Joseph Yam's Blog

土地政策

由土地供應專責小組開展的「土地大辯論」，聚焦如何增加土地供應，方向正確。然而，若要令討論更加有意義，在研究由專責小組提出的各項建議時，我們應該充分考慮香港土地政策的目標和理論基礎，才能確保結論符合公眾利益。我希望在這裏就土地政策，特別是住宅用地方面，提供一些觀點，讓有興趣的人士參考。

(1) 只有政府擁有增加土地供應的能力，可以說是「獨市」供應者。假如在土地市場出現供不應求、價格上升的問题，實際上只有政府才可以解決，責無旁貸。

(2) 政府是公眾利益的促進者和保護者。在供應土地時，需要從公眾利益角度出發。

(3) 現時住宅用地供應短缺情況非常嚴重，導致私人市場的樓價飆升至一般市民無法負擔的水平，並不符合公眾利益，亦影響社會和諧，同時令房屋需求由私人市場轉移至公營市場，增加政府作為公營房屋供應者的壓力。

(4) 市民大眾普遍預期樓價將繼續上升。要改變市場預期及令樓價有序調整，才是真正符合公眾利益的安排。由於住宅用地供應是影響樓價的關鍵因素，因此政府應該大幅增加土地供應，從而改變市場預期。

(5) 政府在任何情況下，不論是有意或無意，均不應利用其住宅用地「獨市」供應者的角色來賺取利潤。

(6) 香港賣地的收入非常可觀，令公共財政錄得龐大盈餘。從宏觀經濟角度而言，香港並不需要龐大的財政盈餘，而且龐大盈餘只會拖着經濟發展的後腿。另外，政府售賣住宅用地的收入，其實是一種稅收，由在私人市場以天價租樓或買樓的一般市民缴付。這是有違政府的房屋政策立場的。

(7) 過去，政府在住宅用地供應的立場上，一直令人誤以為香港存在違反公眾利益的「高地價政策」。因此，政府有需要清楚闡明符合公眾利益的土地政策。

在住宅用地層面，我認為政府的土地政策應該有以下四個重點：

(1) 政府作為「獨市」的土地供應者和保護公眾利益者，應以「提供住宅用地以滿足需求」作為政策目標。這個政策目標附帶兩個重要考慮，一是甚麼數量才能滿足需求，二是以甚麼價格水平去滿足需求。

(2) 在數量方面，政府現時的做法，好像是用一些人口增長和人均居住面積等數據的假設，去推算住宅用地的需求，從而制定相關的土地開發安排。但如果要改變市場普遍對住宅價格「只升不跌」的預期，政府有需要採用大刀闊斧的方式，大幅度增加住宅用地。力度要足以將「供不應求」變成「有求必應」，及長期維持這個狀况。

(3) 在價格水平方面，政府當然應繼續依賴市場機制去發現價格。然而，在決定住宅用地供應量時，政府應該更加留心市場所提供的價格信號。最理想的情況是，只要住宅用地的市場價格高於開發這類土地的平均成本，政府就應該增加供應。此舉有助消除外界的誤解，以為政府刻意推行高地價政策，控制住宅用地供應以作牟利，犧牲市民住屋需要。

(4) 毫無疑問，住宅用地是香港的一項非常重要的資產，丟空而不作發展肯定有違公眾利益。因此，只要住宅用地存在短缺情況，政府就應透過罰則措施，阻止囤積居奇。

若政府採用上述有關住宅用地的土地政策，是有可能會對樓價帶來一定程度的影響。但我們不要忘記，讓樓價回到香港市民可以負擔的水平，是一項重要的公眾利益。實事求是地看，如果我們要認真解決香港房屋問題，在住宅土地供應方面就需要採用大刀闊斧的方式，將「供不應求」扭轉為「有求必應」。政府作為「獨市」供應者和保護公眾利益者，應當勇敢地迎難而上。

大規模開發土地也是適當運用財政盈餘以投資香港未來的好方法。我們的巨額財政盈餘目前存放在外匯基金，主要用於投資外國資產，例如美國國庫券。這筆盈餘應該更好地在香港運用，為香港市民服務。鑑於香港對土地的需求龐大，特別是對住宅用地的需求殷切，因此其中一種做法，是將財政盈餘以資本方式，注資至一間「特殊目的」公司（Special Purpose Vehicle SPV），而該公司獲明確授權負責香港的土地開發及供應，以落實政府土地供應政策的目標。

