Eddie Yue: Hong Kong's treasury markets - the vibe is back
Keynote speech by Mr Eddie Yue, Chief Executive of the Hong Kong Monetary
Authority, at the Treasury Markets Summit 2023, Hong Kong, 4 September 2023.
* * *
Distinguished guests, members, and friends of the Treasury Markets Association
(TMA), ladies and gentlemen.
Opening
It is an honour and a pleasure to be here today at the Treasury Markets Summit.
I still remember the excited anticipation of the Treasury Markets Summit last year - it
was one of the first big in-person financial industry events in Hong Kong after three
years of COVID. Since then, international and cross-border travel has resumed, tourists
are returning and many large-scale events have come back to Hong Kong. We have
been taking every chance to reconnect with our existing business friends in the
Mainland and overseas, and promote our financial services and opportunities to new
friends.
I know that many of you have also been putting a lot of effort into further developing our
treasury markets with much success. But this is no time for complacency. There is a
Chinese saying that "if you stop moving forward, you fall back" (). So in my remarks
today, I would like to highlight some key developments in the past year, and also some
exciting new initiatives that we are undertaking.
Hong Kong's financial markets remained resilient despite challenges
As you all know, the past year was challenging for both the local and global financial
markets. First, the US has tightened monetary policy at the fastest pace in recent
history, raising the interest rate by a total of 525 basis points since March last year. For
comparison, in the last cycle, the policy rate rose just 225 basis points over three years
between 2015 and 2018. This aggressive tightening has caused a lot of challenges for
the investment environment across different asset classes. Added to this, the problems
at US and Swiss banks earlier this year came as a further shock to market
confidence. And currently, signs of distress in the Mainland's property sector and
concerns about its macro outlook are also weighing on market sentiment. That being
said, the Mainland authorities have announced a number of measures to support the
property market and the economy, and I am confident that things will get better over
time.
But despite all these challenges, Hong Kong's monetary and banking systems,
supported by our banks and other treasury market professionals, have withstood these
challenges and continue to remain sound and resilient. This is no small achievement,
and this stability is underlined by a credible and strong monetary system that is well
understood by the market.
Let me start with a few observations on the HKD market. Along with the US monetary
policy tightening, the widening interest rate differential between the Hong Kong and US
dollars has incentivised carry trades, which have led to the weak-side Convertibility
Undertaking (CU) being triggered repeatedly. A smaller Aggregate Balance (AB) has
made the Hong Kong dollar more sensitive to liquidity conditions and movements in the
US dollar interest rate.
It's important to bear in mind, despite the sometimes excitable headlines in the press,
that the triggering of the weak-side CU and the automatic interest rate adjustment
mechanism are part of the way the Linked Exchange Rate System is designed to work.
The Link is the bedrock of the Hong Kong dollar market, which has continued to operate
in a smooth and orderly way as it is designed to do. It so happens that this year is the
40th anniversary of the Linked Exchange Rate System. For four decades, it has
weathered many economic and interest rate cycles - and several outright crises - and
has proved to be highly stable and resilient. The Link has served Hong Kong well and
will continue to do so. Just want to say it again for record: we have absolutely no
intention to change it!
But in case words like "automatic" make it sound as though this all just happens, let me
be clear that we recognise that many of you working in the treasury market also make
an important contribution to the stability of the HKD market. With a lower AB, timely and
efficient funding management have become more important than they were when
liquidity was plentiful. The HKMA has maintained close communication with banks to
facilitate the adaptation to changing liquidity conditions, and encourage efficient
recycling of liquidity to the interbank market. There is also a range of liquidity facilities
for banks to use when they need to. In addition, following industry feedback, in July the
HKMA significantly narrowed the long-standing intra-day time gap of Exchange Fund
Bills allotment and redemption, from a few hours to just a matter of minutes. This
seems just a small technical fix, but calibrations like this helped minimise possible
friction in interbank liquidity and make the market even more efficient.
Our banking system is also holding up well, despite the challenges faced by the
financial markets. Capital and liquidity positions of the banking sector remain robust,
providing strong buffers for banks to withstand shocks. The total capital ratio of locally
incorporated banks was close to 21% at the end of June 2023, well above the
international minimum requirement of 8%. The average Liquidity Coverage Ratio of
major banks was 170% in the second quarter of 2023, well above the statutory
minimum requirement of 100%. In addition, the overall deposit level of the Hong Kong
banking system remains stable, increasing by 1.4% in the first seven months of
2023. Risks arising from exposures to the Mainland's property sector of the Hong Kong
banking sector are manageable. There was no concentration of risks at individual
developer level or at individual bank level. The HKMA has all long been reminding
banks to uphold prudent credit underwriting standards and carefully manage credit
exposures to highly-leveraged companies.
