PLC Paper No. CB(1)1/97-98
(These minutes have been seen by the Administration and cleared with the Chairman)
Ref : CB1/PL/FA/1

LegCo Panel on Financial Affairs

Minutes of Meeting held on Monday, 5 May 1997, at 8:30 a.m. in Conference Room A of the Legislative Council Building

Members present :

Members absent :

Attendance by invitation :

Item IV
Mr Michael WU: Acting Chairman
Securities and Futures Commission

Public officers attending :

Item V
Mr Martin Glass: Deputy Secretary for the Treasury Mr Joseph LAI, JP
Deputy Head, Efficiency Unit

Clerk in attendance:

Ms Estella CHAN: Chief Assistant Secretary (1)4

Staff in attendance :

Ms YUE Tin-po: Senior Assistant Secretary (1)6 (Atg)

I. Confirmation of minutes

II. Information papers issued since last meeting

III. Items for discussion for the next meeting

IV. Market manipulation

V. Review of the operation of trading funds

Electrical and Mechanical Services Trading Fund (EMSTF) and Companies Registry Trading Fund (CRTF)

VI. Any other business

I. Confirmation of minutes

[LegCo Paper Nos. CB(1) 1237 & 1461/96-97]

1. The minutes of the meetings held on 3 and 24 March 1997 were confirmed.

II. Information papers issued since last meeting

[LegCo Paper Nos. CB(1) 1210, 1251, 1340 & 1367/96-97]

2. The Panel noted the information papers issued since last meeting.

III. Items for discussion for the next meeting

3. Members agreed that a special meeting would be held on 19 May 1997 to discuss the following:

protection of consumers credit information;
regulation of red chip stocks trading; and
regulation of intermediaries.

IV. Market manipulation

[LegCo Paper No. 1200/96-97(03)]

4. In view of the recent price volatility in second and third liner stocks, Mr Michael WU advised that the Securities and Futures Commission (SFC) had initiated six inquiries into price movements and requested the listed companies concerned to suspend trading pending the release of announcements or circulars to provide investors with reasons for the trading volumes and/or price fluctuations. However, details of the inquiries could not be revealed to the public at that stage. On recent investigations regarding trading activities on "magic" stocks, Mr WU said that SFC had conducted several inquiries in this regard and liaised with the Stock Exchange of Hong Kong and the Hong Kong Futures Exchange on responsive actions to be taken against listed companies concerned. The investigations would take two months to complete.

5. As to how SFC would deal with large scale price slides in the stock market, Mr WU explained that such situation was normal whenever the supply of stocks at a particular price level exceeded the demand. If short selling was detected in anticipation of a decline in stock prices, SFC would monitor such activities and enforce regulatory control if necessary.

6. As regards the surveillance of abnormal stock price movements, Mr WU advised that SFC would determine whether investigation was necessary on the basis of a set of criteria which included market volatility, trading records and volumes of individual stocks. From the stage of abnormal activity being detected to the filing of a case for disciplinary action or prosecution, a number of steps were involved in the scrutiny of evidence. He remarked that such activities in the stock market required very high standards of proof under the law and it was very difficult to pinpoint the irregularities. As to the surveillance of "over-the-counter" trading, Mr WU advised that SFC would liaise with brokers who were involved in suspected dealings and inquire into the names of their clients, particularly, large shareholders, with an aim to detecting any abnormal trading activities on a particular stock. If SFC considered it necessary to direct suspension of trading of the stock concerned in order to maintain a fair and orderly market, it would request the company concerned to release an announcement or a circular that would provide the market with up-to-date information on its performance and prospects.

7. On the allegation that SFC was less inclined to investigate trading activities of red chip stocks, Mr WU emphasised that SFC had applied equally stringent controls over trading activities of all stocks regardless of their sectors. He explained that as a result of the expectation for an influx of mainland funds and asset injections, red chip stocks had become very popular, leading to speculations and high price premiums. For the past three years, SFC had initiated 100 inquiries into abnormal price fluctuations of red chip stocks. During these investigations, analyses of price movements in each particular sector were conducted taking into account the premiums entailed. He further remarked that although red chip companies were co-operative during the process of investigations, SFC had, at times, encountered practical difficulties in keeping contacts with these companies which were based in Mainland China. In this connection, they had liaised with the China Securities Regulatory Commission for assistance.

