Panel on Financial Affairs (Minutes) 11 Oct 97

Provisional Legislative Council

PLC Paper No. CB(1) 489
(These minutes have been
seen by the Administration)

Ref : CB1/PL/FA/1

Panel on Financial Affairs

Minutes of Meeting held on Saturday, 11 October 1997, at 9:00 a.m. in Chamber 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 CHIM Pui-chung
Dr Hon LAW Cheung-kwok

Members absent :

Dr Hon David LI Kwok-po, JP
Hon Henry WU
Hon Ronald ARCULLI, JP
Hon CHAN Choi-hi
Dr Hon Philip WONG Yu-hong

Public officers attending :
Item I

Mr K C KWONG, JP: Secretary for the Treasury
Mrs Carrie LAM: Deputy Secretary for the Treasury
Mr Colin SANKEY, JP: Head, Efficiency Unit

Item II

Mr Rafael S Y HUI, JP: Secretary for Financial Services
Mrs Rebecca LAI, JP: Deputy Secretary for Financial Services
Mr Andrew SHENG: Deputy Chief Executive; Hong Kong Monetary Authority
Mrs Pamela TAN, JP: Director, Mandatory Provident Fund Office
Mr K Y TANG, JP: Government Economist
Mr Alan C K WONG, JP: Commissioner of Insurance
Mr Frederick W H HO, JP: Commissioner for Census and Statistics
Mr A R HEARDER, JP: Official Receiver
Mr Gordon W E JONES, JP: Registrar of Companies

Clerk in attendance :

Ms Estella CHAN,: Chief Assistant Secretary (1)4

Staff in attendance :

Ms Pauline NG,: Assistant Secretary General 1
Mr Andy LAU,: Senior Assistant Secretary (1)6

I.Briefing by the Secretary for the Treasury on the Chief Executive's Policy Address

The Secretary for the Treasury (S for Tsy) briefed members on the following aspects of the work of the Finance Bureau:

the provision of funds for the initiatives announced in the Chief Executive's Policy Address and Policy Programmes;
the new initiative to develop and implement a target-based management process throughout Government; and
the new initiative to optimize the full potential of Government's estate and release under-utilized sites for development.

(Post meeting note: Bound copies of the presentation materials were circulated to members after the meeting vide PLC Paper No. CB(1) 329).

Establishment of the civil service

2.S for Tsy advised in response to the Chairman that there might be a need to increase the establishment of the civil service to cope with the new initiatives set out in the Policy Address but this would be subject to tight control and upon confirmation that the opportunity for redeployment had been exploited. Despite a 5% increase in real terms in the recurrent public expenditure over the past few years, the overall establishment of the civil service had only grown by 1 to 2% during the same period. The Administration would continue to look for other possible means to maximize the civil service's productivity and improve office efficiency through better deployment of staff and application of information technology. In this regard, a financial proposal to provide computer equipment and related training to clerical and secretarial staff for development into a multi-skilled workforce would shortly be put to the Finance Committee for consideration.

3.On projected growth of the civil service, S for Tsy advised that given the fact that there were other service providers in the community who would also contribute to the initiatives being undertaken, it would be difficult to assess, prior to the completion of the annual budget exercise, the exact number of civil servants required for the necessary work. As an example, he pointed out that civil servants and non civil servants in government schools and subsidized schools respectively would be tasked with the responsibility for implementing the Native-English-speaking Teachers Scheme and the use of Chinese as the medium of instruction. Similar situations would arise in other policy areas.

Establishment of funds and committees

4.Having noted the need to establish a number of funds and committees in order to cope with the new initiatives set out in the Policy Address, a member enquired whether there would be a mechanism in place to ensure value for money. S for Tsy replied that the establishment of committees and allocation of funds for financing the initiatives were indeed two separate matters. In considering the establishment of a committee, the Administration had to be satisfied that such an establishment would be effective in terms of delivery of the objectives. He confirmed that funding in respect of the initiatives and programmes set out in the Policy Address would be subject to the separate approval of the Finance Committee except for those items which fell within the delegated authority of the Administration.

5.On the loan of $100 million to the Hong Kong Tourist Association to start up an International Events Fund, S for Tsy advised that the fund would be managed by the Association subject to the monitoring and control of the Economic Services Bureau.

Budget planning

6.Some members opined that there would be a sharp growth in revenue over the years ahead as revenue from land transactions would no longer be shared between the Government and the Land Fund. Furthermore, rising land premium and the increasing amount of land to be disposed of would also add significant revenue to the fiscal reserves, not to mention the additional revenue generated from the collection of rents in accordance with the Basic Law. A member therefore urged the Administration to take note of the above in planning for public expenditure in the years ahead.

