LegCo Paper No. CB(1) 280/96-97
(These minutes have been seen
by the Administration)
Ref : CB1/PL/FA/1

LegCo Panel on Financial Affairs

Minutes of Meeting
held on Thursday, 10 October 1996 at 10:00 a.m.
in the Chamber of the Legislative Council Building

Members present :

    Dr Hon HUANG Chen-ya, MBE (Chairman)
    Hon Eric LI Ka-cheung, OBE, JP (Deputy Chairman)
    Hon Martin LEE, QC, JP
    Hon Ronald ARCULLI, OBE, JP
    Dr Hon Philip WONG Yu-hong
    Hon Andrew CHENG Kar-foo
    Hon Paul CHENG Ming-fun
    Hon Ambrose LAU Hon-chuen, JP
    Hon NGAN Kam-chuen
    Hon SIN Chung-kai

Members absent :

    Hon David K P LI, OBE, LLD (Cantab), JP
    Hon CHIM Pui-chung
    Hon James TO Kun-sun
    Dr Hon LAW Cheung-kwok
    Hon Mrs Elizabeth WONG, CBE, ISO, JP

Member attending :

    Hon IP Kwok-him

Public officers attending :

Item I
Mrs Lessie WEI, JP
Acting Secretary for Financial Services
Mr David Carse, OBE, JP
Deputy Chief Executive
Hong Kong Monetary Authority
Mrs Pamela TAN, JP
Director, Mandatory Provident Fund Office
Acting Commissioner of Insurance
Mr Frederick W H HO, OBE, JP
Commissioner for Census & Statistics
Mr A R Hearder, JP
Official Receiver
Mr Gordon W E Jones, JP
Registrar of Companies
Miss Elley MAO
Acting Government Economist

Item II
Secretary for the Treasury
Mr Kevin HO, JP
Deputy Secretary for the Treasury
Mr M J T Rowse
Deputy Secretary for the Treasury
Mrs Carrie LAM
Deputy Secretary for the Treasury

Clerk in attendance:

Ms Estella CHAN
Chief Assistant Secretary (1)4

Staff in attendance :

Miss Pauline NG
Assistant Secretary General 1
Miss Anita SIT
Senior Assistant Secretary (1)6

I Briefing by the Secretary for Financial Services on the Governor’s Policy Address

The Economy

Mrs Lessie WEI briefed members on the economic background against which the policy commitments of the Financial Services Branch (FSB) were drawn up. The salient points were as follows:

  1. The fundamentals of the local economy were turning better in 1996, as shown by improved labour market conditions, lower consumer price inflation, reduced trade deficit and reviving stock and property markets. Against this background, it was estimated that there would be a 4.7% real growth in Gross Domestic Product (GDP) in 1996, which was at par with the growth rate in 1995.
  2. The financial services sector employed about 5% of the local workforce and contributed to 10% of Hong Kong’s GDP.
  3. The mission of FSB and related regulatory bodies was to maintain Hong Kong’s status as an international financial centre. This mission was getting more difficult to achieve due to growing competition from other countries in the Asia Pacific region, the demand for a greater variety of financial products, higher expectations for services, and calls for more openness and transparency in the markets. The Financial Secretary, in view of these trends, had announced in his 1996-97 budget the initiatives to promote Hong Kong as a first-class international financial centre and to strengthen its position as a provider of high-quality services to the rest of the region and to the world.

The banking system and the debt market

Mr David Carse briefed members on the work programmes of the Hong Kong Monetary Authority (HKMA). The salient points were as follows:

