Eddie Yue: Keynote speech - Bloomberg Global Regulatory Forum
2023
Keynote speech by Mr Eddie Yue, Chief Executive of the Hong Kong Monetary
Authority, at the Bloomberg Global Regulatory Forum 2023, Hong Kong, 31 October
2023.
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Opening
Good morning, ladies and gentlemen. Thank you for having me today. I'd also like to
welcome Bloomberg for bringing its Global Regulatory Forum to Asia, for the very first
time.
Global landscape
2023 has already proved to be an eventful year in the regulatory and supervisory
space. At the global level, following the banking turmoil earlier in the year, a lot of
emphasis has been put on enhancing the resilience of the sector, as well as in
addressing the underlying challenges exposed by the banking turmoil, such as changes
in technologies and customer behaviour. The Financial Stability Board (FSB) and Basel
Committee on Banking Supervision (BCBS), together with authorities around the world
including the HKMA, are drawing out the lessons learnt, in particular on banks'
prudential and resolution frameworks, interest rate and liquidity risks, and the dynamics
of deposit runs.
Another regulatory priority is crypto-assets. Global regulators are working together to
address the vulnerabilities in these markets, which were clearly exposed in a number of
episodes last year. Various jurisdictions in Asia have recently introduced or enhanced
their regulatory regimes on crypto-assets. Given the borderless nature of crypto service
providers, it is important to have globally-consistent regulation to address the risks they
pose.
The third key area is climate change. The impact of climate change is global in nature
and coordinated action from authorities is crucial to meet the challenges ahead,
particularly in Asian emerging market economies where climate financing could be hard
to come by, and where the trade-offs between socio-economic development and
climate transitions pose particularly thorny questions to policymakers. Finally, more
efforts would be needed to improve climate data and disclosure in order to better
understand and model climate-related risks, and develop effective supervisory
approaches.
The HKMA has long been actively involved in international policy forums, including in
respective of these three areas. We are delighted to see that Asian and emerging
markets are becoming increasingly active in their international participation, and that
international institutions are responding positively. For example, amongst other
meetings that the Bank for International Settlements hosts, the central bank governors
from major emerging market economies - including Emerging Asia, Latin America,
Middle East and Africa, as well as Emerging Europe - meet three times a year to
discuss issues of importance to the economies. And under the FSB, there are six
regional consultative groups, including one for Asia. I have been asked to chair both of
these platforms, and am hoping to use them to better communicate the voices of Asian
economies, to ensure that Asia plays a part in international standard-setting and
policymaking that is commensurate with our growing economic and intellectual contributions
of the region.
Approach in Hong Kong
I would now like to move closer to home. As an international financial centre, we come
across issues that are similar to those that our peers in the rest of the world face, and
we ensure that our rules are of high quality and consistent with international
standards. At the same time, we also take care to strike a balance with market
development. Given the incidents that we have witnessed over the past year, I would
argue that robust regulation is more important than ever to the longer term growth of
our market. Let me elaborate using the HKMA's three key development focuses,
namely, Mainland China, tech and innovation, and sustainable finance.
(i) Mainland China opportunities
As we all know, Hong Kong is the dominant gateway between Mainland China and the
rest of the world. About two-thirds of direct and financial investment between the
Mainland and the rest of the world is intermediated through Hong Kong. And this ratio
has remained largely stable throughout the years, despite the rapid opening up of the
Mainland and growth of its economy and financial market.
Over the past decades, we have been working closely with Mainland authorities to
expand our product offerings. For example, our various "Connect" initiatives have
allowed Mainland and international investors to access products in each other's
market. Starting with the launch of the H-share framework three decades ago, to the
Connect schemes for stocks and over the years expanding into bonds, ETFs, wealth
management products and swaps, the different initiatives are the go-to channels for
cross-border investment and underpin some important milestones such as the inclusion
of the China Government Bond in major bond market indices.
As well, our Renminbi products and services offerings have mushroomed. Last year,
more than RMB330 billion of dim sum bonds were issued in Hong Kong, more than
double the issuance volume the year before. And last year's issuance record was
again surpassed in the first eight months of this year. Hong Kong's offshore RMB's
market has developed the liquidity, infrastructure and ecosystem that are capable of
serving the financing, investment and risk management needs of corporates and
investors alike.
There are many factors behind the success of Hong Kong as a China gateway and an
offshore RMB hub. Our "one country, two systems" institutional arrangement is critical:
it facilitates cross-boundary cooperation between Mainland and Hong Kong authorities,
while allowing Hong Kong to maintain a market environment that is familiar to market
participants from the rest of the world.
The design of these products and service offerings are also conducive to international
participation. Investors using these Connect schemes can continue to follow common
offshore market practices and rules that they are accustomed to, and leveraging their
established legal and operational set-ups in Hong Kong, without the need to open
onshore accounts and engage onshore agents.
All these are familiar factors. I would, however, argue that Hong Kong's robust
regulatory regime has played a crucial, if understated role. For our fellow Mainland
regulators, the various Connect schemes in effect allow investors that are not directly
under their purview to access the Mainland market. Mainland authorities would need to
have confidence that such investors are properly regulated in Hong Kong. Consider
how much emphasis that Mainland authorities put in market stability and order, the trust
that they have in Hong Kong's regime is remarkable. Likewise for international
investors: the fact that they are now investing in a market - the Mainland market -
without actually having connected to that market shows how much they trust that Hong
Kong regulators have done their homework for them, and that we will make sure that
their interest is well-protected and the investment channel will run in an orderly
manner. Our robust regulation is what underpins this trust and in turn, our success as
the hub for all things China.