7.S for Tsy advised that in preparing for the annual budget, the Administration would make a medium range forecast for the next four years, setting out the projected expenditure and revenue. In last year's budget exercise, the Administration had already made adjustments to the forecast, having regard to the accounting changes to the treatment of income received from land transactions and the additional revenue from the collection of rents in accordance with the Basic Law. With the recent announcement of the commitment to increase land supply in the years ahead, the Administration would further review the situation, amongst other considerations such as changes in the economy, when preparing the next medium range forecast. The updated information would be made available to members in the context of the annual budget exercise.

8.In drawing up the budget for the Hong Kong Special Administrative Region, S for Tsy said that apart from keeping expenditure within the limits of revenues, the Administration should also strive to achieve a fiscal balance, avoid deficits and keep the budget commensurate with the growth rate of its gross domestic product (GDP) in accordance with Article 107 of the Basic Law.

Management of Government's investment

9.On management of Government's investment, S for Tsy advised that the Finance Bureau was reviewing, in collaboration with the Hong Kong Monetary Authority, the investment strategy and guidelines on managing the fiscal reserve with a view to securing a higher overall return. The Financial Secretary would discuss the role played by our reserves in the next Budget.

10.S for Tsy further said that, apart from the fiscal reserves which were placed with the Exchange Fund and managed by the Hong Kong Monetary Authority, the Finance Bureau was required to consider strategic investments in statutory bodies by equity and/or loans to help finance infrastructural and social development. For example, Government had made major investments in statutory bodies such as the Housing Authority, the Mass Transit Railway Corporation, the Kowloon Canton Railway Corporation and the Airport Authority to enable them to achieve their social and business objectives. The Government therefore had a duty to monitor the performance of its investments to ensure an appropriate rate of return to the community as shareholders. Further, the Finance Bureau was also responsible for the establishment, as appropriate, of trading funds for business-oriented government activities.

Development of Government's estate

11.In response to the enquiry on whether there would be further disposal of government quarters, S for Tsy advised that the majority of the quarters were, indeed, departmental quarters provided for eligible members of the disciplined services. Given the long term demand for such quarters, it was unlikely that the Administration could manage to reduce the stock in this regard. As to non-departmental quarters for senior civil servants, Government had, in response to changes in the demand for these quarters, reduced the stock by 35% over the past five years, from about 2,500 to 1,600 units.

12. Regarding the new initiative to optimize the full potential of Government's estate and release under-utilized sites for development, S for Tsy advised that the Administration would take a proactive role in site utilisation matters so that the question of optimal site utilisation could be addressed at an early planning stage of each project. In doing so, the Government Property Agency (GPA) would pursue joint-user development as far as possible so as to maximise the use of the sites concerned. In addition, GPA would review under-utilised Government sites now occupied by various Government facilities and draw up a reprovisioning programme for these facilities with a view to releasing surplus sites concerned for redevelopment. The Administration would also explore other usage of Government's property such as erection of advertising signs on roof tops to increase revenue.

13.In response to Members' questions, S for Tsy indicated that the Administration was examining the feasibility of relocating the Central Government Offices (CGO). He noted a member's suggestion to relocate the existing offices to the Tamar Basin reclamation site in Wanchai, thereby vacating the CGO site for redevelopment.

14.In response to the Chairman's enquiry on Government's practice to own or build its own offices, S for Tsy advised that Government's policy was to provide premises for its own use through construction or purchase if a long term need was so identified, as it would be more cost effective in the long run. However, if there was a shortage of suitable sites and having regard to the nature of demand, renting of property in the market might also be considered.

Application of information technology

15.Given the fact that companies' sizes were growing and that companies were required to keep proper business records for tax purpose for seven to ten years, a member commented that the Administration should give clear directions as to which kind of electronic media they would consider acceptable for data storage purpose.

16.S for Tsy replied that presently, the Bureau was charged with the responsibilities of ensuring Government departments' information technology needs were met in the most efficient and cost-effective manner. The concern about acceptance of electronic media for record purpose was a wider issue and would require further examination. In this regard, he undertook to relay the member's concern to the new Bureau to be set up for co-ordinating information technology development in Hong Kong.

S for Tsy

Financial management

17.Noting that some public works contracts might need to be retendered due to performance of contractors not meeting the standards, thereby increasing the project costs, a member asked what kind of mechanisms would be in place to avoid the problem. In reply, S for Tsy said that the Works Bureau would regularly assess the performance of contractors. Persistent non-performers would be disallowed to bid for Government projects for a period of time. For large scale projects, the Administration would invite expressions of interest with a view to shortlisting companies suitably qualified to be invited to submit tender proposals. The Administration would then invite tenders from the shortlisted companies in accordance with the established competitive system.