  1. One major role of HKMA was to promote the stability, efficiency and transparency of the banking system. During 1996, HKMA had continued to promote standards for the proper risk management of derivatives and other financial instruments through the issue of new guidelines to the banking sector in March 1996. HKMA would follow this up through visits to examine the risk management systems of authorised institutions and would increase the use of auditors to carry out examinations of internal control systems on a more regular basis. HKMA was reviewing the capital regime in relation to banks’ risk exposure in derivatives and securities trading. In addition, a new reporting system on banks’ activities in derivatives and securities trading would take effect at the end of 1996.
  2. HKMA planned to put in place in 1997 an "intranet" for the banking sector which would improve communication between HKMA and authorised institutions and would enable the electronic submission of returns.
  3. Transparency of the banking system required sufficient disclosure of information by banks to depositors and their counterparts for fair assessments of the banks’ financial strength and performance. In this regard, banks were required to publish their inner reserves in their 1995 accounts. Even more disclosure by banks would be required in their 1996 accounts. To improve banks’ openness and fairness with their customers in relation to matters such as terms and conditions and charges for various banking services, HKMA was preparing a Code of Banking Practice which would set out agreed standards for the provision of banking services for personal customers.
  4. A Real Time Gross Settlement System (RTGS) to minimise the risks faced by banks in respect of payments among themselves would be introduced at the end of 1996. It would pave the way for Hong Kong in linking up with other RTGS systems abroad, including the one being developed in China.
  5. Establishment of a legal and regulatory framework in respect of "smart cards" (multi-purpose stored value cards) was underway through the Banking (Amendment) Bill 1996, which was being examined by LegCo. The Bill also provided for a new regulatory framework for those money brokers who acted as intermediaries in the wholesale foreign exchange and deposit market.
  6. Preparation work for the setting up of a mortgage corporation was underway and the corporation was scheduled to start operation in the third quarter of 1997. The establishment of the mortgage corporation and the impending issue of 10-year Exchange Fund notes would give a boost to the development of the debt market in Hong Kong.
  7. The International Monetary Fund World Bank meetings in 1997 would provide an important means of boosting international confidence in Hong Kong and HKMA was working hard with the rest of Government to make the event a success. In addition, HKMA was strengthening its bilateral and multilateral links with other central banks and supervisory bodies.
  8. While the financial systems of Hong Kong and China would remain separate after 1997, the linkages between them were bound to increase. HKMA was committed to enhance mutual understanding on how the respective systems worked and to identify areas where closer liaison was required, for example, in payment systems and in bank licensing and supervision issues.

On how far the parent office of a foreign bank’s operating branches or a branch in Hong Kong was expected to support the branch(es) when the latter ran into difficulties, Mr Carse advised that the parent office was expected to fully support its branch(es) in Hong Kong. The responsibility of the parent office to its branches was implied in the fact that the branch(es) was an integral part of the same legal entity as the foreign bank. Part of HKMA’s authorisation criteria and its ongoing supervision were designed to ensure that the parent office overseas was capable of doing that. As to whether such commitment was guaranteed in any formal undertaking, Mr Carse advised that since a branch of a foreign bank was part of the legal entity of the bank, it was superfluous to require the parent office to give a formal undertaking regarding its commitment to its branch(es).

As regards the situation where a foreign bank set up a subsidiary, instead of a branch, in Hong Kong, Mr Carse advised that HKMA would expect the foreign bank to give an undertaking, usually referred to as a "letter of comfort", that it would fully support its subsidiary in Hong Kong and would effectively provide capital and liquidity when needed. As to how far the undertaking was binding on the foreign bank, Mr Carse advised that a letter of comfort was a moral but not a legally binding undertaking. Hence, the primary safeguard should be the capital and liquidity requirements on the subsidiary in Hong Kong to ensure that the subsidiary had enough financial resources to support itself under normal circumstances. In response to a member’s enquiry on the reason for not requiring foreign banks to give a legally binding undertaking for their subsidiaries operating in Hong Kong, Mr Carse replied that such requirement was not an accepted international practice, and would make Hong Kong a less attractive place for foreign institutions to set up business.

On whether HKMA considered it necessary for foreign banks which had subsidiaries operating in Hong Kong to provide letters of comfort anew to the future Hong Kong Special Administrative Region (SAR) government, Mr Carse responded that it was understood that there should be no change to Hong Kong’s monetary system after the transfer of sovereignty in 1997. There was no reason to consider that the existing undertaking given by foreign banks would no longer apply after then. On the contrary, HKMA and the Administration had been relaying the message to foreign banks that the objective of the Basic Law was to achieve a seamless transition of the monetary system.

In response to members’ enquiry on whether there was any plan to change the present allocation of central bank functions between HKMA and certain banks in Hong Kong, Mr Carse advised that the Hong Kong Government, latterly through the HKMA, had been performing the major central bank functions in Hong Kong since late 1980s; the HKMA formulated and implemented monetary policies, managed the Government’s reserves and carried out banking supervision. The Hong Kong and Shanghai Banking Corporation (HSBC) was now purely a commercial bank, though it did perform some functions which some central banks did, like issuing bank notes. However, it should be recognized that the note issuing banks, i.e. HSBC, the Bank of China and the Standard Chartered Bank, were effectively acting as agents for the Government in this respect. The banks had to provide US dollars to be held by the Exchange Fund as backing for the notes to be issued, while the Government paid for the expenses for the note issue. At the moment, HSBC also acted as the management bank of the clearing system, but it would no longer do so when the RTGS was commissioned at the end of the year. Under the RTGS, all fully licensed banks in Hong Kong would hold settlement accounts with HKMA.

