Provisional Legislative Council

PLC Paper No. CB(1) 1241
(These minutes have been
seen by the Administration

Ref : CB1/PL/FA/1

Panel on Financial Affairs

Minutes of Meeting held on Monday, 13 January 1998, at 4:30 pm in Conference Room B of the Legislative Council Building

Members present :

Hon Paul CHENG Ming-fun, JP (Chairman)
Hon NGAN Kam-chuen (Deputy Chairman)
Hon NG Leung-sing
Hon Eric LI Ka-cheung, JP
Hon Ronald ARCULLI, JP
Hon CHAN Choi-hi
Dr Hon Philip WONG Yu-hong
Hon CHIM Pui-chung

Members attending :

Hon LEE Kai-ming
Hon CHAN Yuen-han
Hon Bruce LIU Sing-lee
Hon KAN Fook-yee

Members absent :

Dr Hon David LI Kwok-po, JP
Hon Henry WU
Dr Hon LAW Cheung-kwok

Public officers attending :

Mrs Rebecca LAI, JP
Deputy Secretary for Financial Services

Clerk in attendance :

Ms Estella CHAN
Chief Assistant Secretary (1)4

Staff in attendance :

Mr Andy LAU
Senior Assistant Secretary (1)6

I Confirmation of minutes and matters arising

(PLC Paper No. CB(1)771- Minutes of meeting on 1 December 1997)

The minutes of the meeting on 1 December 1997 were confirmed.

II Information papers issued since last meeting

(CB(1)741 - Reply from the Stock Exchange of Hong Kong to Mr Tony FUNG's letter on ways to improve the operation of the Exchange

CB(1)748 - A letter from the Counsul-General of Japan on the policy package adopted by the Japan Government in order to help revitalize Japan's economy)

2. Members noted the information papers issued since the last meeting.

III Items for discussion at the next meeting

3. Members agreed that the next regular meeting would be held on 12 February 1998, immediately after the joint meeting of the Financial Affairs and Transport Panels scheduled for 4:30 pm - 5.15 pm to discuss the equity injection into Kowloon-Canton Railway Corporation for implementation of West Rail.

4. Members also agreed to discuss the Securities and Futures Commission's Budget for 1998-1999 at the next regular meeting.

(Post meeting note: At the request of the Administration and with the concurrence of the Chairman, the discussion of the item on the Securities and Futures Commission's Budget for 1998-1999 would be deferred to a later meeting and a new item on prosecution of directors for failing to file annual returns was included in the agenda for the meeting on 12 February 1998.)

IV Briefing on developments in the financial markets of Asia

(CB(1)776(01) - information paper provided by the Administration)

5. The Chairman said that as members continued to be very concerned about the financial turbulence in the region, this special meeting was convened in order for the Administration to brief members on the latest developments in the region ' s financial markets and the possible impact they might have on Hong Kong.

6. Noting that the Secretary for Financial Services (SFS) was unable to attend the meeting due to an urgent commitment, the Chairman stressed that members of the Panel were extremely disappointed that SFS had not made any effort to attend meetings of the Panel to discuss the recent development of the financial market.

7. The Chairman pointed out that the recent turmoil in the financial market had caused a lot of distress to the general public, especially because of the unprecedented high interest rates brought about by the Government ' s effort to defend the linked exchange rate. A lot of difficulties were being faced by businesses during the downturn of the economy. Public statements by the Government served little purpose in addressing the public concern. There was a strong demand for the Government to promptly introduce concrete measures to restore the confidence of Hong Kong ' s people. Given that the state of the economy was changing rapidly, members of the Panel considered it unacceptable to wait until the Budget Speech to be made on 18 February 1998 for the Government to introduce stimulating measures to restore the confidence and re-vitalize the economy of Hong Kong.

8. The Deputy Secretary for Financial Services (DS for FS) conveyed the apologies of SFS to the Panel for not being able to attend that meeting. She remarked that as the Chief Executive and other senior Government officials had spoken separately, through the media, about the financial turmoil, she would not repeat their statements. She would, however, highlight that being an open international financial centre, Hong Kong obviously could not be immune from global and regional economic factors and market forces.

9. As to measures to remedy the adverse impact of the recent interest volatility on the economy, DS for FS said that with the government ' s effort to defend the linked exchange rate in order to maintain currency stability, volatility in interest rates could not be avoided. The recent surge in the Hong Kong dollar interest rates was also aggravated by the seasonal demand for additional bank notes. She stressed that the government was not indifferent to the difficulties that high interest rates might have caused to the commercial sector and the public at large. However, it reflected to a large extent the risk premium prevailing in Asia due to the financial market uncertainties in the region which unfortunately was beyond the control of Hong Kong, or for that matter any individual economy in the region. She anticipated that the interest rates would gradually come down when the financial turmoil in the region subsided and the market uncertainties were removed.

10. Regarding the impact of the financial turmoil on Hong Kong, DS for FS advised that in terms of the impact on the stock market, the exchange rates against the US dollar and the short term interbank interest rates, Hong Kong had in fact suffered to a lesser degree than other economies in the region. Whilst the adjustment process might be inconvenient and awkward in the short term, the Administration had every confidence that with its strong economic fundermentals, viable market structure and sound regulatory framework, Hong Kong would be able to rebound sooner than other countries in the region. To bring this message to the knowledge of Hong Kong ' s people would help restoring their confidence. Recent events had proved that the market reacted rationally and steadily, and reflected the sophistication and the maturity of Hong Kong investors.

