Keep calm amid changes
|Last week, I have shown my support to the national security legislation for HKSAR by taking part in the signature campaign.
The National People’s Congress (NPC) has just passed the Decision on the legislation for the Hong Kong Special Administrative Region (HKSAR) in safeguarding national security, and authorised the Standing Committee of the NPC to proceed with the related legislative works. There were widespread discussions in the society over the past week. The political team of the Government has been actively engaging with their respective sectors and stakeholders to elaborate on the issue. During my meeting with representatives of the banking and asset management sectors, I understand from them that quite some of their clients were positive about the legislation and shown understanding about the background. They agreed that restoring public safety and social stability is of utmost importance to Hong Kong and is crucial to a good business and living environment, particularly after almost a year of violent turmoil. On the other hand, they were also concerned about the details of the legislation, especially its scope and implementation mechanism.
The market in general has expressed initial concerns in two areas. Firstly, whether the national security legislation will have impact on the free flow of capital and the Linked Exchange Rate System (LERS) of Hong Kong, as well as the future of Hong Kong’s position as an international financial centre. My answer to these questions is a definite no.
Article 112 of the Basic Law stipulates that, “No foreign exchange control policies shall be applied in the Hong Kong Special Administrative Region. The Hong Kong dollar shall be freely convertible. Markets for foreign exchange, gold, securities, futures and the like shall continue. The Government of the Hong Kong Special Administrative Region shall safeguard the free flow of capital within, into and out of the Region.” This is a venerable constitutional protection, and a critical factor for Hong Kong to maintain its position as an international financial centre. To reiterate, no foreign exchange control would be applied in Hong Kong. Hong Kong dollar shall be freely convertible and capital can flow freely.
As for the LERS, it is mechanism established by Hong Kong to back our monetary base by sufficient US reserve and to provide convertibility undertakings within the zone of HK$ 7.75 to HK $7.85 to one US dollar when there are inflows into or outflows from Hong Kong dollars. The mechanism is underpinned by strong foreign reserves position of over US$ 440 billion, which is more than two times of our monetary base. At the same time, we have our country at our back. All these provide the strongest support to Hong Kong dollar. In fact, implemented in 1983, the LERS proves to be a strong anchor amid countless challenges over time and has no correlation with the Hong Kong Policy Act enacted by the US Congress in 1992. As pointed out by the Hong Kong Monetary Authority (HKMA) and the banking sector in the past week, there has been no noticeable fund outflow. The Hong Kong dollar exchange rate has remained stable and on the strong side of the convertibility zone. Nonetheless, there are still rumours and misleading messages spreading around from time to time. We have to stay vigilant. The Government and the HKMA will closely monitor the situation and clarify when needed. We have the capability, experience and every confidence to tackle the challenges.
The second concern of the market is mainly on the so-called sanctions inflicted by the US, using the national security legislation for the HKSAR as an excuse. The US has announced that it would cancel its special treatment for Hong Kong in aspects such as tariff and export of advanced technology. However, the fact is that the annual amount of local manufactured goods exported to US only accounts for less than 2% in our local manufacturing and less than 0.1% of our total value in export. And it has never been easy to import advanced technologies and equipment from the US, while alternatives are available from the Europe or Japan markets. In short, although the US’s actions so far would cause certain disturbances to the market, the actual impact is limited.
So how will the situation evolve? This has to be analysed from a broader view. The US is the biggest economy in the world and any of its actions could bring disruption to the normal operation of the market. We will stay alert, keep a close watch and react suitably. On the other hand, China is the second largest economy in the world and has been maintaining a quick growth for years. China’s development potential and its huge market are crucial to the development interests of many transnational corporations. Impact to Hong Kong is inevitable in the China-US conflict. Yet, as long as we could continue to maintain our institutional strength and the stable operation of the market, Hong Kong still enjoys a unique position as an international financial centre in the Asian time zone.
Although the US claimed to impose restriction measures on Hong Kong, it is noteworthy that the US indeed has been enjoying substantial economic and other benefits in Hong Kong. In the past decade, the US's trade surplus with Hong Kong has been the biggest among all its trading partners, totalling almost US$300 billion. Hong Kong was US's third-largest market for wine exports and fourth-largest market for beef and beef products. In addition, US’s service industries, particularly the financial and professional services sectors, are also having substantial interests in Hong Kong. Any restriction measure would only at the same time harm the interest of US’s enterprises in Hong Kong.
In fact, the objective of the national security legislation for HKSAR is to restore social stability, public safety and in turn a stable environment for business and investment in Hong Kong. Enterprises with normal operation do not need to worry. Other leading international financial centres in the world are also having their own national security law. For foreign investors in Hong Kong, they can still take full advantage of Hong Kong’s institutional strengths. For instance, under the principle of “one country, two systems”, enterprises could set foot in Hong Kong to tap into the Mainland market with our westernised legal system and business models, our deep and wide capital market, as well as our deep pool of talents.
Hong Kong has always been in a unique position, and perhaps sometimes at the frontline of the competition between the two biggest economies. Yet it also brings us opportunities in furthering the development of Hong Kong’s economy and financial services. Looking ahead, the latest development may speed up the process for those Chinese enterprises currently listed overseas to return to the Hong Kong market for listing. Innovation and technology enterprises and other companies in the Mainland seeking international capital may also give higher priority to Hong Kong as their funding raising platform.
With the Mainland as our hinterland, as well as our commitment to the LERS and the free flow of capital, Hong Kong will remain a hub for international capital, further strengthening the effective operation of our financing function. Last week, MSCI, a world-leading index company, has announced the license of issuing index futures and options contracts based on a suite of indexes on Asia and Emerging Markets to be transferred from the Singapore Exchange Ltd. to the Hong Kong Exchange & Clearing Ltd. This signifies the market’s confidence in Hong Kong.
With the policy support of the Central Government, the Guangdong-Hong Kong-Macao Greater Bay Area (GBA) development plan also provides a great room for Hong Kong’s development. The People’s Bank of China, China Banking and Insurance Regulatory Commission, China Securities Regulatory Commission and the State Administration of Foreign Exchange have together issued a total of 30 guidelines in supporting the development of financial services in the GBA. Hong Kong’s financial sector is looking forward to the establishment of a two-way wealth management connect scheme in the GBA, which would bring enormous business opportunities to the industry and its employees.
Looking back in history, the development of any international financial centres can never be a gift granted by other countries. Hong Kong’s status as an international financial centre is a result of the hard work of many generations, as well as the strong support by our country all along. As the second largest world economy, China’s continuous reform and opening up will generate a vast demand for financial services. This is the strongest support and driving force for Hong Kong to maintain its status as an international financial centre and to keep moving forward amid changes.
May 31, 2020