On whether there was any plan for HKMA to take over the note issuing function, Mr Carse advised that although there was provision in the legislation for the Government to issue bank notes in its own right, there was no intention to change the current system, which had worked well and was well understood by the public. It was also efficient in the dissemination and circulation of bank notes.

Regarding the regulation of non-banking activities carried on by banks, such as insurance underwriting and securities trading, Mr Carse advised that it was recognised that if different regulators were involved in supervising different parts of a bank’s business, there would be potential problems of overlapping and inefficiency. On the other hand, the banking regulator, i.e. HKMA, might not possess adequate expertise in certain areas such as securities and insurance. HKMA was having discussions with the Securities and Futures Commission to identify the best way of supervision over banks’ securities related business. The objective was to arrive at a regime which would minimise overlapping without leaving any gaps in supervision. HKMA would also liaise with the respective regulators to draw up the best regulatory framework for other kinds of non-banking activities carried on by banks. A member opined that it was important that banks should not be granted exemption for its activities from the respective regulatory provisions without sufficient justifications.

The Mandatory Provident Fund System

Mrs Pamela TAN briefed members on the progress of the preparatory work for the Mandatory Provident Fund (MPF) System. She advised that good progress had been made since the MPF Office was established in mid-February 1996, having resolved many issues in the process. She confirmed that it was the Administration’s intention to put all the related subsidiary legislation through the legislative process within the 1996-97 session.

A member expressed concern that if the future Chief Executive of the SAR did not agree to the MPF System, all the preparatory work for the implementation of the system would be in vain. Mrs WEI acknowledged that the support of the Chief Executive was essential for the successful implementation of the MPF System. She said that the Administration was confident that the case for early implementation of the system was well justified.

Members expressed doubt on whether all the related subsidiary legislation could go through LegCo within the 1996-97 session, given the Administration’s indication that it would need to consult Members on a series of subjects. Mrs WEI said that in order to smoothen the legislative process, the Administration planned to brief Members on the issues involved and then draw up the subsidiary legislation according to the approaches and principles agreed with Members. Mrs TAN further advised that the Administration was ready to brief members on the issues from November 1996 onwards and had drawn up a schedule of subjects to be discussed at eight sessions. The schedule would be provided to members for reference.

(Post-meeting note: The list of subjects for the briefing sessions on the MPF System has been circulated to all LegCo Members vide LegCo Paper No. CB(1) 133/96-97 dated 16 October 1996, and all LegCo Members have been invited to attend the first briefing session scheduled for 4 November 1996.)

Having noted members’ concern about the time constraints of Panel meetings and the fact that the subject was of wide concern among LegCo Members, the Chairman said that non-Panel Members would be consulted on the appropriate forum for the briefing sessions on the MPF System.

Supervision of insurance industry

On strengthening the regulatory framework for the insurance industry, Mrs WEI advised that the Administration’s general policy on supervision of the financial markets was to encourage the markets to implement self-regulation at the first level. At the second level, supervision was conducted by the respective statutory bodies. She acknowledged that at present, nearly all financial markets except the insurance industry were supervised by the respective statutory bodies independent from the Administration. She however remarked that the present regulatory frameworks were developed progressively rather than radically. She affirmed the Administration’s intention to establish an independent statutory body to supervise the insurance industry in a step-by-step manner. The success of such a move would be dependent on a number of factors, in particular the support of LegCo Members and whether funds necessary for the establishment of such a body would be approved. Another important issue was whether the regulatory authority should also be responsible for the supervision of schemes under the MPF System. It was expected that a more substantive proposal would be available by the second half of 1997.

A member expressed support for the establishment of a statutory regulatory body for the insurance industry but was concerned that the Commissioner of Insurance had been focusing his supervision on the financial position but not on the conduct of insurance companies and intermediaries. Furthermore, a proper mechanism for receiving and handling complaints from the public and from practitioners was lacking. He therefore urged the Administration to set up a licensing system and a complaint handling system. He also pointed out a possible gap in the Law in respect of the relationship between insurance brokers and insurance companies as legislation governing the relationship between employers and employees did not apply to this aspect.