11. Facing a high interest environment, a member requested the Administration to introduce a new tax allowance to offset high mortgage interest payments and to lower the overall rates percentage charge so as to relieve the burden of general public. DS for FS replied that she would relay the suggestion to the Financial Secretary. As to whether it was feasible to request the banking sector to consider restructuring the payment schedule of loans so as to provide short term relief to borrowers, DS for FS said that whilst she would convey the proposal to the Hong Kong Monetary Authority for consideration, she would also remind members about the importance of maintaining the stability and integrity of the banking sector.

12. As regards whether separate assessments had been made on the impacts of high interest rates on specific sectors of the economy and the growth of gross domestic product (GDP), DS for FS said that she would confirm with the Government Economist if an assessment had been conducted on the economic impact of the high interest rates on various sectors of the economy and whether such kind of information, if available, would be included in the Budget. She however anticipated that given the strong economic performance in the first half of 1997/98, there would still be a positive growth in GDP for the whole financial year.

13. A member opined that there seemed to be a lack of co-ordination amongst the Administration and other regulatory bodies in dealing with the financial turmoil and suggested setting up a contingent body to look into related matters and solicit inputs from academics and the financial sector. DS for FS did not agree that there existed a co-ordination problem amongst the Administration and other regulatory bodies. Under the leadership of the Financial Secretary, the Financial Services Bureau maintained a very close working relationship with the regulatory bodies including the Hong Kong Monetary Authority, the Securities and Futures Commission, the two Exchanges and the clearing companies. The Chief Executive had also been kept informed of the development of the matter. As such, there was no need to establish a separate body under a different name to look after the matter. She also advised that a review on the financial turmoil was underway, and academics, practitioners in banking, fund management and investment sectors, and overseas experts had been invited to provide advice. However, given that the incident was still evolving, it would not be appropriate to arrive at a conclusion at that stage. The Administration would brief members on the result of the review when available. Admin

14. DS for FS further explained that in an open market like Hong Kong, price movements were a fact of life which reflected the way that market forces worked. They therefore should not be taken as prima facie evidence of market deficiencies. In fact, the fact that the market had continued to operate efficiently demonstrated the strength of the market system and its ability to stand up to challenges like those experienced during the turmoil.

15. In response to a member ' s question on the origins of the financial crisis in the region, DS for FS said that excessive external debts borne by economies in the region was the trigger of the crisis. There had been overheated investments in domestic infractructure which were financed by short-term external debts. Liquidity problem in servicing some of these debts in the short term by some economies set off a rippling effect on the quality of other debts in the region. Crisis broke out when investors lost confidence in the whole region.

16. A member expressed concern about whether the liquidation of the Peregrine Investment Holding would be followed by similar incidents in the brokerage industry and how the situation would be monitored to safeguard investors’ interest. DS for FS clarified that the liquidation of the Peregrine was due to the financial difficulties of the listed investment company and there was no such problem in other subsidiary companies of the Group which dealt with securities or trustee services and were under the existing regulatory regime. The Administration and the relevant regulatory bodies had paid close attention to the Peregrine incident. Apart from keeping track of the most current financial positions of brokerage firms, the regulatory body had issued guidelines to all firms in the industry to ensure that protective measures were in place to safeguard investors’ assets.

17. In the light of the failure of Peregrine, some members enquired about the implication for the retirement scheme industry and the current state of the various retirement schemes managed by the Peregrine Group including its own. DS for FS advised that all the mutual funds and provident fund schemes managed by the Peregrine Group including its own were held separately under the custody of the Peregrine Asset Management Company, and these assets would not be affected by the liquidation. As to a member ' s question on the details of the portfolio, DS for FS advised that she could not disclose this kind of information as they were solely collected for regulatory purposes.

18. .Regarding the impacts of the financial turmoil on the future development of retirement schemes, DS for FS said that whilst investments would inevitably involve a certain degree of risk, the future Mandatory Provident Fund (MPF) or other private retirement schemes would be subject to stringent investment guidelines, and all trustees would be regulated by appropriate legislation. There would also be requirements on adequate public disclosure to ensure transparency. As such, the short term fluctuation of the financial market should not be a reason for losing confidence in retirement schemes. She would re-affirm with the MPF Office that investment standards and guidelines would be properly in place and that there would be adequate provisions to govern the disclosure of information by trustees in the interests of beneficiaries. Public education programmes would be launched in due course to familiarise the public with the operation and regulation of the scheme.

19. In response to a member ' s question on recent changes in the levels of US dollar and Hong Kong dollar bank deposits, DS for FS replied that she would provide the information after the meeting. Admin

20. A member noted that Taiwan seemed to have outperformed Hong Kong in withstanding the financial turmoil and asked if there was any lesson to be drawn. DS for FS replied that she did not have the information in hand and agreed that the case of Taiwan would warrant further study.

21. Another member questioned whether it was appropriate that HKMA had set its intervention level below the linked exchange rate of HK$7.8/US$. DS for FS advised that there had long been debates on the matter. The Hong Kong Monetary Authority was presently conducting a review on the matter and would shortly submit a report to the Financial Secretary. Regarding the particular incident in October last year when the overnight Hong Kong Interbank Offered Rate soared up sharply, she explained that there had been speculative activities in the foreign exchange market with people short selling Hong Kong dollars. Having assessed the market situation, it was considered appropriate to intervene in the foreign exchange market at that time. She, however, pointed out that the triggering point for intervention would vary from case to case and would be subject to detailed examination.

V Any other business

22. There being no other business, the meeting ended at 5:40 pm.

Provisional Legislative Council Secretariat
2 April 1998