Developing Financial Services Industry

42.    Hong Kong is an international financial centre, and the financial services industry underpins our economy.  The industry employs 230 000 people, or six per cent of the total workforce.  It is a high value-added industry that contributes 16 per cent to GDP.  It is also a major client of professional services and drives growth in other consumer industries.  Maintaining the competitive edge of our financial services industry is crucial to economic development.  The focus of developing the industry is the diversification of its business and products.

Fund and Asset Management Business

43.    The total value of fund assets under management in Hong Kong is more than $9 trillion, ranking second in Asia.  As the global economic balance shifts more towards the East, Asia is experiencing some of the fastest wealth growth in the world. We shall seize this opportunity to further develop our fund and asset management business.

44.    To strengthen its position as a premier international asset management centre, Hong Kong will provide relevant legal and regulatory frameworks, and a clear and competitive tax environment with a view to attracting more funds of various types to base in Hong Kong to broaden the variety and scope of our fund business.  Hong Kong-domiciled funds will drive demand for professional services such as fund management and investment advice as well as legal and accounting services.

45.    To attract more private equity funds to domicile in Hong Kong, we propose to extend the profits tax exemption for offshore funds to include transactions in private companies which are incorporated or registered outside Hong Kong and do not hold any Hong Kong properties nor carry out any business in Hong Kong.  This will allow private equity funds to enjoy the same tax exemption as offshore funds.  We shall conduct consultation on the amendments to relevant tax legislation and detailed proposals.

46.    At present, investment funds established in Hong Kong can only take the form of trusts.  As an international financial centre, Hong Kong should provide a more flexible business environment for the industry to meet market demand.  To attract more traditional mutual funds and hedge funds to domicile in Hong Kong, we are considering legislative amendments to introduce the Open-ended Investment Company, an increasingly popular form used in the fund industry.  We are discussing the relevant legal and regulatory frameworks with regulators. The public will be consulted once a proposal is drawn up.

47.    To expand the distribution network of Hong Kong's fund industry, the Securities and Futures Commission is studying with the Mainland authorities an arrangement for mutual recognition of funds.  The arrangement will attract more funds to establish in Hong Kong and foster the development of those professional sectors engaged in the registration, investment management and sales of funds.

48.    In addition, the Government has introduced two bills into this Council, with a view to enhancing Hong Kong's competitiveness in the development of Islamic finance and facilitating the development of trusts services industry in Hong Kong.

49.    As the Mainland experiences rapid growth in wealth and a steady opening of its capital account, the Qualified Domestic Institutional Investor (QDII) Scheme, which allows investment of Mainland capital in offshore financial markets, is expected to be further relaxed.  This will help the growth of the private wealth management business in Hong Kong.  The number of private banks in Hong Kong has increased from 27 at end-2007 to 41 now.  To tie in with the development of private wealth management, the Government and the regulators will continue to support the work of the sector in setting up a trade association, taking forward programmes relating to the accreditation and enhancing the training of practitioners.

Insurance Business

50.    The Government is seeking to introduce a bill into this Council within this year to establish an independent Insurance Authority to align the insurance regulatory regime in the local insurance industry with international practices.  This will facilitate the development of the industry and protect the interests of policyholders.

51.    Many large enterprises in Asia are keen to run their own captive insurance companies to insure against their business risks.  To attract more enterprises to form captive insurance companies in Hong Kong, I propose to reduce the profits tax on the offshore insurance business of captive insurance companies, such that they will enjoy the same tax concessions as those currently applicable to reinsurance companies.  Attracting a cluster of large-scale captive insurers in Hong Kong will promote the development of other related businesses, including reinsurance, making Hong Kong's risk management services more diversified.

Offshore Renminbi Business Centre

52.    Hong Kong is now the world's largest and most efficient offshore RMB business hub, with the world's largest offshore pool of RMB.  Total RMB deposits and outstanding RMB certificates of deposits stood at RMB 720 billion at end-2012.

