LC Paper No. CB(1)1622/98-99
(These minutes have been seen by the Administration)

Ref : CB1/PL/FA/1

Legislative Council
Panel on Financial Affairs

Minutes of meeting held on Monday, 1 March 1999, at 10:45 am in the Chamber of the Legislative Council Building

Members present :

Hon Ambrose LAU Hon-chuen, JP (Chairman)
Hon Kenneth TING Woo-shou, JP
Hon James TIEN Pei-chun, JP
Hon Cyd HO Sau-lan
Hon Albert HO Chun-yan
Dr Hon David LI Kwok-po, JP
Hon NG Leung-sing
Hon Margaret NG
Hon Ronald ARCULLI, JP
Hon James TO Kun-sun
Hon CHEUNG Man-kwong
Hon HUI Cheung-ching
Hon Bernard CHAN
Hon SIN Chung-kai
Dr Hon Philip WONG Yu-hong
Hon Jasper TSANG Yok-sing, JP
Hon Timothy FOK Tsun-ting, JP
Hon FUNG Chi-kin

Members attending :

Hon Martin LEE Chu-ming, SC, JP
Hon LEE kai-ming, JP
Hon CHAN Kam-lam

Members absent :

Hon Eric LI Ka-cheung, JP (Deputy Chairman)
Hon David CHU Yu-lin
Hon Ambrose CHEUNG Wing-sum, JP

Public officers attending:

Agenda item IV

Mr CHAU Tak-hay
Secretary for Trade and Industry

Mr Kenneth MAK
Principal Assistant Secretary for Trade and Industry

Agenda item V

Mrs Rebecca LAI, JP
Deputy Secretary for Financial Services

Mr Wallace LAU
Assistant Secretary for Financial Services

Agenda item VI

Mr Martin GLASS
Deputy Secretary for Treasury

Miss Amy TSE
Principal Assistant Secretary for the Treasury

Mrs Alice LAU
Assistant Commissioner of Inland Revenue

Miss LAU Ming-sum
Chief Assessor (Acting), Inland Revenue Department
Attendance by invitation:
Agenda item V

Mrs Laura CHA, JP
Acting Chairman
Securities and Futures Commission

Mr David SO
Financial Controller
Securities and Futures Commission
Clerk in attendance :
Ms Estella CHAN
Chief Assistant Secretary (1)4
Staff in attendance :
Ms Pauline NG
Assistant Secretary General 1

Ms Connie SZETO
Senior Assistant Secretary (1)1
I Confirmation of minutes and matters arising
(LC Paper Nos. CB(1)838 and 839/98-99)

The minutes of the meetings held on 9 October and 7 November 1998 were confirmed.

II Information paper issued since last meeting

2. Members noted that no information paper had been issued since last meeting.

III Items for discussion at the next meeting
(LC Paper No. CB(1)914/98-99(01))

3. Members agreed to discuss the following items at the next regular meeting scheduled for Tuesday, 13 April 1999, at 2:30 pm -

  1. Progress report on year 2000 readiness of the financial services sector in Hong Kong; and

  2. Progress of implementation of the Mandatory Provident Fund (MPF) system.
(Post-meeting note: The agenda for the meeting had been revised to include an item on Insurance Companies (Amendment) Bill 1999.)

V Briefing on the meeting of the Chief Executive's Council of International Advisers
(LC Paper No. CB(1)914/98-99(02))

4. Upon the Chairman's invitation, the Secretary for Trade and Industry (S/T&I) briefed members on the outcome of the first meeting of the Chief Executive (CE)'s Council of International Advisers (CIA) held on 20 January 1999. He advised that discussion at the meeting focused on three main areas namely, Asia's adjustment to the financial turmoil, improving Hong Kong's competitiveness, and its long-term development strategy; and that the meeting was very useful and constructive.

