Interview: Financial stability a top priority in Hong Kong, says currency regulator chief

Chan Tak-lam, Chief Executive of the Hong Kong Monetary Authority (HKMA), has said that Hong Kong sees financial stability as a top priority to protect the region from financial turbulence and maintain the competitiveness of its financial sector.

The real competitiveness of Hong Kong's financial sector is not profit-making but its conservative style and prudent operation, said Chan during an exclusive interview with Xinhua.

Chan said he believed that the recent decline of the Chinese yuan is a fluctuation inevitable in the marketization process of the formation mechanism of yuan's exchange rate.

The Chinese central bank's latest move is an important step for the Chinese mainland to improve its capital market openness and promote the reform of the formation mechanism of yuan's exchange rate, according to Chan, who started to serve his current position since 2009.

The central parity rate of the yuan depreciated by 4.66 percent against the U.S. dollar during Tuesday to Thursday last week, triggered by a central bank reform in its forex policy to give market forces bigger say in deciding the yuan's prices.

The HKMA chief said he did not believe that the yuan would step into a downtrend channel.

"In long term, I don't believe the yuan will step into a continuous depreciation channel since the mainland's economy, including exports, is promising," Chan said.

Speaking of financial stability, Chan said Hong Kong would always face turmoil of outside financial markets, thus it is necessary to keep the banks' capital adequacy ratio higher than those in the European and American banks to write off uncollectible accounts when necessary.

"Some people criticize the authorities for raising a requirement higher than the international standard set by the Basel III, which will lead to an 'unfair' competition for Hong Kong banks," said Chan, "I don't agree."

The competition between banks should focus on services and stability rather than a business model based on making more profit with a minimum capital adequacy ratio, he said.

The total assets of Hong Kong's Exchange Fund, cornerstone of Hong Kong's financial stability, has increased from 350 billion Hong Kong dollars (about 45.16 billion U.S. dollars) in 1993 to 3. 15 trillion Hong Kong dollars by the end of 2014, a surge of nearly eight times in 20 years, according to Chan.

"Many people believe that the investment strategy of the Exchange Fund was too conservative, and the fund should be invested in more ways since it has far exceeded the amount needed for sustaining financial stability," Chan said.

"The fund has a legal function to maintain Hong Kong's financial stability and is also the hard-earned money of Hong Kong residents, so we decide that its investment strategy should be pro- conservative and focus on mid-and-long-term return."

When the global financial crisis broke out in October, 2008, it was the resources of the Exchange Fund that the SAR government used to provide an unlimited guarantee for all deposits of the banks in Hong Kong, Chan recalled.

"At that time, the total amount of bank deposits was 5.8 trillion Hong Kong dollars, while now it is about 10.6 trillion Hong Kong dollars. How much we will need to cover the guarantee now? How could we keep depositors and market participants assured without adequate fund?" said Chan.

Chan emphasized that as a completely open economy and financial center, Hong Kong will never rule out possibilities of financial crisis triggered by outside markets, no matter how cautious the authorities are.

"The Exchange Fund is our last line of defence to maintain Hong Kong's financial stability," Chan said.

The HKMA chief said he has warned the public against the risks of excessive financial leverage to Hong Kong's market. In his speeches and articles, Chan describes excessive leverage as "root of all evil" in financial turmoil and crisis.

"A capital market driven by many leverage trading could not last long, this is the law of economics," Chan said.

Chan said he always stands highly alert to debts. "The process of de-leveraging is very hard. If we don't want to 'pawn' our next generation, like what some advanced countries have done, we should not leave them piles of debts to deal with."

The HKMA chief also said that he is fully confident of the future development of Hong Kong's financial industry.

He expressed disagreement with the view that Hong Kong will be "mainlandized" and lose competitiveness as Hong Kong and the mainland make more exchanges and cooperation.

"Some were worried that Hong Kong would lose its future as Shanghai, Beijing or Shenzhen have more direct financial businesses with the world...but I don't agree," he said.

He cited foreign trade growth as an example. The mainland's total foreign trade volume was about 470 billion U.S. dollars in 2000 when Hong Kong achieved a total transit trade volume of 180 billion U.S. dollars. In 2013, the mainland's foreign trade volume exceeded four trillion U.S. dollars while Hong Kong's transit trade volume also increased to 450 billion U.S. dollars.

"The closer the mainland and Hong Kong become, the more active Hong Kong could be as a connector and more advantages Hong Kong will have to develop its economy," Chan said.

The mainland's financial openness will provide continuous sources for Hong Kong. For instance, Hong Kong has benefited the most from the process of the internalization of yuan, he said.

Chan sees the liberalization of mainland capital accounts, which will make cross-border capital flow much easier, as another opportunity for Hong Kong's financial industry. "Once it is realized, Hong Kong banks will have absolute advantages and be very competitive in providing relevant services."

Chan agreed that Hong Kong should actively catch up with China' s new development strategies, including the "One Belt, One Road" initiative.

Trade is closely connected with financing, in which yuan plays a vital role. "Supported by the internationalization of the yuan, the 'Belt and Road' initiative will yield twice the result with half the effort," he said.

"Hong Kong could play a very important role in this process," he said, "I'm fully confident that Hong Kong's financial industry has a promising future." Endi