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Views on a comprehensive risk management centre during my quarantine

Life is as unpredictable as weather.  My infection with COVID last week had instantly overturned my life and work schedules.  It also drove me to reflect on the importance of risk management, which is essential to people, the economy and the society.  One of the key functions of the financial market is to identify and measure risks, as well as to price and allocate them, such that market participants with different expectations on risks for the future can manage the risks based on their individual preferences and needs, and may even earn a return.

I very much agree with the views put forward by Dr Hon Tan Yueheng in a Legislative Council panel earlier.  Risk management involves not only insurance business, but should also cover a broader scope of financial market risks.  The National 14th Five-Year Plan clearly supports Hong Kong to strengthen its role as an international risk management centre.  The HKSAR Government has spared no effort in promoting the development of Hong Kong as an international risk management centre, by “leveraging Hong Kong’s advantages, meeting the Country’s needs” and making good use of our unique position as an important bridge between the Mainland and international markets as well as a crucial node in the domestic and international dual circulation.

Comprehensive offshore risk management hub for Renminbi and Mainland assets
Hong Kong possesses the world’s largest offshore pool of Renminbi (“RMB”) funds and is the premier gateway to the Mainland financial market for overseas investors in the process of the internationalisation of RMB.  To meet Hong Kong and international investors’ strong demand for risk management tools for different assets in the Mainland stock and bond markets, we have been proactively strengthening the offshore RMB risk management business and expanding the suite of relevant financial derivatives products while increasing the capacity of the mutual spot market, with a view to developing Hong Kong as a more comprehensive offshore risk management hub for RMB and Mainland assets.  For example, the trading volume of the MSCI China A-share index futures contract has been on the rise since its launch in October last year, which rose from around 1 400 contracts on the first trading day to the daily average of over 12 000 contracts in October this year.  Moreover, further to the listings of the first batch of Exchange-traded Funds (“ETFs”) that track the MSCI China A50 Connect Index in the end of last year, the first batch of A-share structured products, the MSCI China A50 Connect Index derivatives warrants, were listed in August this year, providing the market with a new risk management tool for A-share investment and further consolidating Hong Kong’s role as an offshore A-share risk management centre.  In October this year, their total turnover reached over HK$45 million.

In respect of risk management for bond market, the Hong Kong and Mainland regulators announced their agreement in July this year on establishing mutual access between the interest rate swap markets of the two places (“Swap Connect”).  It will, for the first time, extend mutual access arrangements to the realm of derivatives products.  The Northbound Trading of Swap Connect, to be launched as soon as possible after completion of the necessary preparation, will create synergy with Bond Connect and facilitate international investors’ management of their interest rate risks for RMB bonds through a convenient and secure channel.  The initiative will be conducive to enhancing the depth and breadth of the opening-up of the Mainland financial market, and create more opportunities for the financial sector in Hong Kong.  Meanwhile, the China Securities Regulatory Commission announced in September this year that it will support the issuance of Mainland government bond futures in Hong Kong.  This will not only improve the liquidity and reduce the bid-ask spreads in the Mainland government bond market, but will also allow overseas investors to hedge against changes in interest rates on RMB assets, thereby introducing effective risk management tools for investing in Mainland government bonds.

International insurance and risk management hub
Undoubtedly, the vibrant development of the Hong Kong insurance industry, with its ability to provide sound solutions for managing a variety of risks, is crucial to Hong Kong’s role as an international risk management centre.  To promote further development in the sector, the HKSAR Government implemented a series of measures to enhance competitiveness of the insurance industry last year, including the roll-out of a dedicated regulatory regime and pilot grant scheme for insurance-linked securities (including catastrophe bonds); profits tax concession for marine and specialty insurance business; expanding the scope of risks insurable by captive insurers; and enhancing the supervision of insurance groups.  To align the regulatory framework in Hong Kong with international standards while ensuring financial stability, we plan to put in place a risk-based capital regime, which will make capital requirements more sensitive to the level of risk borne by insurance companies.

Moreover, Hong Kong is a global insurance hub and home to business operations of numerous multinational insurers and reinsurers with rich experiences and knowledge, providing diverse professional services to enterprises participating in infrastructure and investment projects overseas.  At the same time, the Insurance Authority (“IA”) has established exchange platforms to facilitate deal matching for Mainland enterprises involved in large-scale infrastructure and investment projects to enhance comprehensive risk management capabilities.  This will strengthen Hong Kong’s function as the risk management centre in the regions, and contribute to national strategies including the Belt and Road Initiative.

We also actively promote participation of the insurance industry in our Country’s domestic circulation.  With support under the “Outline Development Plan for the Guangdong-Hong Kong-Macao Greater Bay Area (GBA)” and central financial regulatory authorities’ publication of the “Opinion on Financial Support for the Construction of the GBA” in 2020, we are striving for implementation of various insurance co-operation measures in the GBA.  In particular, we are working towards the establishment of insurance after-sales service centres in places such as Nansha and Qianhai in the near future, so as to provide GBA residents who are holders of Hong Kong policies with support in different areas, such as enquiries, claims and renewal of policies.  We will maintain close communication with the industry and relevant Mainland authorities, with a view to exploring further deepening and expanding mutual access of insurance markets.

The IA will host the Asian Insurance Forum 2022 next Monday (5 December).  The Government plans to take the opportunity of this annual flagship event to announce the roadmap for the future development of the Hong Kong insurance industry, setting out our visions, missions and policy measures to further enhance Hong Kong’s role as an international insurance and risk management hub.  While I am still under isolation, I am very much looking forward to exchanging views on the development roadmap and other issues with leaders and experts of the industry at the Forum, and together charting the way forward.

2 December 2022