Summit Dialogue on Global Economic Governance: Regulating the Global Economy for Global Growth
Singapore, 13 November 2009
Distinguished guests, ladies and gentlemen,
Good morning. I am delighted to join this important dialogue on global economic governance. Hong Kong is known as a business city, so I'll get straight down to business.
In the past year, we've experienced what, for many of us, will be the worst global financial crisis in our lifetime.
Concerted international efforts and extraordinary domestic policy measures have been able to stave off even more serious disasters. While some economies have seen the waning of the recessionary tide, the fundamentals of many economies remain impaired. Recovery from the turmoil will be gradual at best, and there will be bumps along the way. Gyrations in the financial markets, and bubbles in asset markets remain ahead of us.
As the crisis seems to have bottomed out, policymakers are shifting their focus from stimulating recovery to what the preferred mode of recovery and economic development should be going forward.
There is no turning back the tide of globalisation. So, better global governance will be required. We support the principles of balanced, inclusive and sustainable growth, free trade, and open market. These are all enshrined in the G20 Pittsburgh Statement and previous APEC statements.
There is no "one-size-fits-all" model of economic development, given the varying socio-economic background and needs of individual economies.
Having said that, it is beneficial for economies to draw lessons from the experiences of one another. So let me share some Hong Kong experience with you.
While Hong Kong was hit hard during the global economic turmoil, we have recovered quite well compared to some advanced economies. We put this down to sound fundamentals and lessons learnt from the 1997 Asian financial crisis, which I will go into a bit later.
In dealing with the current crisis, we adopted a strategy of "stabilising the financial system, supporting enterprises, and preserving employment". I chaired a Task Force to explore ways to overcome the crisis as well as look for a silver lining - that is, new opportunities and ways to enhance Hong Kong's competitiveness.
We launched short-term measures to tide over immediate difficulties. These measures cost some US$11 billion, the equivalent of 5.2% of our GDP, which was a higher percentage than the average of the relief packages in G20 economies.
On the back of a stabilizing global economy and renewed growth momentum in the Mainland of China, our measures are paying off. In the second quarter of this year, our economy grew 3.3% over the first quarter. We anticipate further improvement in the third quarter.
The crisis also forced us to take a hard look at the role of government in promoting economic development. We decided that we should continue to grow our four pillar industries - financial services, tourism, trading and logistics, and professional services. At the same time, the financial crisis gave us a rude shock - we could not rely solely on these four industries for sustained and stable growth.
So, we decided to nurture and develop six other industries where Hong Kong already had a competitive edge - education services, medical services, testing and certification, environmental services, innovation and technology, and cultural and creative industries. We are not picking winners - these industries will sink or swim on the strength of market interest and customer demand. What we provide is policy support to help them develop further.
Taking a broader view, we remain as committed as ever to the free trade ideals of APEC. We firmly oppose protectionist measures that hinder the flows of goods and services. Such moves are counter-productive and do more harm than good. If you think about it, the interaction between the slump in global trade and the global financial crisis advocates the best argument against protectionism. Now, at least, everyone has the bitter experience of how much prosperity suffers when trade suffers.
As far as our financial markets are concerned, we have so far fared well. During the crisis, our markets operated smoothly. We introduced timely and forceful measures to maintain stability in the initial stages of the crisis. These included a full deposit guarantee, and various capital and liquidity standby assistance for banks, which were never taken up.
Our banking system remained sound and provided much needed support for continued economic activity in Hong Kong. Liquidity was not excessively squeezed. Our banking sector remains a net creditor in the international banking system. Capital adequacy ratio and liquidity ratio of locally incorporated banks are well above the 8% and 25% statutory minimums.
Our monetary system was also robust. Even under very stressful international conditions, the Hong Kong dollar exchange rate against the US dollar remains stable under our Currency Board System.
Earlier I mentioned the 1997 Asian financial crisis. Many have said it was a blessing in disguise. The 1997 crisis allowed many Asian economies to realise their weaknesses. As a result they reformed, revamped and strengthened their markets. This laid a solid foundation for them to weather the current crisis relatively better that the US and European economies.
For Hong Kong, in the wake of the 1997 crisis, we strengthened our Currency Board System and discouraged over-leveraging in the property market. We developed a formal risk assessment framework to ensure stability of our banking system. We set risk management standards especially on credit, market and liquidity risks for our banks. We also adopted the Basel II capital framework to strengthen capital adequacy, risk management and transparency.
For the securities market, we merged the Stock Exchange of Hong Kong, the Hong Kong Futures Exchange, and their associated clearing houses into one single entity. We transferred their function of supervising intermediaries to the Securities and Futures Commission.
We also established a robust system interface between Hong Kong's real time multi-currency payment systems and bond settlement system. This has provided a safer and more efficient settlement channel for HK dollar, US dollar and Euro-denominated bonds, which helps to reduce settlement risks.
All of these reforms enhanced our ability to weather the current crisis.
The process of recovery and repair worldwide is still incomplete. Economies must sustain the necessary policy response for balanced, inclusive and sustainable growth, and draw up exit strategies in a co-ordinated manner. Reform of the global financial architecture should remain a top priority on the action agenda.
Hong Kong will maintain steadfast support for international and regional fora to improve global economic governance and financial regulatory reform, and will actively participate in their activities. We have something worthwhile to contribute.
We are an active member of the Financial Stability Board. We are represented in all the three standing committees of the Board, providing advice and expertise on vulnerabilities assessment, regulatory co-operation, and standards implementation issues. This is a role that we willingly and wholeheartedly accept.
We also take concrete action to translate high-level principles agreed at the Financial Stability Board into practical guidelines for implementation in Hong Kong. For instance, following the release of the Principles for Sound Compensation Practices in April this year and the Implementation Standards in September, we have drafted a "Guideline on a Sound Remuneration System" for industry consultation in October. We plan to promulgate the Guideline by the end of this year.
Looking ahead, we are mindful that financial over-regulation may dwarf the recovery path. We are closely following international discussions on the regulation of hedge funds and credit rating agencies. We support measures conducive to active due diligence and risk monitoring, and to reducing the risk of financial instability.
Domestically, we shall continue to upgrade our financial regulatory system, but we shall try to strike a reasonable balance between market development and investor protection.
We shall continue to play to our strengths. For example, we have an effective short-selling regime in Hong Kong, under which people are prohibited from conducting naked short selling. This arrangement is stricter than in many other places but conducive to better market discipline. We are further considering the introduction of short position reporting requirements to increase transparency. We stand ready to share our experience and, indeed, our Securities and Futures Commission currently chairs the Task Force on Short Selling under the International Organisation of Securities Commissions.
Ladies and gentlemen, challenges are nothing new to Hong Kong. Our resilience and entrepreneurial flair have carried us through difficult times before, and they will again this time. We have emerged from this crisis with a renewed vision and strength. I hope that other economies, and of course the business community, can also turn this crisis into a new opportunity for growth and prosperity.