回到「土地大辯論」的各個選項：明顯地，大規模填海是必須的長期項目。我只是擔心東大嶼都會計劃是否足夠，應否也考慮包括吐露港，以建立一個能夠長遠解決香港未來數十年土地短缺問題的戰略性土地儲備？短中期的大刀闊斧措施則包括重新規劃農地和部分郊野公園用地。

任志剛

2018年8月28日

習近平總書記十九大報告中在金融領域上說：「深化金融體制改革，增強金融服務實體經濟能力，提高直接融資比重，促進多層次資本市場健康發展。健全貨幣政策和宏觀審慎政策雙支柱調控框架，深化利率和匯率市場化改革。健全金融監管体系，守住不發生系統性金融風險的底線。」

有記者問我的看法。

「金融服務實體經濟」這個基本功能，在很多地方，因受著華爾街金融文化和金融全球化的雙重影響，已被拋諸腦後，甚至出現金融霸權的不良現象。炒賣風氣熾熱，金融中介的私利蓋過了金融好好服務經濟的公眾利益。複雜的金融運作模式和金融產品，製造了系統性金融風險，令金融危機頻繁地發生。金融監管效率相對下降，雖然要求多多，但對解決核心的金融文化問題，搔不著癢處，更有架床疊屋之嫌、增加資金融通成本之弊，更不能守住「不發生系統性金融風險的底線」！

內地的貨幣金融體系，看來比先進國家如歐美的貨幣金融體系落後。分配金融資源的效率，在不全是市場化的影響下，好像較低。的確是有深化各項金融改革的必要，包括令各金融範疇更「市場化」，將資金融通渠道多元化，「提高直接融資比重，促進多層次資本市場健康發展」等。但金融服務實體經濟的核心价值，在內地金融政策制訂上，旗幟鮮明，是一股清新空氣，更能在過去廿多年，守住了不發生系統性風險的底線，是值得其他國家學習的典範！

任志剛
2017年10月18日

和大家重溫34年前今日的一個政府新聞稿

有一支番鬼佬大戲裏面的主題曲，是用法文唱的。出於 Donizetti 的 “La Fille Du Regiment” (中英文翻譯分別是”連隊的女兒”和”Daughter of the Regiment”)。主題曲叫”Ah Mes Amis”，要求男高音唱出九個 high C，被視為對男高音歌唱家極具挑戰的一首歌。

我在思考金融問題時，習慣聽著歌劇。這首有九個 high C 的主題曲，給予我靈感，在金融領域上也想出九個 high C。這是九個值得金融持份者高度關注的 C，分別是：Conflict, Compensation, Competition, Complexity, Conduct, Compliance, Cost, Crisis 和 Culture。

很榮幸被邀在中大 Alumni Association of Surgeons 舉辦的”李國章傑出講座”演講。我利用這個機會，將這九個我認為值得高度關注的 C，寫進演詞內。在這裡也和大家分享。抱歉只有英文本。

任志剛
2017年10日13日

ARTHUR LI DISTINGUISHED LECTURE

Alumni Association of Surgeons
The Chinese University of Hong Kong

The Nine High Cs in Finance

Joseph Yam

13 October 2017

I have a habit, a good one I think; and this is to do what doctors tell me to do. So when Uncle Arthur asked me to speak at this function I did not hesitate and agreed. I was at a loss afterwards as to what I, as some kind of a finance person, can meaningfully share with a group of surgeons. The only thing, I think, I have in common with surgeons is that I am also quite skillful in doing things with my hands. But I did not have the courage, like you, to handle life with my bare hands, so I chose to do woodwork instead as a hobby. Let me show you one of my works: two interlocking endless chains craved from one block of wood, with no stitches, no bandages, no glue and no tricks involved [Note 1].

Yes, I have much respect for doctors, surgeons in particular. Let me tell you this story about two classmates: one became an investment banker on Wall Street and the other a surgeon. At a class reunion, the investment banker was keen to boost how successful he had been, of course in terms of how much money he made: something like US$20 million in the past year. Looking at this surgeon classmate of his condescendingly he asked: “what did you make”? The surgeon, calmly and confidently, answered: “I made a difference”.

