3 Sept 2018
Financial Services Industry in Hong Kong
- Table: Number of Authorised Institutions
- Table: Breakdown of Fund Management Business
- Table: Market Performance in the Equity Market
- Table: Total Gross Premiums in the Insurance Industry
- Table: Outstanding Amount of Hong Kong Dollar Debt Instruments
- Table: Business Sectors
- Table: Number of Authorised Insurers (as of May 2018)
- Table: Cumulative Number of Certificates of Hong Kong Service Supplier Issued
- With Hong Kong being an international financial centre, its financial services sector remains one of the most important economic pillars, accounting for 17.7% of the city’s GDP and providing some 253,100 jobs in 2016.
- Hong Kong was ranked 3rd in the Global Financial Centres Index (GFCI) released by Z/Yen Group in March 2018. Since releasing the first semi-annual results in March 2007, GFCI has consistently ranked Hong Kong as one of the top international financial centres in Asia.
- Hong Kong has one of the world's most active and liquid securities markets. There is no control over capital movement, no capital gains and dividend income tax.
- Hong Kong’s stock market was the 3rd largest in Asia and 6th largest in the world in terms of market capitalisation as of end 2017. There were 2,118 companies listed on the Hong Kong Exchanges (HKEx) in the same period, with a total market capitalisation of more than US$4.4 trillion.
- Hong Kong is one of the world’s most active markets for initial public offerings (IPO), with US$12.9 billion raised in 2017.
- Hong Kong hosts the largest pool of RMB liquidity outside the Chinese mainland.
Ranges of Services
The banking system in Hong Kong is characterised by its three-tier system, which is formed by three types of banking institutions: licensed banks, restricted licence banks and deposit-taking companies, which are authorised to take deposits from the general public. The three tiers of deposit-taking institutions operate under different restrictions. Only licensed banks and restricted licensed banks can be called banks. As of July 2018, there were 154 licensed banks, 18 restricted licence banks and 17 deposit-taking companies. There were also 47 representative offices of overseas banks.
Hong Kong is a major regional fund management centre with a large concentration of international fund managers in Asia. According to the SFC survey, around 66.3% of the investment funds (excluding REITs) were sourced from outside Hong Kong in 2016. Despite that, assets managed in Hong Kong made up over 50% of the asset management business. In 2016, 70.5% of the assets managed in Hong Kong were invested in Asia-Pacific, amounting to HK$4,954 billion, with HK$3,337 billion in Hong Kong and the Chinese mainland, HK$443 billion in Japan and HK$1,174 billion in the rest of the Asia-Pacific.
Securities industry trading services are provided by investment banks, commercial banks, finance companies and securities brokerage companies.
Investment banks are the principal underwriters for initial public offerings (IPO). Hong Kong's highly liberal and liquid securities market has attracted many international investment banks and securities houses to build their presence here, eyeing the IPO and securities businesses. In the secondary market, local retail customers are served mainly by local brokers and banks, whereas institutional buyers are principally served by the international brokers and investment banks.
Being the most liquid overseas market for mainland enterprises, Hong Kong is an important centre for raising capital for companies on the Chinese mainland. The majority of mainland companies seeking overseas listings have their listing in Hong Kong. As of end 2017, 1,051 mainland companies were listed in Hong Kong, with a market capitalisation of HK$22,522 billion, or about 66% of the total.
According to the Insurance Authority, the top five insurers by overall gross premium in 2016 were AXA General, Bupa, China Taiping Insurance (HK), Zurich Insurance and Bank of China Group Insurance. Other mainland insurers listed in Hong Kong include China Life Insurance, Ping An Insurance of China, CNOOC Insurance, China Pacific Insurance and People’s Insurance Company (Group) of China.
Insurance Agents and Brokers
Insurance agents and brokers serve as an intermediary between policyholders and the authorised insurers. While insurance agents are contracted with a certain insurance company, insurance brokers are not affiliated with any insurance company.
As of March 2018, there were 2,413 insurance agencies and 62,811 individual agents registered with the Insurance Agents Registration Board, and 771 authorised insurance brokers who are the members of the approved bodies of insurance brokers, namely The Hong Kong Confederation of Insurance Brokers and Professional Insurance Brokers Association.
Issuers of debt securities include governments, banks and corporations. The debt market is mostly made up of governments, with bonds commonly used to finance a variety of projects and operations. Investment banks act as underwriters to help issuers sell the bonds in the market. The Government Bond Programme (GB Programme) was implemented in 2009, with the aim to enlarge the Hong Kong local bond market. An outstanding amount of HK$104.7 billion under the GB Program was recorded as of June 2018. The Hong Kong government has also launched an inflation-linked bond issue programme called iBond, with the latest batch rolled out in May 2016.
The majority of private equity funds in Hong Kong come from overseas and invest in companies in the region. Hong Kong Venture Capital and Private Equity Association (HKVCA) helps the development of private equity and venture capital, with over 380 corporate members as of end 2017.
The Hong Kong government has established an information portal, StartmeupHK, for Hong Kong’s start-up community, listing the latest start-up events and resources, including government incentive and incubation schemes, accelerators, angels and venture capitalists, along with success stories of both local and overseas start-ups. Aside from this, StartBase.HK, an open-source startup profiling database set up in Hong Kong, has been launched to facilitate information flow between venture capitalists and startup companies, with an aim of encouraging the development in the venture capital market.