8. On the view that the Chinese Government had deliberately injected capital into the stock market of Hong Kong to boost stock prices, Mr WU remarked that this could be a rumour in the market. Such injection of capital would not necessarily entail a breach of the law unless market manipulation was detected.

9. Responding to Mr SIN Chung-kai, Mr WU advised that it was not a breach of regulation for political and social celebrities to favour a particular stock in public speeches as this would not lead to any adverse effect on the stock market in terms of fairness and transparency. However, surveillance would be required if SFC suspected that the celebrities making the remarks were involved in trading of that particular stock or had used their positions for personal gains. Regarding the disclosure of sensitive information on a particular stock by senior government officials or SFC staff, Mr WU said that the former were bound by legislation relating to official secrets whilst the latter were governed by the internal control system of SFC.

10. In response to Mr Martin LEE, Mr WU advised that the case mentioned in the second paragraph of the information paper was the only precedent case concerning failure to comply with a Notice issued by SFC, which required the production of books and records in connection with an investigation into suspected creation of false markets. As to whether investors in the market were fully aware of the incident, Mr WU said that SFC had relied on medias coverage for publicity of the case.

11. In response to the Chairman, Mr WU advised that under the existing legislation, the maximum penalty for the offence of market manipulation was two years imprisonment or a $ 50,000 fine. Considering that the present statutory penalty was not commensurate with the nature of the offence, SFC had proposed, in the future rationalisation of the Securities and Futures Ordinance, to increase the penalty to three years imprisonment or a $2 million fine.

12. The Chairman commented that SFC should enforce sanctions against brokers who had given misleading information to investors. Mr WU responded that there were relevant guidelines in the fit and proper criteria to remind brokers of their accountability for the information given. Nevertheless, SFC would review the matter to see whether the regulatory control mechanism should be strengthened in this respect.

SFC

V. Review of the operation of trading funds

[LegCo Paper No. CB(1) 1440/96-97]

13. The Deputy Secretary for Treasury (Dep S for Tsy) briefed members on the salient points of the information paper on updated review of the operation of trading funds as at March 1997. In essence, the trading funds continued to perform well in respect of improvements on service standards and productivity. On the financial front, all trading funds, except the Sewage Service Trading Fund (SSTF), had achieved above-the-target rates of return. Due to special market conditions, the rates of return achieved by the Land Registry Trading Fund (LRTF), Office of the Telecommunications Authority Trading Fund (OFTATF), and Post Office Trading Fund (POTF) were considerably above the targets. Since the establishment of a development reserve for Office of the Telecommunications Authority (OFTA), the Administration was prepared to discuss with other trading funds the setting up of similar development reserves to take account of unexpected fluctuations in operating results.

14. In response to the Chairman, the Deputy Head/Efficiency Unit (DH/EU) advised that the objective of the Efficiency Unit (EU) was to pursue Governments pledge to improve the trading funds services and productivities to the community and to enhance openness and accountability by formulating, securing support for, and overseeing, the implementation of the trading funds reform. EU would propose a review on the measurement of productivity improvements on trading funds and develop long-term productivity measurements in terms of unit cost, unit output, etc.

15. As regards dividends, Dep S for Tsy advised that the trading funds would pay to Government dividends of around 30% to 50% of any surpluses in excess of the target returns, taking into consideration their current financial performances and financial projections for the following year. He stressed that in paying dividends, a balance would be maintained between the interest of the public and Government. Nevertheless, Government was prepared to set up development reserves for operating surpluses of trading funds, which would help to reduce the requirement for future fee increases.

Admin

16. At members request, the Administration undertook to provide further information on the following:

the rationale behind the performance targets of all trading funds and whether the targets could be revised; and
the unaudited outturn for 1996-97 as given in Annex F of the updated report in dollar terms.