5. On Mr NG Leung-sing's enquiry about advisers' views on Government's operation in the stock market last August, S/T&I said that advisers understood the Administration's stance and the purpose of the market operation, which was to fend off currency speculators and to restore order in the market with a view to protecting the interest of the investing public. As regards recommendations on the disposal of the acquired securities, S/T&I said that advisers opined that the matter should be proceeded with prudence in order to avoid causing adverse impact on the market.

6. On Mr FUNG Chi-kin's enquiry about advisers' recommendations on measures to monitor and regulate international capital flows, S/T&I said that advisers recognized the need to set up a new international financial architecture for this purpose as well as the relevance of Hong Kong's experience to its design, in particular, the experience in combating currency attacks during the Asian financial turmoil. He explained that in the wake of the turmoil there had been a general consensus on such a need among the international financial community including the International Monetary Fund (IMF), G7 (Group of seven leading industrialized nations), G22 (Group of 22 systematically significant economies) and the Asia-Pacific Economic Co-operation (APEC). The importance and urgency of international co-operation in monitoring cross-border fund flows was stressed by CE at APEC meeting in November 1998. He emphasized that Hong Kong would continue to pursue the matter through its participation in various international financial groups.

(Post-meeting note: The Administration advised after the meeting that in response to the crisis in Asia, Finance Ministers and Central Bank Governors from G22 met in Washington, D.C. in April 1998 to examine issues related to strengthening the international financial architecture. This initiative was intended to complement ongoing efforts in the IMF, the World Bank and other international institutions and forums, and to help develop a broad international consensus on these important issues. The April meeting was attended by Finance Ministers and Central Bank Governors from Argentina, Australia, Brazil, Canada, China, France, Germany, Hong Kong SAR, India, Indonesia, Italy, Japan, Korea, Malaysia, Mexico, Poland, Russia, Singapore, South Africa, Thailand, the United Kingdom and the United States.)

7. As to the advisers' views on improving the regulatory framework of the local financial market, S/T&I said that advisers noted the Administration's commitment and efforts made in this area since the Asian financial turmoil and advised that Hong Kong should continue to build on its existing strengths in ensuring adequate supervision in the market and further improving its efficiency.

8. Mr James TIEN enquired about CIA's discussion on ways to improve Hong Kong's competitiveness. Mr HUI Cheung-ching asked whether advisers had recommended the Administration to introduce similar measures as those taken by the Singapore government which had succeeded in lowering production costs and improving its overall competitiveness.

9. S/T&I said that advisers noted that Hong Kong was undergoing rapid downward adjustment in its cost structure as evidenced by a substantial fall in property prices and market rentals, as well as a general reduction in salaries and wages. They believed that the adjustment process was necessary for Hong Kong to regain its competitiveness. On Singapore's experience, S/T&I said that advisers had not made any comment on this aspect. He also stressed that as Singapore's political, economic and social systems were very different from those of Hong Kong, it was inappropriate to make a direct comparison between the two places. Nor was it possible for Hong Kong to implement those measures taken by the Singapore government, such as to impose, unilaterally, an across-the-board pay-cut for the entire workforce. He further cautioned about the knock-on effect of large scale pay-cut on the economy which might further dampen consumer spending and slow down economic recovery. Under Hong Kong's free-market economy, which was characterized by a pluralistic and independent legislature, autonomous labour union system and guaranteed freedom of speech and of the press, economic re-adjustment had to be driven by market forces free from intervention of the Government. These fundamentals had contributed to a flexible and efficient administration, as well as an creative and highly adaptable workforce which underpinned the success of Hong Kong as a major international financial centre.

10. Responding to Mr NG Leung-sing's further enquiry on advisers' views on Hong Kong's economic outlook, S/T&I said that while advisers were not overly optimistic about a quick recovery of Hong Kong and had made no prediction on the time required for undertaking the adjustment, they shared a positive view on Asia's development over the long term and stressed that Hong Kong should improve further its efficiency in order to expedite the adjustment process. In order to stimulate the local economy and relieve pressure on the public, a number of measures had been put forward in the 1998-1999 Budget, which included tax concessions and increased public spending on infrastructure projects, to attain the envisaged GDP growth.

