprises social security cash grants, the Mandatory Provident Fund, heavily subsidised housing, medical and nursing care as well as financial products that may overcome the elderly’s longevity risks and investment risks. At the moment, some 57% of the Government’s recurrent expenditure is spent on education, welfare and health.

 

Even if we were able to raise sufficient revenue to support a costly universal pension scheme, the consequences of inadequate funding for enhancing medical and welfare services to meet the needs of the elderly could not be overlooked.

 

It is important for me to stress that our multi-pillar approach is built upon a key principle that echoes the theme of today’s forum – shared responsibility, that the responsibility for caring for our elderly should be one to be shouldered jointly by individuals, families and the community. The overall design upholds our long-held beliefs on self-reliance and targeted assistance for the needy. As our friends from Australia will notice, our model is akin to that in your home country-income protection system integrating a mandatory employment-based saving system with an essentially means-tested social security pillar, which is similar to your Superannuation and Age Pension.

 

Pension challenges

Hong Kong holds many of the pension system challenges for the 21st century. With low fertility rates coupled with increasing life expectancy, our old age dependency ratio is expected to triple in the next 50 years. In addition, a number of issues in the design of our retirement protection system are far from settled.

 

The Mandatory Provident Fund system has to be improved – fees must be lowered and “leakage” as a result of early withdrawals by employers to offset severance and long-service payments must be tackled. Risk sharing is one of the most controversial aspects. For example, how the risk of increased longevity can be better apportioned between individuals and the community without creating moral hazard.

 

Alongside population ageing, other changes such as changing household composition and family structures are taking place such that reliance on children and other family members will become increasingly difficult. With a growing population of asset-rich income-poor elderly, should we also consider how to help the elderly to make better use of their assets to supplement their retirement income?

 

In a society as diversified as Hong Kong, it is not surprising that there are widely divergent views as to what we should do to improve retirement protection for the elderly.

 

While Hong Kong is charting its way forward, the experiences of other economies are highly relevant in many ways. We may avoid repeating the mistakes elsewhere; we may also incorporate into our own system successful features in other places.

 

Chief Secretary Carrie Lam gave these remarks at the Hong Kong Retirement Schemes Association and Association of Superannuation Funds of Australia 5th Asia-Pacific Pensions Forum.

via Moroccan Trader HK faces pension challenges