But to be fair to the investment banker, and indeed to the many of those working in the finance industry, they do have an important role to play in society. Whether or not they play this important role well is another matter. Generally speaking, there are two types of people or entities in society: those with money wishing to seek a return for it and those without money wishing to raise it so that they can deploy it for whatever they want to do – to finance different types of businesses, to buy a home or a clinic, etc. Obviously, if money can be safely and efficiently mobilized from the former to the latter, rather than being kept under mattresses, the public interest will be well served, in that the economy will then prosper.

But there is understandably a mismatch between the risk appetites of those with money to invest and the risk profiles of those raising money. This principally is because of the lack of information, time and the necessary skills to identify, quantify and manage risks. For example, with so much time spent in the operating theatre, you, as an investor, would probably not be in a position objectively to assess the credit-worthiness of even a close relative who needs money to buy a home, to the extent of feeling comfortable in lending him money directly. So we need financial intermediaries of different types, collectively forming the financial system, to do the matching of risk appetites and risk profiles, and in the process to mobilize money in support of the economy. Specialized skills are required to perform this matching, which basically involves:

• The transformation of risks – as in the case of banking where the credit risks of borrowers are transformed into the credit risks of banks which, with prudential supervision by the banking regulator, depositors generally accept;

• The transfer of risks – as in the case of the securitization of mortgages (or other risk assets on the books of banks) and the distribution of these securities to investors; and

• The transaction of risks – as in the case of market-making of financial instruments to provide liquidity and reliable price discovery, so as to attract investors’ interests in them.

Has the financial system performed this conceptually simple task in the mobilization of money well? Given the recurrence of debilitating financial crises of an international dimension, the answer, I am afraid, must be “NO”. Then, the next questions on everybody’s mind must be “what went wrong?” and “how do we fix it?”

Yes, I will at least try and address these complex questions tonight. But let me first share with you another hobby of mine – listening to operas, and in particular, the feature arias that define those operas for me, like “Nessun Dorma” in Puccini’s “Turandot” or “Celeste Aida” in Verdi’s “Aida”. Opera music is essential for me when thinking through problems in finance, just like some of you listening to it at the operating table. One of my favorite arias is “Ah Mes Amis” in Donizetti’s “Daughter of the Regiment”, which is famous for the nine demanding high Cs for Tonio the leading tenor role. Being king of the high Cs, Pavarotti of course delivered them extremely well, notably at Covent Garden in 1967 or in the Metropolitan Opera House in 1972, when his voice was simply pure (but also a little clinical to me). I think only Juan Diego Florez matched his excellence in delivering this aria in 2007 in Vienna. Florez sang the nine high Cs with such force, control and comfort that it stopped the show for nearly ten minutes, with thundering applause from the audience [Note 2]. This was just before the global financial crisis broke, with much fire and fury, and inflicting much pain on the world economy. That aria prompted me later to identify also nine high Cs in finance that are much less pleasant – nine highly problematic Cs that I wish to share with you this evening.

The first C stands for CONFLICT. This conflict is a fundamental one, between the public interest in finance on the one hand and the private interest of the financial intermediaries on the other. The public interest in finance, if I may attempt to articulate it, is one of ensuring that the financial system efficiently serves the users of financial services, which then promotes the general economic wellbeing of society. The private interest of the financial intermediaries is obviously the maximization of institutional profit and individual remuneration, and providing themselves with all sorts of benefits in kind, for example, their palatial working environment, lavish entertainment and travelling in style. The conflict can be readily appreciated by considering the financial intermediaries as the middle man between investors and fund raisers, matching their risk appetites and risk profiles, as I mentioned earlier. The more successful is the middle man in extracting gain in the process, the worse deal the users of financial services get, in terms of a lower rate of return for their money and a higher cost of raising money. The users of financial services pay for the cost of financial intermediation. The higher the cost of financial intermediation, the lower is the efficiency of the financial system.