11. On the strategy for Hong Kong's future development, Mr Kenneth TING asked about advisers' recommendations on the strategy to promote innovation and technology and efforts to attract foreign investment.

12. S/T&I advised that CIA was briefed on the recommendations of the first report of the Commission on Innovation and Technology and shared the vision of Hong Kong in upgrading its manufacturing and service industries, as well as enhancing development in areas including information technology, telecommunication and commercialization of Chinese medicine. Advisers considered it essential for Hong Kong to develop excellence in education and attract outside expertise to realize this vision. On attracting overseas investors, advisers urged Hong Kong to continue to uphold a free market and to maintain a level playing field. They also stressed the importance of intensive publicity efforts in Hong Kong's major overseas markets in order to project Hong Kong's positive image forcefully.

13. Referring to some advisers' comments that negative media reports on Hong Kong might have discouraged overseas investment, Mr Philip WONG remarked that the media should be urged to impress the world with positive information on Hong Kong.

14. In response, S/T&I shared that positive media reports were helpful in boosting overseas investors' confidence in Hong Kong. Notwithstanding that the media was free to decide their coverage, the Government should endeavor to release positive information on Hong Kong hoping that this would be conveyed by the media to the overseas.

15. Mr Martin LEE was disappointed that the importance of the rule of law and protection of freedom which were the basic fundamentals for Hong Kong had not been mentioned by the advisers.

16. S/T&I said that advisers were briefed on Hong Kong's latest developments since the handover in 1997 including the smooth transition in political and social systems. Despite economic difficulties encountered during the Asian financial turmoil, advisers fully shared the view that the existing legal system and guaranteed freedom of speech and of the press were important fundamentals underpinning the success of Hong Kong. They also recognized the Administration's commitment in preserving these fundamentals.

17. Pointing out that the Administration's information paper and supplementary information provided by S/T&I so far only contained general views and advice of advisers, a number of Members enquired about concrete recommendations of CIA. Mr SIN Chung-kai also requested the Administration to release the full content of discussion of the meeting.

18. In response, S/T&I said that as the main function of CIA was to advise on strategic issues pertinent to the long-term development of Hong Kong from the international perspective, the recommendations made was therefore mostly broad and strategic in nature. Moreover, owing to the tight schedule it was impossible for advisers to have in-depth discussion and make specific recommendations on every issue during the six-hour meeting. On the request for releasing the full details of discussion, S/T&I said that the meeting was not open to the public. Similar to arrangements of other Government advisory bodies, verbatim record of meeting had not been produced. The information paper was a summary of views and advice made by CIA.

19. Messrs CHEUNG Man-kwong and SIN Chung-kai queried the cost-effectiveness of spending about $1.5 million on the one-day meeting for obtaining the expected views and advice. Pointing out that no benchmarks had been provided for basic issues such as, upholding a free market and maintaining a level playing field, and ensuring adequate supervision of the financial market, Miss Cyd HO opined that the meeting was merely a "public relation show". She enquired about the Administration's assessment on the effectiveness of the meeting.

20. S/T&I disagreed that the meeting was a "public relation show" and stressed that it was useful and productive, hence value-for-money. Advisers had provided insightful perspectives on the global economic prospects and their potential impact on Hong Kong. They had broadly endorsed the Administration's plans and programmes drawn up for its long-term development which had strengthened Government's resolve to move forward. It was a honour to have the distinguished business and corporate leaders spending their precious time to share with the Administration their international perspectives. Some advisers had paid for their own transportation and accommodation expenses without requesting for reimbursement from the Government. On the other hand, the meeting had fostered Hong Kong's link with the international advisers. Enhancement of advisers' affiliation with Hong Kong would promote its international image and help to attract foreign investment in the long run. S/T&I advised that while it was a common practice of multi-national corporations to set up international advisory committees similar to CIA, Shanghai had already established its council of international advisers for some years and a number of large Mainland cities were following suit.