Mr H Y MOK advised that under the Insurance Companies Ordinance, persons involved in the management of insurance companies were required to meet the fit and proper criteria. For intermediaries, there were two codes of practice, one for agents and the other for brokers. The codes were to facilitate self-regulation by the industry. The Administration would continue to discuss with the industry on how to enhance the professionalism of the intermediaries, including providing a standardised training for all intermediaries. He also advised that the legislation in respect of licensing of insurance intermediaries had been enacted in June 1995. Having noted a member’s comment that the existing licensing requirements did not pertain to forming a basis for professionalisation of insurance intermediaries, he said that the Administration would review the licensing system after a longer period of implementation and the member’s comment would be taken into account.

Expansion of Companies Registry’s database

On the Companies Registry’s initiative to expand its computer database in 1997 with the aim of introducing remote, on-line access to key information on companies during 1998, Mr Gordon W E Jones advised that the plan was to build up a database of key facts of all companies registered in Hong Kong. At present, the database covered the company names index, the document index, the index showing all the directorships held by directors of listed companies and details of disqualification orders issued by the courts in respect of directors. The expanded database would in addition cover the details of all companies’ registered office addresses, share capital structure, details of all the directors of all types of companies in Hong Kong and company charges. He remarked that this was a massive data conversion exercise. It was hoped that the project would be completed by 1998. The intention was to facilitate on-line search of information by customers in accountancy firms, legal firms, banks and secretarial firms.

On the time needed to update the database upon the Registry’s receipt of new information, Mr Jones advised that although the updating could not be done immediately upon the receipt of documents as in most cases, the documents needed to be registered before the database was amended, the Registry had been doing that as speedily as possible. So far, he was not aware of any significant delay in this respect.

Mechanisms for handling complaints related to the financial sector

On the extent of HKMA’s role in handling complaints from bank customers, Mr Carse remarked that the complaint hotline set up under HKMA pursuant to the wide public concern about debt collecting agencies employed by banks was intended to be an expedient measure to facilitate HKMA’s supervision over the conduct of banks. He said that apart from the concern of significant resource implications, there was also the concern of whether it was appropriate and legitimate for HKMA to extend its role to protection of banks’ customers. HKMA’s role under the Banking Ordinance was mainly concerned with strategic issues such as maintaining the stability of the banking system.

On whether FSB would consider establishing a financial services complaint unit to receive all complaints related to financial investment, Mrs WEI advised that complaints in respect of different types of financial investment were presently handled by the respective regulatory authorities. In order to keep in view of the overall picture of all complaints related to the financial sector in Hong Kong, FSB would make an arrangement to obtain regular reports on the complaints received by all regulatory authorities.

Mrs WEI expressed reservation on the suggestion that FSB should follow the Transport Branch (TB) in establishing a central complaint unit, and pointed out that there was much difference between TB and FSB in the way they played the regulatory role. She advised that members of the public were welcome to make enquiries through the public enquiry telephone line of FSB, which was included in the directory of enquiry telephone numbers of Government departments available at District Offices. She assured that enquiries and complaints received through the enquiry line would be carefully attended to by FSB.

A member was of the view that FSB, as a policy branch for the financial affairs in Hong Kong, should play a more active and direct role in receiving public complaints.

II Briefing by the Secretary for the Treasury on the Governor’s Policy Address

Mr K C KWONG briefed members on the policy commitments of the Finance Branch in 1996 as set out in the booklet entitled "The 1996 Policy Address - Management of Public Finances" tabled.

Fiscal reserves and the Land Fund

A member noted that according to the Governor’s policy address, Hong Kong’s fiscal reserves was forecast to rise to over HK$170 billion by the end of 1997-98, and the Land Fund to nearly HK$150 billion. He enquired if the Land Fund would be merged with the fiscal reserves after the transfer of sovereignty in 1997. Mr KWONG advised that it had been clearly stated in the 1984 Sino-British Joint Declaration that the Land Fund would be at the disposal of the future SAR government.

On the suggestion that since Hong Kong had accumulated huge reserves, the Administration might consider appropriating funds from the reserves to improve the living standard of the poor in the community, Mr KWONG advised that the level of the Government’s reserves was not a factor directly relevant to the control of public expenditure. The most important principle underlying the Government’s management of public finances was that public expenditure, over time, should not grow faster than the economy as a whole.

As regards when and how the reserves would be utilized, Mr KWONG advised that such should be based on the particular circumstances of the time. For example, in the 1995-96 financial year, there was a surplus in the General Revenue Account but the total public expenditure exceeded the total public revenue by HK$3.1 billion for that year. The deficit was attributed to the need to appropriate funds from the Capital Investment Fund for equity injection into the Airport Authority and the Mass Transit Railway Corporation for the new airport project and the airport railway project. For that year, the fiscal reserves were utilized to cover the deficit.

