In the annual report of 2007-08, I made a remark that my first full year as Chairman of the Securities and Futures Commission (SFC)
was “one of stark contrasts” – euphoric markets in the first half and the start of the subprime crisis towards year-end. While the global
financial crisis may have abated three years on, uncertainty – and not just on the financial front – continues to pose endless challenges
for a financial regulator.
International risks
It has been an eventful spring, marked by political upheavals in the Middle East and North Africa (MENA) and a massive earthquake and
tsunami in Japan. While unrest in the MENA region could dent oil output and stoke inflationary pressures globally, the natural disaster in
Japan’s northeast has damaged some of its nuclear plants, posing a serious threat to public safety and requiring major reconstruction that
will further burden its already heavy government debt and potentially undermine economic growth. Nuclear energy is undergoing a rethink
globally and this could have a major impact on future energy supply and cost.
These developments complicate the uncertainty that already surrounds the uneven global economic recovery and growth and the assurance of global financial stability, given that balance sheet restructuring after the global financial crisis is incomplete and slow, and leverage remains high.
Moreover, the world is still coping with the sovereign debt crisis in peripheral Euro zone economies and unsustainable sovereign debts and fiscal deficits of larger economies. Concern is growing that these could unravel as interest rates normalise or increase to fight inflation or as investors demand higher yield for the risk of holding sovereign debt. As banks are major holders of sovereign debt, they would be particularly vulnerable to a price adjustment. There is also the risk that prolonging the current low-interest-rate environment in advanced economies would encourage a comeback of higher yielding exotic financial instruments, making faster growing emerging markets more attractive to capital inflows and asset prices in these markets highly vulnerable to major correction once interest rates normalise.
Against this backdrop, regulatory reforms are progressing but face implementation challenges of fatigue and of having to roll out the legislative, rule and procedural changes to give effect to the reforms, which can be quite complex, more so where different national systems are involved. It is in the interest of policymakers, regulators and industry to work together to achieve the desired outcomes without the unintended consequences.
Regional risks
Asia is also not immune to the risks that are playing out internationally. Inflationary pressure is growing as oil prices are likely to remain high in the face of geopolitical tensions, while changing demographics in Asia and the nuclear crisis in Japan are likely to maintain pressure on already increasing food prices in Asia. When monetary easing reverses in advanced economies, the higher interest rates could potentially destabilise financial markets if defaults by borrowers impair bank balance sheets and force banks to rein in lending and disrupt economic activities and growth. The debt servicing burden of governments also could become unsustainable in the face of rising interest rates and growing deficits.
Although Hong Kong has emerged relatively unscathed from the global financial crisis, it faced its own set of challenges. Asia’s faster growth had attracted capital inflows and this was given a further boost by the announcement of a second round of quantitative easing by the United States. Hong Kong’s stock market comfortably absorbed these inflows without much impact on the price-earnings ratios of companies. Prices in the property markets of Hong Kong and the Mainland increased substantially, prompting policy makers on the Mainland and Hong Kong to introduce prudential measures to cool the property market and to consider policies to increase the supply of affordable housing.
Staying vigilant
Hong Kong is in a relatively fortunate position given its proximity and role in bridging capital flows from and to Mainland China, the world’s second largest economy that is continuing on its growth path. But as a major international financial centre, Hong Kong cannot afford to be complacent. Hong Kong is a highly open market and is affected by developments from around the world and also from the Mainland. Hence, the SFC has to remain vigilant to developments both outside and inside Hong Kong in order to assess their implications and consider appropriate action as required to maintain the orderly functioning of our securities market. We need to continue to maintain regular dialogue with the industry, as well as other regulatory agencies and the Government, and to strengthen our regulatory system as required to maintain a robust market infrastructure and the confidence of investors.
Over the past year, we took steps to introduce measures to improve industry practices and strengthen investor confidence. A key measure is enhanced disclosure requirements for investment products and fine-tuning the guidelines governing the sales practices of intermediaries. Other measures are in the pipeline and progress is on track for market consultation in due course. The SFC is mindful of the importance of ensuring that our regulations remain relevant and effective and are in tandem with international standards.
Bigger role as China’s world stage
China’s growing economic influence offers Hong Kong huge opportunities. In addition to its traditional role as the world’s window to China and the Mainland’s international capital-raising platform, Hong Kong is a testing ground to broaden the renminbi’s role on the world stage. In fact, the twelfth Five-Year Plan has a chapter devoted to Hong Kong and Macau for the first time, underlining the potential of the offshore renminbi centre as a future growth sector for Hong Kong.
One indicator of the potential is the rapid growth in renminbi deposits, which have grown more than seven times from the end of 2009 to RMB451.4 billion as at the end of March. The market has responded positively to the opportunities to develop renminbi products. The SFC will keep a watchful eye on any additional risks that may accompany the stream of renminbi products and its related transactions, review the market situation constantly, and closely collaborate with other regulators to pre-empt potential problems.
So once again, vigilance will be our watchword. We will press ahead with educational initiatives, using all mass media channels, to caution investors not to jump on the bandwagon without fully understanding the risks of this asset class.
On the industry front, closer economic ties with the Mainland have attracted more intermediaries from across the border to set up operations in Hong Kong. As a major asset management centre in the region, Hong Kong, indeed, is in a unique position as a springboard for Mainland fund houses to gain experience before venturing overseas.
Hong Kong is committed to healthy competition and will continue to maintain a robust regulatory framework and market infrastructure and diligently enforce our rules so that Hong Kong remains an attractive investment destination for intermediaries and investors alike.
Balancing act
I was asked recently when would be a better time to be a financial regulator. Would it be when the markets are robust or would it be when markets face a downturn, problems crop up, and everyone turns to you for answers?
I have seen ups and downs and I am convinced that regulators don’t have “good times” or “bad times,” only no time to slack off. As a financial regulator, we are always
trying to balance naturally different self-interests that sometimes diverge. Besides ensuring that the industry infrastructure is sound and that industry participants behave appropriately, the SFC also has a statutory obligation to help develop Hong Kong as a financial centre and to safeguard investor interests. The balancing act gets more demanding as investment products and financial markets get more complicated.
Regulators are not in a popularity contest and we have to maintain a healthy dose of scepticism. We have to remain coolheaded and objective whatever the market situation, keep a keen eye on our objectives and act to achieve the desired outcomes.
We also recognise the importance of ensuring that our organisational design and structure remain effective to meet the SFC’s strategic and operational objectives and needs, and have initiated a review to improve our organisational governance and effectiveness.
To achieve our objectives, our efforts alone are not sufficient. We need the market and investors to act with self-discipline and responsibility. Discipline on all our respective parts would be the best assurance of a quality market that would be in the interest of all of us.
The SFC has faced many challenges. The diligence and commitment of our staff are outstanding, while ingenuity in dealing with some complex situations and, above all, good team spirit, have contributed to our success in meeting these challenges. I thank the staff and the Board for their unstinting support, dedication and contribution. I also wish Martin [Wheatley] all the very best for the future, as he leaves Hong Kong after almost six years as CEO of the SFC to take up more exciting regulatory challenges in Britain, his homeland.
Dr Eddy C Fong
Chairman