17. On the prospects of SSTF, Dep S for Tsy advised that SSTF was about to commit several billions of dollars to the purchase of new equipment over the next few years. Under the current regime of fees and charges, Government could envisage no way of recovering the operation costs of SSTF. In this connection, the Administration would submit proposals to seek an increase in sewage charges to enhance the service and to achieve a break-even in costs. A consultation exercise on the review of the trade effluent surcharge was underway and the charging scheme for sewage services would be examined pending the outcome of the review. He added that SSTFs service performance had been above target, despite the current operating deficit and deferred commissioning of the Strategic Sewage Disposal Scheme (SSDS) Stage 1.	SSTF

18. After discussion, the Administration undertook to provide information on the following:	SSTF

the reason for SSTF to take 10 working days to issue demand notes for sewage connections, and the processes involved; and
the reason for SSTF to take 2 working days to respond initially to written customer accounts enquiries, and the processes involved.

It also undertook to provide a breakdown of the savings which led to the reduction in the unaudited deficit for the year 1996-97 as specified in paragraph 22 of the update report.	Admin

19. As to how major investments of POTF would be controlled by Government, DH/EU advised that whenever POTF came up with a proposal on major investments, the proposal would be cleared with the Policy Branch in consultation with the Finance Branch for advice on its viability and the rate of return. Subject to the Administrations endorsement, the proposal would be incorporated into the business plan of POTF. Reports would be submitted to LegCo on an annual basis. There were similar control mechanisms over major investments of all trading funds.	POTF

20. As regards the question on future postage increases, Dep S for Tsy advised that postal rates would unlikely increase in 1997-98, and in future years part of the current surplus of POTF could be retained to form a development fund which could be used to stabilize postage rates.

Admin

21. Mr Martin LEE commented that the Post Office should further improve on its targets or set a higher target for areas where targets had been met. For example, outward airmail letters could be delivered to air carriers on the same working day instead of the following working day for European countries, since flights to these countries normally left in the evening, and 100% of the parcels could be delivered in less than 3 working days of the day of posting or arrival. The Administration noted his views and undertook to review the targets.

Admin

22. The Deputy Chairman requested information on POTFs current market share in Speedpost. Dep S for Tsy advised that the Administration would try to provide the information if it was not commercially sensitive.

23. Having noted that the operation of POTF had been discussed at the meeting of the Economic Services Panel on 14 April 1997, members requested an extract of the relevant minutes and information papers on the subject.

(Post-meeting note: The requisite information has been circulated vide LegCo Paper No. CB(1) 1623/96-97.)

24. On the financial performance of OFTATF, Dep S for Tsy responded that a target rate of return (i.e. 14.5%) had been set for OFTATF since its establishment on 1 June 1995. It had somewhat predictably over-achieved its target in 1995-96 with a rate of 42.4% due to the relatively high fee level regime that OFTA had inherited from its vote funded predecessor. The achievement was also due to the strong demand in the telecommunications sector for OFTAs service. However, OFTA had undertaken that it would not increase its fees for five years and would transfer all operating surpluses in excess of the target return to a development reserve so as to reduce the requirement for future fee increases.

OFTATF

Electrical and Mechanical Services Trading Fund (EMSTF) and Companies Registry Trading Fund (CRTF)

25. At members request, the Administration undertook to provide the following information:

Admin

actual performance of EMSTF up to 31 March 1997 in terms of operational targets achieved;
the Administrations assessment as to whether or not EMSTF could survive after untying in two years time;
benchmarks/outside indices to facilitate assessment of improvements on productivity and unit cost of EMSTF;
the reason for the Companies Registry (CR) to take 19 working days for general registration of documents for local companies, and the processes involved; and
the reason for CR to take 11 working days to register charges, and the processes involved.

VI. Any other business

26. Dr LAW Cheung-kwok informed members that he had decided to withdraw the item on the establishment of an economic development council following the Administrations indication that no information paper would be provided on the subject. He was disappointed that the Administration was not forthcoming in the provision of a discussion paper, as the discussion would not be fruitful if no information paper was available. However, he would move a motion debate in the Council on this issue at a later stage.

27. The meeting ended at 10:35 am.

Provisional Legislative Council Secretariat
3 July 1997

Last Updated on 18 August 1998