In response to a member’s enquiry on whether the present level of Government’s reserves was considered by the Administration as sufficient, Mr KWONG stated that the present level was considered reasonable in the sense that it could convey a message to the world that Hong Kong maintained a stable economy and a financially sound public sector at this time of transition.

The 1997-98 budget

On whether the budget to be put to LegCo in March 1997 would be a 12-month budget or otherwise, Mr KWONG confirmed that it would be a 12-month budget covering the period from 1 April 1997 to 31 March 1998 and the budget would be submitted in its entirety to LegCo in the Estimates exercise. In response to the Chairman’s enquiry on whether such was also the understanding of the Chinese and the British governments, Mr KWONG said that the two sides had reached the agreement in the Expert Group set up under the Joint Liaison Group (JLG) that the budget would be submitted to the legislature in accordance with the procedures stipulated in the Law.

As to whether the Administration would have to re-submit the budget to the provisional legislature after 30 June 1997 if the present LegCo was replaced by a provisional legislature at that time, Mr KWONG affirmed the Administration’s commitment that the 1997-98 budget would be implemented in its entirety upon approval by the present LegCo.

Regarding whether the budget would include provisions for the provisional legislature for its operation from 1 July 1997 to 31 March 1998, Mr KWONG said that such would be revealed in the budget to be submitted to LegCo in March 1997. He reiterated the position of the Administration that it was opposed to the setting up of a provisional legislature to replace the present LegCo.

In response to members’ enquiry about the matters yet to be resolved by the Expert Group regarding the 1997-98 budget, Mr KWONG said that the budget was prepared according to the conventional work schedule. According to the work schedule, the Expert Group would discuss the revenue part in the coming few months. He however could not disclose details on the agenda and deliberations of the Expert Group as such had to be kept confidential.

Handing-over of assets to Hong Kong SAR government

As regards the handing-over of the Hong Kong Government’s assets to the future SAR government, Mr KWONG advised that it had already been clearly stated in the 1984 Sino-British Joint Declaration that all the assets now owned by the Hong Kong Government would become the assets of the future Hong Kong SAR government after the transfer of sovereignty. In this connection, it had been agreed by the British and the Chinese governments in September 1996 after the meeting between the two foreign ministers that matters pertaining to the handing-over of assets would be discussed by the JLG. In response to members’ enquiry on whether this arrangement was indicative of problems or disagreements on the handing-over of assets, Mr KWONG said that the arrangement was made simply because the JLG was considered the appropriate forum for the Chinese side to raise queries or ask for information.

Regarding the list of property assets owned by the Hong Kong Government handed over to the Chinese Government in January 1996 as referred to in the booklet tabled, Mr KWONG advised that a copy of the list had also been provided to LegCo in January 1996.

(Post-meeting note: Members were informed vide LegCo Paper No. CB(1) 107/96-97 dated 11 October 1996 that the list of property assets owned by the Hong Kong Government was provided to LegCo in response to an oral question asked at the LegCo sitting on 10 January 1996. The list was deposited in the Library of LegCo for Members’ reference.)

A member enquired if there were any problems pertaining to the handing-over of other assets and liabilities. Mr KWONG replied that all the assets and liabilities of the Hong Kong Government were clearly recorded in the books of the Government. As regards when the Administration could report to the Panel on the details regarding the handing-over of assets (and liabilities), he advised that the subject had not yet been discussed by the JLG.

Combating tax evasion

On whether the Administration was confident that cigarettes smuggling was effectively under control, Mr KWONG advised that enforcement against cigarette smuggling had achieved very good results last year. The Administration would continue its efforts in this regard. A member opined that heavier duty should be imposed on cigarettes to compensate for the public expenditure on the health and medical services for health problems induced by smoking. Since cigarette smuggling was effectively under control, the Administration should be confident to raise the duty on cigarettes. Mr KWONG responded that in 1995-96, the duty on tobacco was raised by 9%. He would actively consider the member’s suggestion. On the other hand, the Administration would continue to strengthen the anti-smoking campaign. In response to the member’s enquiry, he agreed to provide information on the present prices of cigarettes in the black market.


On the enforcement against smuggling of diesel oil, Mr KWONG advised that this year’s result showed good improvement over the past two years. It was however considered that the enforcement in this area should be further strengthened. If necessary, more resources would be allocated to this area in 1997-98.

The meeting ended at 12:05 am.

Legislative Council Secretariat
8 November 1996

Last Updated on 18 August 1998