21. Some members were of the view that better preparation would help to enhance the effectiveness of the CIA meeting. As some advisers might not have a good understanding of Hong Kong's situation, Mr Benard CHAN opined that relevant information should be provided to advisers prior to the meeting. To facilitate discussion at the meeting, Mr Albert HO suggested that specific questions with clear objectives targeted at contentious issues should be forwarded to advisers before the meeting.

22. While emphasizing that there were clear and concrete themes and topics for discussion for the first meeting, S/T&I took note of members' views in improving arrangements and preparation for future meetings. The Principal Assistant Secretary for Trade and Industry added that besides relevant information on the three main issues for discussion, background information on Hong Kong which included the Annual Report, the Policy Address and the Budget of previous years was provided for advisers' reference before the meeting. The Administration had also provided additional information upon request of advisers. S/T&I remarked that some advisers, due to their previous links with Hong Kong, were well conversant with the local situation. With a view to enhancing advisers' understanding of related issues, a short presentation was given on each item before discussion and exchange of views. In order to keep advisers up-dated on Hong Kong's developments, reference materials and relevant information would be sent to them whenever necessary.

23. In reply to Mr Ronald ARCULLI's enquiry about possible means for the Legislative Council to monitor the Administration's follow-up actions on various recommendations, S/T&I said that relevant bureaux would take into account advisers' recommendations in their policy formulation and implementation. While it would be difficult to submit regular reports on progress of CIA's recommendations as most of them were broad and strategic in nature, some recommendations, such as to develop excellence in education and attract outside expertise, were being pursued and their progress was regularly monitored by respective panels.

V Securities and Futures Commission's budget for 1999-2000
(LC Paper Nos. CB(1)914/98-99(03) and (04))

24. At the Chairman's invitation, the Deputy Secretary for Financial Services (DS/FS) briefed members on the main features of the 1999-2000 budget of the Securities and Futures Commission (SFC). She highlighted that notwithstanding the estimated deficit of $131 million and the contribution of $300 million to the Unified Exchange Compensation Fund (both to be absorbed by SFC's reserves), SFC had for the seventh consecutive year decided not to request Government funding for its operations under section 53 of the SFC Ordinance (Cap 24). The Administration was satisfied that SFC's reserves still remained at a prudential level and considered that the deficit should have no significant adverse effect on its normal operations or the performance of its statutory functions.

25. Mr TSANG Yok-shing expressed concern about whether the estimated revenue from investor levies could be achieved. He was of the view that the estimated increases of 5% and 11% in the average daily turnovers for the stock and futures markets respectively were over optimistic in view of the current market downturn and further enquired about the basis of such estimates.

26. In response, the Acting Chairman, SFC (AC/SFC) said that the projected income from investor levies was worked out based on the estimated market turnovers for the financial year of 1999-2000. She remarked that due to rapid growth in turnovers and increasing volatility of the market since 1995, the differences between estimated and actual market turnovers had become more apparent, making it more difficult to have very accurate forecasts. For instance, the estimated average daily turnover for the 1997-1998 financial year was about $6 billion but the actual turnover turned out to be about $20 billion. With a view to having a more accurate reflection of the changes in the budget, SFC had revised its budget estimates in the past few years. As a result of the mid-year review undertaken in October 1998, the original estimated average daily turnover of $11 billion for 1998 was revised to $5.7 billion taking into account the actual average daily turnover for the first half of 1998-1999. The projected daily market turnover for 1999-2000 had been worked out based on the revised estimate of $5.7 billion.