There is of course conflict almost everywhere in society. It is for the responsible authorities suitably to protect and promote the public interest, if there is identified a need to do so, and strike the right balance. This is a political process and the outcome reflects the interaction of political power between the stake holders. The users of financial services are collectively politically passive. The majority just want the loan that they badly need and the safety of their deposits. They are not in a position to bargain. By contrast, being in the position of controlling where money comes from and where it goes to in the economy, the financial intermediaries typically have much political clout. They are quite skillful in wielding those political influence to promote their interests, including keeping the regulators at bay. Look at Wall Street and its extensive presence in the White House and you can appreciate how influential they are. Consequently, the resulting balance between this fundamental conflict between the public interest of promoting financial efficiency and the private interest in the maximization of profits and remuneration by the financial intermediaries is very much tilted in favour of the latter. In my opinion, it is an unfair balance, perhaps disgustingly so.

This conveniently takes me to the second C, which stands for COMPENSATION. The investment banker I mentioned earlier, who made US$20 million in a year, happens to be just a trader. He has probably been successful in generating substantial revenue for his investment bank and was given a sizable bonus. In his mandate as a trader, there is much emphasis on revenue generation and he is remunerated principally on this quantitative performance measure, although there are other measures relating to the quality of risk management, compliance and conduct. Higher up through to the top management of an investment bank, compensation also has a clear and prominent linkage to different measures of revenue or profitability. A common practice is for there to be a bonus pool into which a substantial proportion of revenue is routinely transferred during the year. And when the investment bank scores a big deal, there would be a special transfer. All this typically meant that variable compensation in an investment bank amounts to about half of profits before tax.

You probably know how much a CEO of an investment bank on Wall Street make. I don’t even want to mention it. But I am not jealous of it. I just wonder sometimes what exactly are the professional skills and personal qualities that put someone in such an “enviable” position. I can understand why, in the medical profession in Hong Kong, there is an abundance of what is now called “man from the planets” (星球人) or “man from the moon” (月球人), and I am happy for them because most of them don’t sleep saving lives and taking care of our health. But taking advantage of being in a privileged position, protected by licences, to determine where money comes and goes in the economy to extract astronomical compensation is another matter altogether. And to realize that this is at the expense of the users of financial services makes it worse. Thankfully, the use of huge amounts of public money to bail out banks which were regarded as too big to fail in the developed markets in the 2008 crisis has drawn attention of the financial authorities to the possible need to regulate compensation practices, if not compensation levels, and there are regulatory initiatives on the table. Whether this effort can be sustained or is effective in curbing compensation, thus leaving more with the users of financial services, is still to be seen. My view is that there is a need for a more fundamental change in approach, which is for compensation to be determined by how well the users of financial services are being served.

Let me move on to the third C, which stands for COMPETITION. Finance is a captive industry in which financial intermediaries have to be licensed or registered by the financial authorities, and subject to prudential supervision and conduct regulation, for the good reason, among other things, that the users of financial services, especially the small investors and depositors, need suitable protection. There are, for banks, the usual capital adequacy requirements, liquidity requirements and leverage restrictions to limit risk-taking. Apart from these, most financial authorities adopt a market-based approach to finance, allowing the financial intermediaries to identify, take, price and manage risks associated with their businesses. Against this background, the licensed financial intermediaries compete freely for business.

This is fine, at least for the bread and butter type of banking business of taking deposits and extending loans. Competition largely takes the form of price competition, resulting in higher deposit rates for depositors and lower borrowing rates for borrowers, compared with the case when an interest rate cartel was still considered necessary to prevent cut throat competition. I am glad that I managed to get rid of the Interest Rate Rules of the Hong Kong Association of Banks back in the nineties. We now have a net interest margin (NIM) in Hong Kong that is significantly lower than in other jurisdictions – a measure of financial efficiency that we can justifiably be proud of [Note 3]. This is absolutely in the public interest, although not in the private interest of the banks.

However, in other areas of this money business where there is less uniformity in the delivery of service, competition also takes other different forms of a non-price nature. The majority of users of financial services are not in a position to make meaningful comparisons before they make a choice. Sometimes there simply is not enough information disclosed to make a rational decision on the services and financial products offered to investors. As a result, the balance of interests shifts in favour of the financial intermediaries against the users of financial services. Indeed, different business models are designed for the principal purpose of bringing in more revenue and therefore enriching the bonus pool rather than better serving customers. This is notwithstanding the regulatory requirements on capital, liquidity and leverage, which somehow the financial intermediaries cleverly manage to get around or to minimize their restrictive impact.

