The Hong Kong Monetary Authority, the city's de facto central bank, faces a wide array of challenges after a relatively smooth ride under the helm of outgoing chief Norman Chan Tak-lam, who announced its retirement on Thursday.
Having announced his retirement just three days after Beijing unveiled its development blueprint for the Greater Bay Area, the outgoing HKMA chief leaves his successor the task of melding the financial and banking system of Hong Kong more closely with those of nearby cities, including Guangzhou, Shenzhen and Macau.
As a result, HKMA’s core task to maintain the city’s financial stability and integrity is set to become more challenging as Hong Kong becomes more integrated with the Greater Bay Area.
One foreseeable consequence is likely to be a greater influx of renminbi into the Hong Kong banking system, potentially weakening the role of the Hong Kong dollar as the city's official currency.
The monetary authority is already studying proposals to integrate wealth-management platforms within the Greater Bay Area. For instance, the HKMA plans to allow mainlanders to trade overseas financial products in Hong Kong directly with renminbi, instead of with the Hong Kong dollar or other foreign currencies.
In addition, there are constant discussions over whether the Hong Kong central bank should scrap the peg between the city’s currency and the US dollar and tie it to the renminbi instead. Such calls are likely to become stronger as Beijing accelerates the pace of the renminbi's internationalisation, and are, therefore, something that the new HKMA chief will have to deal with.
FINTECH AND REGTECH
At the same time, it will also have to come up with suitable regulations for new financial technologies that may be imported into Hong Kong.
In its 2019 Hong Kong Banking Outlook, KPMG said Hong Kong’s banks and financial institutions will have to adopt new fintech solutions during the integration process.
"The opening up of China's financial services sector will have a knock-on effect on financial institutions in Hong Kong,” KPMG said. “This involves the greater integration and sharing of business intelligence, systems, data and key performance indicators between entities to enhance overall synergies within mainland China and globally.”
But there are question marks over whether Hong Kong is ready for such a transformation, particularly when it has yet to come up with a concrete regulatory framework for fintech companies already operating within its own city boundaries.
"It is undeniable that Hong Kong's closeted banking system has lagged behind trends in fintech on the mainland and in Singapore, for instance," one fintech entrepreneur, who asked to remain anonymous, said. "It has been very slow to adopt best practices in regtech on Chan's watch."
"Even its much smaller, sister special-administrative-region Macau has been more proactive and forward-looking,'' the fintech entrepreneur said.
Chan’s successor also faces an immediate uphill struggle to maintain economic stability at a time when Hong Kong is being hit by a double-whammy of slowing Chinese growth and US-driven trade tensions.
Being China’s gateway to international markets, Hong Kong is on the frontline for both. While China’s decelerating economic activity will hurt Hong Kong as a re-export centre for Chinese goods, the trade dispute could also reduce capital inflows into Hong Kong and hurt investor sentiment.
Indeed, these factors are already hurting the local economy.
Hong Kong’s economic growth for the last quarter of 2018 was less than 1.5% — the weakest since the first quarter of 2016. The data shows the extent of the slowdown after an average growth rate of 3.7% in the previous first three quarters.
The economic downturn, in turn, will likely weigh on Hong Kong’s pricy housing market and increase the risk of mortgage defaults, thereby threatening the stability of the banking system.
During his tenure, Chan implemented a series of measures that helped to reduce the city's average mortgage-debt-to-property-equity ratio to 51% from 64% in 2009. But the figure is still high by international standards.
Since taking office in 2009, the outgoing HKMA chief largely worked under a favourable macro environment as the world economy recovered from the global financial crisis and asset prices soared on the back of quantitative easing measures.
His successor is likely to have a less supportive backdrop.