27. In reply to Mr Kenneth TING's enquiry about SFC's response to the Enhanced Productivity Programme introduced across all government departments and subvented bodies, AC/SFC emphasized that as the regulator's job was to ensure adequate supervision of the market in the light of changing conditions, it was difficult for SFC to commit to a definite enhancement programme with specific targets of productivity gains to be achieved in time. Notwithstanding the anticipated heavy workload of improving the market regulatory system, SFC had made efforts to reduce expenditure as far as possible without deteriorating its services quality. Besides freezing the annual salary increase in the 1999-2000 budget, temporary contract staff would be employed as far as possible in order to minimize growth in the staffing structure. Moreover, effort to streamline operation would be stepped up with increased application of enhanced information technology systems.

28. Responding to Mr SIN Chung-kai's query about the conflict between the objective of containing staff growth and the proposed creation of eight new professional staff posts in the budget, AC/SFC explained that the increase in headcount was to cope with additional workload arising from the market reform review and the related legislative works for the Composite Securities and Futures Bill, as well as the vetting of MPF-related products. In line with the objective to control expenditure growth, the special team comprising six advisers, formed to assist in the market and legislative reform, would only be appointed on a temporary contract basis. Moreover, enhanced implementation of the information technology strategy would enable the deletion of two general grade staff posts to make room for the creation of professional staff posts, as well as help to raise staff productivity.

29. Pointing out that six out of the eight new professional staff members would be involved in work related to the implementation of MPF system, Mr SIN Chung-kai expressed concern over insufficient manpower resources for tackling the Year 2000 (Y2K) problem in the financial services sector.

30. AC/SFC stressed that SFC was very concerned about the Y2K readiness of the industry and was committed to ensuring timely Y2K compliance of all registered intermediaries by the specified deadline. Two para-professional and one professional staff posts were proposed in the area of intermediaries supervision for coping with the increased workload including tackling the Y2K problem.

31. On Mr Albert HO's concern over inadequate resources for administering the new licensing system for insurance intermediaries which were engaged in the promotion of securities linked MPF schemes, AC/SFC said that SFC would consider re-deploying existing staff with suitable experience in trust management and investment products supervision to take up the new duties in order to ensure the effectiveness and smooth operation of the licensing system. DS/FS added that the Administration was working in close collaboration with MPF Authority and SFC to develop the necessary licensing system and regulatory framework for MPF scheme providers. Notwithstanding the anticipated heavy workload, the Administration's intention remained to implement the MPF system by late 2000.

32. Quoting SFC's failure in giving early warning about the presence of market manipulation in last August as an example, Mr FUNG Chi-kin opined that SFC should review its capability in regulating the securities and futures markets. He urged the Administration to consider re-distributing SFC's regulatory functions to the two Exchanges and waiving SFC's fees imposed on broker members of the Exchanges. He explained that the proposal would not only help to streamline SFC's structure, hence reducing its operating costs, but would also eliminate duplication in charging and regulation of financial intermediaries since broker members were already regulated by the respective market bodies and were required to pay membership fees.

33. AC/SFC clarified that due to different focuses in regulatory work, the role and fees and charges imposed on intermediaries by SFC as the overall regulator of the markets should be distinguished from those of the Exchanges. Indeed, the majority of SFC's registered intermediaries were non-broker members of the Exchanges. At present, only about 900 out of a total of some 10,000 registered intermediaries were broker members of the Exchanges.

34. As regards setting of the level of fees and charges, AC/SFC advised that SFC had adopted the principle of full cost recovery as far as possible and there had been no revision in rates since 1994. Besides keeping the levy rate for futures contracts unchanged at $1 per contract, the prevailing levy rate of 0.011% on securities transaction and the share ratio of 4:7 between SFC and the Stock Exchange of Hong Kong (SEHK) would also be maintained in 1999-2000. Indeed, the share of SFC's transaction levy had been decreasing over the past few years. The share between SFC and SEHK was at the ratio of 5:5 when SFC was established. It was later revised downward to 6:7 in 1994 and further to the current ratio of 4:7 in 1997. She added that while SFC had considered increasing its income from the levy rates and re-adjusting the fees and charges of its services, these were not pursued recognizing the current economic condition and the sluggish market environment.