53.    Hong Kong also serves as a platform for enterprises and financial institutions all over the world to carry out various financial activities such as RMB payments, financing and investments.  RMB trade settlement conducted through Hong Kong banks in 2012 exceeded RMB 2,600 billion, a year-on-year increase of 37 per cent and representing over 90 per cent of the Mainland's cross-border trade settled in RMB.  The RMB bond market also showed continuous growth.  At end-2012, outstanding RMB bonds issued in Hong Kong exceeded RMB 230 billion, an increase of 62 per cent over end-2011.

54.    Since the launch of the RMB Qualified Foreign Institutional Investors (RQFII) Scheme at end-2011, the range of offshore RMB investment products has been broadened.  Among them, Exchange Traded Funds tracking the A-share indices have been well received by the market.  We shall continue our dialogue with the relevant Mainland authorities to expedite the next stage of RQFII's expansion, which will include extending the pilot scheme to qualified Hong Kong financial institutions.  These measures will promote the circulation of RMB funds and diversify the development of RMB investment products.  We shall continue to strengthen our market infrastructure, and stay connected with other financial centres in the world with a view to further enhancing the use of RMB for trade settlement, financing and investment at the international level, consolidating Hong Kong's position as an offshore RMB business centre.

Basel III

55.    The Basel Committee on Banking Supervision announced in early January the details of the revised regulatory liquidity standards of Basel III to be implemented progressively between 2015 and 2019.  The Hong Kong Monetary Authority (HKMA) is assessing the impact of the revision on the local banking sector to draw up a corresponding implementation plan for industry consultation.  We shall devise regulatory rules that suit our financial markets and business environment to promote the stability of our banking system.

Government Bond Programme

56.    Since the launch of the Government Bond Programme in 2009, the systematic offering of bonds has attracted local and overseas investors to the Hong Kong bond market and expanded the investment base.  As at early February this year, outstanding bonds issued under the Programme totalled about $70 billion.

57.    Given the situation of global financial markets, there has been a sustained growth in the demand from investors and financial institutions in Asia and other emerging markets for high quality public debt papers, including Hong Kong Dollar government debt.  I hope that the Government Bond Programme can be expanded to meet the criteria of certain global benchmark bond indices to attract more investors.  To further promote the sustainable development of our bond market, I propose to expand the size of the Government Bond Programme from the current $100 billion to $200 billion to provide adequate room for the Programme to continue in the next five years.  We shall move in due course an amendment resolution in this Council to raise the maximum amount of borrowings under the Government Bond Programme.

58.    The Government also issued two sets of inflation-linked retail bonds (iBond) under the Government Bond Programme.  Both the total amount of applications and the total application amounts for the iBond issued last year set a new record for local retail bonds, reflecting the investing public's greater awareness of, and interest in, retail bonds.  To maintain this growth momentum, I propose launching a further iBond issue of up to $10 billion under the Government Bond Programme.  The iBond, with a maturity of three years, will target Hong Kong residents.  Interest will be paid to bond holders once every six months at a rate linked to the inflation rates of the last half-year period.  The HKMA will announce the details in due course.  I have to point out that the further issuance of iBond is a measure to address the current low-interest rate environment.  It is a non-recurrent measure.  In the long run, the Government will not confine bond issuance to a particular type of bonds.  We shall develop different types of bonds for a more diversified bond market in Hong Kong.

Stored Value Facilities and Retail Payment Systems

59.    Over the past ten years, the number of local internet banking accounts has increased at an average annual rate of 22 per cent to over eight million at present, with an average transaction volume of around $4 trillion per month.  Shopping and bill paying on innovative online and electronic payment platforms are becoming increasingly popular.  The development of electronic payment instruments and retail payment systems can make payment processing more efficient for companies, especially those in the retail industry.  Such development will encourage local enterprises to extend their global sales networks, and stimulate the growth of other ancillary trades, including electronic transaction services and computer system developments.  We are considering possible amendments to the legislation to introduce a licensing regime for stored value electronic money and to empower the HKMA to supervise the relevant retail payment systems, which will help establish a sound regulatory regime for Hong Kong.

60.    Given the rapid developments in the global financial markets, the Government needs to tap advice from market experts.  The Chief Executive has announced the establishment of the Financial Services Development Council, a high-level, cross-sector advisory body, to offer views and suggestions to the Government on developing and promoting our financial services industry as well as reinforcing our position as an international financial centre.