Maintaining financial stability requires the joint efforts of both the regulators and the
financial industry. One example of successful cooperation among the HKMA, the TMA
and the banks is the monumental effort that has gone into LIBOR transition, which has
just crossed the finish line this year. Several years of planning and close collaboration
were essential to ensure that this global initiative to replace LIBOR with alternative risk-
free rates was implemented smoothly in Hong Kong. The result is that our financial
markets have remained resilient and steady in the post-LIBOR era.
The resilience of our monetary and banking systems have reinforced Hong Kong as a
leading financial centre, allowing treasury markets in Hong Kong to keep evolving so as
to stay ahead of the game.
Staying ahead of the game
Based on this solid foundation, we have been undertaking multiple initiatives to make
sure that we "move forward", with a focus on market connectivity; RMB
internationalisation; and digitalisation.
Market connectivity
Hong Kong's unique status as the dominant gateway to China is what sets us apart
from other international financial centres. Our proximity to the Mainland, coupled with
common law system, bilingual environment and world-level infrastructure, makes us the
perfect "testing ground" for Mainland's capital account liberalisation. The suite of
mutual market access schemes serves as a compelling example. From Stock Connect,
Bond Connect, Wealth Management Connect, to ETF Connect and Swap Connect, we
have striven to provide diverse and efficient channels for cross-boundary investment,
asset allocation and risk management.
Our efforts do not stop here. Just to share a few examples of our discussion with
Mainland regulators on further enhancements. For Wealth Management Connect, we
are exploring ways to widen the product scope, enhance sales and promotion
arrangements, and allow more financial institutions to participate. We are making
progress and I look forward to sharing more with you in the very near term.
For Bond Connect, we are looking to provide more interest rate risk management and
liquidity management tools to global investors while expanding the list of Southbound
market makers. To further develop the recently launched RMB Counter in the stock
market, we are exploring the inclusion of the RMB counters in Southbound Stock
Connect. All of the above will deepen the two-way opening-up of Mainland financial
markets while further consolidate Hong Kong's role as an international financial centre.
RMB internationalisation
But Hong Kong's edge as the leading offshore RMB business hub is not just a matter of
our mutual market access with the Mainland. In fact, Hong Kong has the largest
offshore RMB liquidity pool, occupies the top position for global RMB payments, and
has a mature RMB business ecosystem which has been enhanced over the
years. Looking ahead, the long-term economic growth and capital account opening
process of China would continue to provide impetus to further advancements of
offshore RMB business. Market participants would find RMB useful for their
crossborder trade settlement as well as investment diversification amid the challenging global
macroeconomic conditions. To meet growing RMB business demand, we will continue
our efforts in enhancing RMB liquidity, product and infrastructure in our offshore RMB
market. Meanwhile, the TMA has recently formed a working group of experienced RMB
specialists from banks in Hong Kong to gather views on offshore RMB market
development. I look forward to the working group's proposals on opportunities and
concrete steps in taking things forward.
Enhancement of our offshore RMB business platform allows us to strengthen our
intermediary role which connects China and the rest of the world, and in turn promote
wider use of RMB in the international markets. An increasing number of economies,
including those in the Middle East and the ASEAN, want to use the RMB to settle their
trade with China. So we are working with banks to promote more participation in our
offshore RMB market from ASEAN and the Middle East. We think the industry can
really play a big role in overseas promotion events. We also welcome the industry to
build use cases to address existing pain points, and we are happy to provide policy
support.
In addition, Hong Kong's offshore market is the best place to serve the development of
the Greater Bay Area (GBA). Enterprises in the GBA are able to handle their
crossborder settlement, investment, financing and asset management in Hong Kong for their
overseas business expansion. We believe all these initiatives and developments will
reinforce Hong Kong's role as an international financial centre and offshore RMB
business hub, and equip ourselves with more experience and capabilities to facilitate
further RMB internationalisation and China's economic development as well.