(ii) Tech and innovation
Tech and innovation is another area that I believe regulation and market development
are complementary and can feed into each other in a virtuous cycle. This is particularly
the case for virtual assets. There was a time when virtual assets and the so-called
cryptocurrencies were seen as a way to escape from the reach of governments and
regulation. Some continue to hold this belief, but they are now a minority. Two reasons
explain this. First is some high profile failures in the industry. Many of the causes
behind the failures - poor governance, misuse of client assets, etc. - are not new and
are exactly the kind of issues that regulations were created to address in the first
place. Second, and perhaps paradoxically, is the early success of some virtual
assets. Their staying power has attracted the attention of many mainstream investors,
who in turn demand that these assets are subject to the same set of robust regulation
that such investors are used to before they are willing to participate in the market. Of
course new products and services call for fresh perspectives and approaches, but the
very core of robust regulation remains more relevant than ever.
And this is exactly the approach that Hong Kong took when the government announced
the framework for virtual asset development last October. It is clear in the framework
that an important prerequisite for virtual asset development is the need to have robust
regulatory guardrails. Under the "same activity, same risks, same regulation" principle,
regulators have developed a comprehensive framework for the regulation of virtual
asset activities, and are now rolling out the various components one by one.
An important component is the regulatory regime for Virtual Asset Service Providers
that the Securities and Futures Commission has launched. The regime aligns the
requirements for Virtual Asset Exchanges in terms of anti-money laundering and
counter-terrorist financing, and investor protection to those currently applicable to
traditional financial institutions, hence offering licensed Virtual Asset Exchanges the
status and credibility to access a wider net of investors in the Hong Kong market. An
additional benefit is that financial intermediaries and banks can partner with licensed
Virtual Asset Exchanges when offering clients with virtual asset dealing services,
provided that relevant regulatory conditions are met. From the perspective of Virtual
Asset Exchanges, a licensing status can offer them the potential to open new
distribution channels in Hong Kong, tapping into our sizable asset and wealth
management market.
Another important element of the virtual asset world is stablecoins. Given their nature
and intended usage, stablecoins - especially payment-related ones - will likely have
relatively broad and frequent interconnection with the mainstream financial system and
day-to-day commercial financial and economic activities. An appropriate regulatory
environment will help address financial stability risks possibly posed by such assets,
and promote the orderly and sustainable development of the industry. In this
connection, the HKMA concluded the consultation on stablecoins regulation in January
and, based on industry feedback, is working to bring certain activities relating to
stablecoins into the regulatory perimeter.
(iii) Sustainable finance
Similar to virtual asset, sustainable finance is a development area that I believe would
benefit from better regulation. Come to think of it, the comparison is interesting because
the two industries cannot be more different: regulators worldwide all want to promote
sustainable finance, whereas most are at best sceptical about virtual assets. Whereas
the sustainable finance industry recognised the benefit of regulation early on, going as
far as coming up with their own industry principles for green and social bonds when the
regulators were not quite ready, the virtual asset industry has always taken a more
libertarian anti-regulation stance.
Let us first acknowledge the tremendous progress that has been made in regulating
sustainable finance. For example, in disclosure: building on the guidelines by Task
Force on Climate-Related Financial Disclosures (TCFD), the International Sustainability
Standards Board (ISSB) launched the Sustainability Disclosure Standards in June. The
standards provide the global baseline for firms to communicate their environment
impact and climate risk exposure, as well as how they plan to transition to a more
sustainable future. Disclosure and reporting are important not just in providing the kind
of information that investors and other stakeholders need to engage with companies
and nudge them towards sustainability, the process of preparing the relevant disclosure
is also important in concentrating minds and compelling management to think seriously
about the issues. Hong Kong is supportive of better disclosure. We are the first Asian
jurisdiction mandating TCFD-aligned climate-related disclosure across the financial
sector by 2025, and with the launch of ISSB standard, regulators in Hong Kong are
working to align relevant local requirements with this global baseline.
Other than disclosure, good progress is also being made on risk management, stress
testing, climate scenario design, etc., which are important issues discussed often at
international forum such as Network for Greening the Financial System (NGFS).
At the same time, a lot more needs to be done. First is on taxonomy, or simply a
definition of what is green and what is not. Many jurisdictions have now launched their
own taxonomies, which in isolation is extremely useful because they provide clarity to
firms and investors alike. Problems, however, emerge when you look at all the
taxonomies in total. Proliferation of taxonomies could be confusing and may inhibit
cross-border sustainability investment. Many taxonomies are in fact quite similar; and
harmonisation can be done. The HKMA, for example, is developing a local green
classification framework on the basis of the Common Ground Taxonomy jointly
developed by China and the EU. We release a prototype of the local framework in May
to gather feedback, and are aiming to launch the final version soon.
Another important area is transition finance. It has evolved from a fringe topic mired in
greenwashing controversy, to generally accepted as a mean to support emerging
markets and hard-to-abate sectors in achieving their climate objectives. Here the issue
is almost the opposite of that of taxonomy: while we now have a consensus at the
conceptual level, operationalising transition finance remains a challenge, given that
what qualifies as transition finance is often firm, industry and country-specific.
Conclusion
I hope I have given you a good overview of our approach to regulation and the
symbiosis between regulation and market development. For sure regulation is no
panacea to all the problems that we face, but good regulation should provide a strong
foundation for markets to prosper. And I am sure that we would all learn more about
this at the rest of today's event.
Thank you.