II.Briefing by the Secretary for Financial Services on the Chief Executive's Policy Address

Development of the financial infrastructure

18.At the invitation of the Chairman, the Secretary for Financial Services (SFS) briefed members on the main policy commitments of the Financial Services Bureau, emphasising that the Administration was committed to improving Hong Kong's position as a premier financial centre. Despite previous efforts made by the industry itself and regulatory bodies in providing state-of-the-art technology in the financial services sector, the Administration would continue to develop the financial infrastructure. It was hoped that through the application of latest information technology, value-added services could be provided to enhance the competitiveness of Hong Kong's market. He advised that the Administration would shortly commission a study to examine ways to enhance the financial infrastructure by integrating and upgrading the systems of various exchanges and clearing systems to improve system security and efficiency with a view to linking up the banking, securities and futures trading systems to facilitate straight through processing of transactions.

19.The Deputy Chief Executive, Hong Kong Monetary Authority (DCE/HKMA) added that in recognising the importance of information technology to the success of a market in today's dynamic and global business environment, HKMA had commissioned a study in 1994/95 to examine, inter alia, the development of Hong Kong's financial infrastructure in order to meet future needs of the industry. The study confirmed that electronic commerce and electronic money would be the dominant trend in future. In order to cope with keen competition from other economies, and to maintain Hong Kong's status as an international financial centre, there was a need to further improve Hong Kong's financial infrastructure. In this regard, the inter-bank payment system had been upgraded through the implementation of the Real Time Gross Settlement system.

20.DCE/HKMA advised that in order to compete with other major financial centres such as New York, London and Singapore, the Administration was working towards straight through processing across the financial system with a view to achieving payment versus payment (PvP) and delivery versus payment to enhance efficiency and minimise settlement risks. As a first step, a secure intranet linking regulators and regulated institutions would be developed. HKMA had also reached agreement in principle with the People's Bank of China to establish a PvP link between the HK dollar payment system and China National Automated Payment System.

21.A member welcomed the Administration's move to develop the financial infrastructure in Hong Kong but opined that not much had been done in the past for the benefit of the trade. He also expressed worry on brokers' adaptation to electronic trading and support systems. SFS advised that whilst some adaptation problems might be envisaged at the initial stage, it should be short-lived and manageable. As in the case of the introduction of electronic processing in the Stock Exchange of Hong Kong (SEHK), practitioners gradually adapted to electronic transactions. In order to cope with the rising demand, SEHK was also planning for the third terminal. On measures to enhance the quality of brokers, SFS advised that the SEHK and Securities and Futures Commission would establish an examination-based securities institute with a view to upgrading the standards of brokers.

Impact of the recent currency crisis in Asia

22.Noting that the growth of government expenditure over time was in line with the trend growth rate of the economy, a member expressed concern that the recent currency crisis in Asia would adversely affect our economy and hence the growth of our public expenditure in future.

23.In reply, the Government Economist (GE) said that the Administration was closely monitoring the situation. Whilst it would be difficult to assess the exact degree of impact and its duration at this stage, the currency crisis in Asia would inevitably lead to some short term effects on our economy. However, given the economic performance in the first half of the financial year, it was envisaged that a 5% GDP growth in real term as projected in the medium range forecast for the whole year would be attainable. He advised that the Government managed its finances against the background of a rolling five-year medium range forecast of expenditure and revenue. The most important principle underlying the government's management of public finance was that government expenditure, over time, should not grow faster than the economy as a whole. In this regard, short term fluctuations of the GDP level should not have great impact on the longer-term growth trend.

24.On the duration of the impact, GE advised that the crisis prompted a brief speculative attack on some Asian currencies. However, given the sound economic fundamentals in these economies, their medium and long term performance should not be too bad. As such, the appreciation of the Hong Kong dollar and the resulting impact on Hong Kong's economy might be short-lived.

Currency in circulation

25 .Since the Hong Kong dollar was widely used in South China, a member enquired whether this would have any adverse impact on the banking sector. DCE/HKMA replied that the $8 billion Hong Kong dollars presently in circulation were backed by a fivefold reserve of US dollars. The 20% of the Hong Kong currency currently being circulated in South China would not have great impact on Hong Kong's ability to manage its monetary affairs. Eventually most of the currency would come back to Hong Kong for redemption, and the currency flow had been reasonably smooth. The Administration had also discussed the subject matter with the People's Bank of China and was satisfied that the banking system was not adversely affected.

26.The member, however, opined that if there was a rush to redeem the currency, it would be difficult for HKMA to maintain an equilibrium in the system. He also considered it undesirable to issue new monies whenever there was a shortfall of money in circulation due to outflows of the currency. Furthermore, the increase in the flow of Hong Kong dollar cash between Hong Kong and China had resulted in some Hong Kong banks having to handle large amounts of cross-border flows of cash. He therefore urged the Administration to review the subject matter.