One manifestation of this type of non-price competition is the move towards COMPLEXITY, and this is my fourth highly problematic C in finance. There are probably now more people trained as rocket scientists employed in the finance industry than in building rockets! They are engaged to design complex business models, making use of advanced information technology, to beat their competitors and other players in the typical zero-sum games of trading in financial markets [Note 4]. My view is that to win a zero-sum game, you need to possess at least one of three attributes: luck, skill and inside information. Luck is something that you cannot count on forever; skills can be replicated quickly as there are more than one rocket scientists and even the best ones have a price; and the use of inside information is cheating, unethical and possibly illegal. You simply cannot play a zero-sum game and expect to win on a sustainable basis. The use of inside information is however a grey area in terms of defining insider trading, outlawing, effectively policing and proving it [Note 5]. This regrettably puts those with privileged access to such “professional” financial markets as the foreign exchange market and most over-the-counter markets for financial derivatives at a distinct advantage. They know the collective desire of the customers they are supposed to serve. They would go as far as to engage in front-running, arguing that they are merely “pre-positioning” themselves so as to serve better their customers. In practice, this becomes the source of billions and billions of trading profits of the investment banks that you hear reported regularly. Perhaps you will be happy if you are a shareholder of those investment banks, but who then are the losers of this zero-sum game? They are the poor users of financial services!

Complexity extends from business models to financial products offered to investors. The aim, it is claimed, is to maximize return for their customers, making available to them a significantly higher yield for their money than those that can be derived from the traditional financial products like deposits, bonds and equities, for example, the triple-A rated minibonds issued by Lehman Brothers yielding 6%, compared with less than 1% for bank deposits. First order derivative products with a high degree of leverage betting on the changes in the prices of certain financial products, stock index futures and warrants for example, have become quite common. Then there are the more exotic structured products that involve pooling different types of financial instruments, including derivatives, and slicing them into different tranches of varying risk ratings assigned by rating agencies to enhance their attractiveness. In a low interest rate environment with investors keen to search for yield, these complex financial products proliferated and are given simple acronyms that give them misleading legitimacy: ABS, BBC, SIF, MBS, ABCP, CDS, CDO, CLO, etc., etc. They are like a big bowl of thick alphabet soup. You can’t possibly see the bottom of it, in other words, you can’t see clearly the risks involved. Because you are hungry, you take it anyway, urged on by the experts wanting your business; and by the time you see the bottom of the bowl, you probably have had too much of it already. And the consequence is not just indigestion. Some of the combination of alphabets may have become toxic.

In some investment banks, the business to “originate and distribute” complex financial products is like running a production line in a factory. Origination involves the process of acquiring different financial assets, mixing, slicing and packaging them into deceptively simple structured products. Distribution involves either marketing them directly at retail outlets or pushing them to investors through private banking and wealth management operations. Because the demand is there, this business is highly profitable, in terms of fees for running the production line and trading profits from market-making and position-taking. There is therefore management pressure for the production line to be run at a high speed. As a result, the quality of the input and the safety of the production line are compromised, and the output becomes potentially toxic, making it highly vulnerable to significant falls in the price of the input. This is exactly what happened in the US to the so called Collateralized Debt Obligations (CDOs) using residential mortgages as the principal input. Pressure to keep the production line running at high speed led to the use of sub-prime mortgages of typically 100% loan-to-value ratios and the use of counterparties in the production process who are unable to deliver when under stress. You know what happened when the residential property market bubble in the US burst in 2008.

Let me move on to the fifth C – CONDUCT. This is again a highly problematic one. Incentive shapes conduct. Along with questionable business models at the institutional level is questionable conduct at the level of individuals. It is not difficult to appreciate the mentality of a trader in his late twenties or early thirties arriving at his trading desk. He is given a mandate that has much emphasis on revenue generation. He is remunerated largely, or in some cases solely, on how well he does in revenue generation in the form of variable pay, the amount of which pales his pitiful little amount of fixed pay in comparison. His next vacation, sports car, mortgage payment for his decent home and many other luxuries he craves depend on his performance at the desk. Yes, he is also given position limits to observe and under close surveillance. But the pressure is there; so is the temptation to walk over the line.