Digitalisation and innovation
I've just explained how the HKMA will be focusing on market connectivity and RMB
internationalisation going forward. Let me now move on to the third and final focus area
- digitalisation and innovation. In fact, digitalisation and innovation is at the same time
an underlying enabler that makes the previously-mentioned exciting developments
possible. For example, if not for digitalisation and the relevant tools, the HKMA would
be hard-pressed to imagine, let alone begin, the multi-year journey of overhauling the
CMU.
Although digitalisation is so critical to the future of an organisation, regrettably some
entities, public or private, are still hesitant to digitalise their processes - possibly
because not everyone is fully convinced that the long-term benefits could outweigh the
short-term costs of investment and efforts. More often than not, the benefits of
digitalisation in terms of the efficiency gained and cost saved are not that easy to
measure at the early stages of a digitalisation project.
Though success may take time to materialise, the HKMA has continued to stay very
open-minded and push ahead with digitalisation and innovation on many fronts. For
instance, we published our new Fintech Promotion Roadmap two weeks ago to further
accelerate fintech adoption in the financial services industry. In addition, we have
continued our work on a proposed regulatory regime for stablecoins, with the aim of
fostering responsible and sustainable development of this nascent development. The
HKMA continues to invest in digitalisation and innovation because we believe that they
can open up new opportunities. Let me elaborate a bit here.
First is the opportunity to test a concept and validate efficiency gains in a controlled
scale. Technology enables us to think big to address pain points in a way previously not
possible. Take our tokenised bond journey as an example. Previously we developed a
prototype digital platform for green bond tokenisation with BIS Innovation Hub's Hong
Kong Centre, with cutting-edge features like individual wallets for investors and tracking
environmental impact in real time.
When it comes to implementation, with real-money transactions involved, we tend to
start small and proceed more prudently. By starting small - targeting only institutional
investors - we assisted the Government in issuing the world's first tokenised
government green bond and tested out the efficiency gains of the tokenisation
technology in practice. It was encouraging to see that settlement time shortened from
T+5 to T+1; and the possibility to further reduce that to near real time in theory.
Another example is Project mBridge. Last year, a pilot was conducted to test the
concept of applying central bank digital currency to solve the key pain points of
crossborder payments. The favourable outcomes of the pilot confirmed the potential and
ability of mBridge to speed up cross-border payments, lower the cost, improve
transparency, and simplify operational complexities. So we value greatly this first
opportunity to just pilot ideas to solve longstanding pain points.
Second is the opportunity for public-private sector collaboration. Using again the
example of tokenised green bond, during the process we collaborated with the private
sector closely - the HKMA contributing our neutrality and credibility; the private sector
contributing their technical know-how, speed, and agility. On the technical front, while
the commercial blockchain platform used in the issuance was built by a bank, the cash
tokens on the platform were issued by the HKMA as a central bank. This kind of close
technological collaboration was rather unprecedented, and allowed both the public and
private sectors to learn from each other over the course of the project.
The same can be said for our ongoing e-HKD study. Back then, I confessed that Hong
Kong, like other places that have numerous advanced retail payment options, lacks a
"10 times better" use case of e- HKD to attract mass adoption. The same challenge still
holds today. That's why for the past couple of months, the HKMA has been conducting
pilots with the industry to explore innovative, potential use cases. The pilots are still
ongoing, but thanks to our partners in the private sector, our understanding of different
design choices of the e- HKD system as well as potential implementation issues has
significantly deepened.
If not for the initiatives above, these new forms of public-private sector collaborative
innovation would not have realised in the first place, and we wouldn't have been able to
break new ground.
Closing
Change is the only constant in the economy and financial markets. We have ridden out
various storms and difficulties in the past few years, and the future will not be without
challenges. But Hong Kong maintained its unmatched adaptability and resilience, and I
am happy to see that our efforts continued to bear fruit in the past year. The city's roles
as an international financial centre and as the "super-connector" between the Mainland
and the rest of the world have been demonstrated, and I am sure that - with your
support - they will remain strong and secure.
Hong Kong is ready to embrace the opportunities ahead. The future will depend on the
joint efforts of policy makers and, more importantly, market participants like every one
of you attending the Summit today.
So I would like to conclude by thanking the TMA and its members for their contributions
in making our financial markets stronger.
I know we can rely on the continued support and active participation of the TMA and all
its members and we look forward to sharing this journey with you. Thank you.