Liquidity in the banking sector

27.Given the fact that the Administration was committed to providing land for housing development with a view to achieving 70% home ownership by 2007, a member questioned whether there was sufficient liquidity in the banking sector. He was also concerned that the policy objective might impact adversely the banking sector in the light of the growing demand for mortgages along with rising home ownership, in particular when the ratio of residential mortgage to the total amount of loan fund available of some major banks might have already reached the benchmark of 40%.

28.DCE/HKMA advised that HKMA had examined the subject in detail. As experienced in other developed economies, reliance on the banking sector alone would not be adequate to meet the demand for mortgages in the long run, having regard to the large pool of residential mortgages outstanding and the growing demand for mortgages along with rising home ownership. In this regard, the establishment of a mortgage corporation operating under prudent and profit oriented principles and subject to proper risk control and regulatory framework would be the most effective avenue to develop the market. Other sources of income generated from retirement schemes and long term savings could be available to finance the rise in residential mortgages. He advised that given the savings rate in Hong Kong, liquidity should not be a problem. Rather, the issue was whether there was a proper legal framework to protect investors' interests in residential mortgages. To this end, the Administration was confident that a proper regulatory framework would be in place to safeguard investors' interests. On whether there was a need to revise the 40% property lending benchmark and whether the rising demand for mortgage loans would have any pressure on the banking sector, DCE/HKMA undertook to provide written responses to the Panel.

29.In response to a member's enquiry on the appropriate degree of regulation and monitoring of the banking sector, SFS advised that as an international financial centre, Hong Kong followed banking supervisory policies that were in line with international standards. To ensure the soundness and stability of the banking sector, the Government would need to review closely the regulatory framework, having regard to developments in Hong Kong and overseas. The Administration would aim at striking a balance to avoid too much regulation. He noted the member's comments that disclosure of information should only be confined to those in need and advised that HKMA, in fact, met with the banking sector each year to review the requirement of information disclosure.

The debt market

30.On measures to enhance the competitiveness of Hong Kong as a funding centre for mainland enterprises, SFS advised that whilst Hong Kong had made considerable advances over the years, there was still room for improvement, in particular, on the overall efficiency and further development of the debt market for fund raising. As for the latter, it was envisaged that with the development of the MPF Scheme and mortgage-backed securities, additional funds could be generated to back up the further development of the debt market in Hong Kong.

The Mandatory Provident Fund System

31.SFS advised that it was the Administration's intention to put all the related subsidiary legislation of the Mandatory Provident Fund (MPF) scheme through the legislative process so that the scheme could be put into effect by late 1998.

32.Noting that members of the public would have to wait for 20 to 30 years before they could realise the benefits arising from the MPF scheme, a member expressed concern that the MPF scheme could not provide immediate retirement protection for the elderly and low-income workers. He opined that the Government's financial support to the MPF scheme was insufficient. The Director, Mandatory Provident Fund Office responded that given the limited amount of contribution, it was inevitable that a longer period would be expected before accrued benefits could be realised. Apart from living on own savings or the enhanced financial security provided by the MPF scheme after retirement, old-aged people or retired persons who were in urgent need of financial assistance could seek the social security assistance provided by the Government. The Administration's stance on the issue of retirement scheme was very clear. In order to avoid recurrence of similar problems experienced in western countries, the Government considered that any retirement scheme to be introduced in Hong Kong must be sustainable. In this context, MPF with a Government capital injection would fit this criterion.

Financial Services Institute

33.Noting that various courses and programmes on financial services were offered by local institutions, a member questioned why there was still a need to set up a Financial Services Institute. In reply, SFS said that in view of the diversified and fragmented nature of training courses and programmes being offered by various tertiary institutions, professional bodies, regulatory bodies and the industry itself, there might be a need for the Administration to take up a co-ordinated role in providing training and development of quality personnel to serve in the financial services sector. To this end, the Administration would commence a study, with the sponsorship of the banking sector, to examine the various training courses and programmes available in the market, and to assess the projected manpower requirements and training needs in collaboration with relevant bodies in the financial services sector. He noted a member's comment that in assessing the subject matter, the requirement of practical industry training should also be considered.

34.In response to a member's request on speeding up the establishment of the proposed Financial Services Institute, SFS advised that the study on existing training programmes was expected to be completed within a few months and the results would be made known to members for reference. Depending on the study findings, the Administration could then assess the market need and the need to set up the institute. A detailed work plan would be drawn up in due course.

III.Any other business

35.There being no other business, the meeting ended at 11:15 am.

Provisional Legislative Council Secretariat
21 November 1997