Industry Development and Market Outlook
Market Connections with the Chinese mainland
To improve the opening and healthy development of capital markets on the mainland and in Hong Kong, Shanghai-Hong Kong Stock Connect was officially launched on 17 November 2014, allowing cross trading of eligible stocks between the two stock exchanges with initial daily quotas of RMB 13 billion for northbound trading of SSE-listed securities and RMB 10.5 billion for southbound trade of HKEx-listed securities. Similarly, the Shenzhen-Hong Kong Stock Connect was launched on 5 December 2016, with the initial quotas same as those for Shanghai Connect’s northbound and southbound trading, covering 881 and 417 stocks respectively.
In response to market needs, Stock Connect’s daily quota has been expanded. Effective from 1 May 2018, the northbound daily quota has been increased from RMB13 billion to RMB52 billion for both Shanghai Connect and Shenzhen Connect, while the southbound daily quota will be increased from RMB10.5 billion to RMB42 billion for each.
In March 2017, Premier Li Keqiang announced that a Bond Connect to link up bond markets between Hong Kong and the Chinese mainland will be set up in 2017. This mutual bond market access programme was launched in early July 2017, marking a new milestone in the development of the mainland’s capital market and further strengthening Hong Kong’s role as an interface between the Chinese mainland and international markets. For now, only northbound trading is operative under Bond Connect to allow overseas investors to invest via Hong Kong in China’s US$9 trillion bond market, with the southbound trading link to be added subsequently. As of October 2017, the number of approved international investors under Bond Connect has reached 200, representing more than one-third of the total overseas registration under the Qualified Foreign Institutional Investor Scheme and other channels.
Hong Kong’s New Listing Rules
In the 2018-19 Budget, Hong Kong Financial Secretary Paul Chan, advocates the transformation of Hong Kong’s listing platform to be more desirable for emerging and innovative enterprises. The new listing regime launched on 30 April 2018, when the HKEx added three new chapters in the Main Board Listing Rules and made consequential changes to the current Rules. It includes providing the listing of “new economy” companies with weighted voting rights structures and the introduction of pre-revenue biotechnology companies. The listing reform allows Hong Kong to capitalise on the opportunities of emerging technology companies and accelerate the development of the new-economy sector. In the longer term, it enables the injection of new knowledge on emerging and innovative businesses into the investor community, including business models and technologies.
Offshore RMB Centre
Since 2004, Hong Kong banks have been allowed to provide personal RMB business. With the introduction of the Pilot Scheme for Settlement of Cross-border Trade in Renminbi in 2009 and the expansion of the scheme in July 2010, a wide spectrum of RMB services are provided to corporate customers, including RMB certificate of deposits, RMB bonds and trade finance. Hong Kong plays an important role in the mainland’s external trade settlement, handling some RMB3.9 trillion in 2017 and processes over 75% of the world’s RMB payment transactions, making Hong Kong the largest offshore RMB centre globally. It allows businesses to take advantage of the diversity and liquidity of Hong Kong’s RMB market and facilitate business cooperation with Chinese companies.
Hong Kong as a Fundraising Hub
Being the key financial and capital market in Asia, Hong Kong’s financial institutions are well positioned to capture opportunities on capital raising and deal making in the region, especially with the China’s Belt and Road Initiatives (BRI) and the development of Greater Bay Area. Financing demand, including green financing and green bonds, will continue to increase due to more and more infrastructure projects under the BRI. It is expected that Hong Kong will continue to play a prominent role for capital raising, particularly in IPOs, bond issuance and the private equity sector.
Fintech is reshaping the financial sector and driving innovation in financial services globally. In Hong Kong, fintech development is also burgeoning with a wave of new participants, such as start-ups and incumbent financial institutions offering fintech solutions to global markets and worldwide users, including payment system and data analytics.
In recognition of the need for progress, a number of measures were introduced to support fintech development. In March 2016, the Hong Kong Monetary Authority (HKMA) set up the Fintech Facilitation Office and dedicated fintech platforms were established with the Hong Kong Securities and Futures Commission (SFC) and the Insurance Authority (IA) to facilitate communication between regulators and the industry players. HKMA, SFC and IA have also launched Sandboxes, which allow financial institutions to collect user feedback and data on their fintech products or services. The Hong Kong government continues to foster fintech development with a series of financial support measures announced in the 2017-18 Budget, including the Innovation and Technology Venture Fund of HK$2 billion for technology start-ups.
Robotics and Artificial Intelligence (AI) Development
Hong Kong is still at an early stage when it comes to adoption of robotics and AI in the banking and finance sector, compared to our neighbouring regions such as the mainland and Singapore. According to a survey conducted by KPMG in March 2018, nearly half of the 388 respondents agreed that the level of automation in their companies was low, and only 7% confirmed that their companies have an annual budget for robotics and automation development. Despite this, some larger banks in Hong Kong are catching up in a bid to serve tech-savvy customers and cut costs in the long run. HSBC, Hang Seng Bank and Standard Chartered are using chatbots to handles general customer enquiries. On top of efforts by individual parties, the Hong Kong government is also pushing development by providing financial incentives, such as the Technology Voucher Programme and the Technology Talent Scheme.
The Mainland and Hong Kong Closer Economic Partnership Arrangement (CEPA)
Hong Kong's financial services sector is one of the liberalised sectors benefiting greatly under CEPA, including the banking, insurance and securities markets. Currently, financial services are covered by the Agreement of Trade in Services (ATIS) signed in November 2015 between the Hong Kong government and the Ministry of Commerce of China. This agreement further liberalises the services market and extends geographical coverage to the whole Chinese mainland.
Further details on the liberalisation measures on financial services can be found here.