35. As regards SFC's performance during the market crisis in last August, AC/SFC stressed that SFC had carried out its duties and functions in respect of markets supervision within limits of its statutory powers. DS/FS remarked that it would be unfair to made an overall assessment on SFC based on its performance in a few isolated incidents. Admits its other important functions, such as licensing and supervision of intermediaries, SFC had taken expedient actions to step up efforts in regulating the markets before and during the Asian financial turmoil. She also added that over the year there had also been marked improvements in the regulatory framework for the securities and futures markets in Hong Kong under the persistent efforts of SFC and other market operators.

VI Review of the tax reserve certificate system
(LC Paper No. CB(1)914/98-99(05))

36. At the Chairman's invitation, the Deputy Secretary for the Treasury (DS/Tsy) briefly introduced the recommendations detailed in the information paper to improve the tax reserve certificate (TRC) system and to make the system more equitable to taxpayers.

37. Noting that over 80% by total value of TRCs sold in recent years were conditional TRCs which taxpayers were required to purchase in respect of objection and appeal cases, Mr FUNG Chi-kin remarked that measures such as introducing more frequent reviews of TRCs interest rate to reflect the prevailing market situation would have limited effectiveness in promoting the use of normal TRCs, the objective of which was to encourage taxpayers to save for tax payment.

38. In response, DS/Tsy said that the Administration was optimistic that the uptake of normal TRCs would be increased with the proposed extension of the optional Pay-As-You-Earn (PAYE) Scheme (to be renamed as "save-As-You-Earn" Scheme) to all taxpayers and the introduction of scripless TRCs. The number of civil service participants in the PAYE Scheme had so far increased by ten times from a few hundred to over 4,000 since the introduction of the Scheme.

VII Any other business

Late membership of the Panel

39. Upon the Chairman's invitation, the Assistant Secretary General 1 explained that at the beginning of this session, Mr Martin LEE informed the Panel Chairman that due to a mistake made on the signification form filed by his personal assistant, his name had appeared on the membership list of the Economic Services Panel rather than the Financial Affairs Panel which he intended to join. He therefore sought the Chairman's agreement for him to join the Panel. The Chairman, after consulting the Secretariat and the relevant provisions in the House Rules, noted that he had no authority to accept Mr LEE as member because the reason for late membership in this particular case was outside the scope of House Rule 23 which stipulated that the Chairman of the Panel had the authority to decide whether to accept late membership on grounds of indisposition or absence from Hong Kong. As the House Committee was at that time considering the possible re-alignment of duties among economy-related Panels for undertaking issues relating to the overall economic development of Hong Kong, the matter had been held in abeyance pending the decision of the House Committee in this respect. Since the House Committee later decided to maintain the status quo of Panels' terms of reference, Mr LEE raised the matter with the Chairman again.

40. The Chairman invited members' views on Mr Martin LEE's request to join the Panel.

41. Mr Ronald ARCULLI said that while he welcomed Mr Martin LEE to become a member of the Panel, the Panel had no authority to accept late membership under existing provisions of the House Rules. He suggested the matter be referred to the House Committee for a decision. Moreover, he remarked that it was cumbersome for the House Committee to deal with every late membership case outside the scope of House Rule 23 and suggested that a provision be made in the House Rules on the arrangements for the consideration of late membership on grounds other than indisposition or absence from Hong Kong.

42. After deliberation, members supported that Mr Martin LEE be accepted as a member of the Panel and agreed to seek the House Committee's endorsement in this respect. They agreed that the acceptance of late membership should not have any bearing on the Panel's earlier decision on the chairmanship and deputy chairmanship. They also agreed with the suggestion that a provision be made in the House Rules on the arrangements for the consideration of late membership.

(Post-meeting note: The House Committee at its meeting on 12 March 1999 endorsed the Panel's recommendation to accept Mr Martin LEE as a member of the Financial Affairs Panel.)

43. There being no other business, the meeting ended at 12:45 pm.

Legislative Council Secretariat
29 June 1999