Financial Secretary Paul Chan

Today's discussion, "Conversations with Global Investors", will focus on how investors could position themselves to manage risks and capture future opportunities. It just cannot be more timely.

While I look forward to panelists' sharing about their valuable insights in their respective investment areas, I would like to share how Hong Kong has weathered through the risks and volatilities in our financial markets.

To set the scene, let us acknowledge that the global economic outlook and the investment environment are extremely challenging to everyone. Supply chain disruptions have failed to ease following the three-year COVID-19 epidemic. Aggravated by geopolitical tensions, particularly those from the Russia-Ukraine conflict this year, inflation in advanced economies has been pushed to levels not seen for decades. Aggressive, prolonged tightening of monetary policies by central banks to curb inflation will further dampen global demand and investments.

Hong Kong is an international financial centre (IFC), but we are also a small and open economy. We virtually have no natural resources and rely heavily on external trade and investments. We have no capital control. Our economy is highly susceptible to external volatility. Turmoil in markets outside is destined to impact Hong Kong.

At a city level, how do we manage the financial market risks brought by a world characterised by high uncertainties and volatility? Central to this is our belief that we must deal with security and development together in a well co-ordinated manner. Security and development are two mutually dependent subjects. Financial stability is an integral component of security which is the prerequisite for economic development. Yet, economic development provides the best support to security as it strengthens our ability and capability to fend off challenges and risks.

That is why over the past three challenging years, we have paid much attention to ensuring our financial stability and security.

First, we have established a surveillance system to detect risks in our financial markets. Together with the financial regulators, we have adopted a cross-market, co-ordinated and round-the-clock monitoring mechanism over all sectors of the financial market. It provides, on a rolling basis, regular and in-depth as well as ad hoc reports of the markets to enable us to detect if risks have been building up.

Second, we have stringent capital and other requirements on the regulatees. We conduct on-site inspections and stress test them on both regular and an ad hoc basis to ensure that they have conducted themselves properly and are resilient; and reports filed by them are accurate and complete. We will act decisively as and when necessary.

Third, we maintain strict discipline and build strong buffers in preparation for turbulence. Take our banks as an example. In Hong Kong, the capital adequacy ratio of banks currently stands at around 20%, which is way higher than the international standard of 8%; their liquidity ratio is around 155%, compared to the international standard of 100%. Classified loan ratio is just about 1%. Our banking system had assets of US$3.3 trillion as at the end of last year, more than nine times our gross domestic product.

One aspect of financial stability that critics like to talk about during times of volatility, is the Hong Kong dollar exchange rate under the Linked Exchange Rate System. Over the years, we have kept the exchange rate of the Hong Kong dollar at US$1 to HK$7.75 to $7.85. When the strong or weak side of the band is touched, the Monetary Authority will come in to take or give Hong Kong dollars, in accordance with the system design. The consequential increase or decrease in the aggregate bank balance will trigger an interest rate adjustment, and the market will eventually find its equilibrium. As mentioned above, we have built very strong buffers and resilience in the banking system to support this, and we have been exercising strict discipline to keep the capital inflow in liquid US dollar-denominated instruments so that we can pay them back anytime. It is all the more worth mentioning that our foreign currency reserves stand at around US$430 billion, equivalent to about 1.7 times Hong Kong's monetary base.

So if you bet against the Hong Kong dollar, you are bound to lose. You can verify my advice with certain hedge fund managers in the US who have been wrong about the Hong Kong dollar time and again.

As for securities, Hong Kong's stock market is vibrant, active, highly liquid, efficient and transparent, attracting investors from all over the world. We attach great importance to investors' protection as well. We believe that for a market to succeed in the long term, it must be trusted by both market participants and investors.

To achieve this, we set clear rules for our markets, stringent requirements on our participants, maintain high transparency of its functioning and ensure that policies and practices are implemented in a consistent and predictable manner. For they are the cornerstone of international investors' confidence in the Hong Kong market, where they can make use for investment and fundraising.

The stock market in Hong Kong has been quite volatile recently. There have been calls that the Hong Kong Special Administrative Region Government should do something, for example, about short selling in the market.

Let me tell you that on a daily basis, we analyse in-depth the performance of our market. For example, factors causing such volatility; its performance vis-à-vis markets in the region and the global markets; the short-selling volume and the underlying reasons; who are the players; the relationship between short selling and short positions; any concentration risks, etc. We also look at the futures market as well as the derivatives market, and analyse the information in the trade repository system. We also look at the clearing houses, licensed corporations and mutual funds to ensure that they are financially sound and resilient. So far, there has been no cause for alarm.

In short, amid market volatility, we focus on whether the markets are functioning in an orderly manner and properly, and whether there are systematic risks, irregularities and vulnerabilities that will threaten Hong Kong's financial stability.

I hope my sharing on our philosophy and approach towards market regulation has facilitated better understanding and inspired more trust in our system and our markets. Hong Kong is an IFC with an internationally aligned regulatory regime, deep liquidity, great transparency and much resilience, with proper safeguards to protect our investors. We are simply the best IFC in Asia. You are most welcome to do business and make more investments here.

Financial Secretary Paul Chan gave this speech at the Global Financial Leaders' Investment Summit: Conversations with Global Investors seminar on November 3.