Problematic conduct takes different forms. Unauthorized trading is one; perhaps hoping that making big money for the firm while breaching limits or hiding the breaching of limits would be tolerated. Manipulating the fixing of benchmark prices, such as those for interbank money market rates and exchange rates, is another; perhaps hoping that such manipulation would help to show greater profits attributable to him or his team and choosing to ignore that the fundamental role of benchmarking is to facilitate accurate price discovery. Cheating customers on what the prevailing price is in markets to which the firm has privileged access is yet another; perhaps hoping to profit the additional few “pips” when the unknowing customers deal with the firm at marked-up prices, away from market prices that are considered to be fair even after including a reasonable “spread” to pay for the service. Let me quote what a trader said when testifying in court recently in a financial market manipulation case to underline the seriousness of misconduct in finance. He said: “I wanted every bit of money I could get because that’s your performance metric, that’s how you’re judged”. In another court case concerning manipulation in the foreign exchange market, tapes on conversations in the dealing room revealed an interesting statement by another star trader. He said: “if you are not cheating, then you are not trying hard enough.”

Let me move on to the sixth C – COMPLIANCE. This is something that bankers moan and groan about very much nowadays. I don’t blame them, particularly for those who are running the bread and butter businesses of taking deposits and extending loans, which is a rather basic mechanism in the mobilization of money in support of the economy. They are not the complex, cutting edge financial businesses typical of Wall Street. So when the problems originating in Wall Street led to regulators imposing intrusive requirements – very much shutting the stable door after the horse has bolted – and these requirements are implemented globally given the globalization of finance markets, there is every reason for the conservative and well-disciplined banks to feel unhappy. Indeed, regulatory compliance has become a heavy burden to the industry [Note 6]. In the dealing rooms of banks, no matter what you are doing, whether it is proprietary trading, asset management, serving clients in wealth management or private banking, all oral conversations are now taped. There are also elaborate computer systems and a large number of supervisory staff to monitor behavior, including analyzing the use of words in the millions of on-line conversations. There are posters to remind employees the need to behave. These remind me of the novel 1984 by George Orwell and the famous slogan therein that “Big Brother is Watching You”!

And Big Brother is getting bigger all the time. With information technology revolutionalizing the delivery of financial services, adding complexity and risks that have to be managed and monitored, the role of Big Brother has been expanding and becoming more sophisticated. Big Brother is also very expensive, adding much to the overall COST of doing business in finance, and this is the seventh C. Apart from the astronomical staff costs and compliance costs, there are the huge overheads. And there are the hefty fines that regulators and law enforcement agencies impose on banks as punishment against institutional misconduct and failure to prevent employee misconduct [Note 7]. The total cost of running the financial system is the cost of financial intermediation or the cost in the mobilization of money from those who have it to those in need. It is obviously paid for by the users of financial services, in the form of the difference between the rate of return for the money of those who have it and the cost of money for those raising it; in other words, the intermediation spread. In the simple case of traditional banking, the intermediation spread is the net interest margin (NIM) between the deposit and lending interest rates, from which the costs (including the profits) of running the bank are paid for.

The intermediation spread, as measured by the cost of running the financial system, should be identical to the intermediation spread, as measured by the difference between the rate of return for investors and the cost of raising money by borrowers. However, we often observe the anomalous phenomenon when, on the one hand, investors enjoy a high rate of return for their money and fund raisers can borrow cheap money, in other words, a low intermediation spread from the point of view of the users of financial services; while, on the other hand, financial intermediaries concurrently run large overheads, make much profit and pay huge bonuses to their staff, suggesting a high intermediation spread from the point of view of the service providers. To explain this anomaly demands an academic thesis. But let me offer a simple explanation. This lies in the time dimension, which provides much room for manoeuvre by the financial intermediaries in running this lucrative money business. The mathematical identity between the intermediation spread from the users’ side and the intermediation spread from the service providers’ side holds true not every day, every month or every year, but over a period of time. The anomaly I described earlier involves a shift of the intermediation spread paid for by users of financial services from the future to the present into the pockets of the service providers! I call this an inter-temporal shift of the intermediation spread or, to use a convenient acronym, ISIS!

I have, in fact, moved onto the eighth C; and this C stands for CRISIS. To enrich compensation in a competitive environment, the financial intermediaries engage in questionable business models, go for complexity and their employees drift into misconduct in the delivery of services. In the process, unknown risks that are systemic in nature are created. Yes, for a while, all were happy: the investors, the fund raisers and, of course, the financial intermediaries themselves. But when the unknown systemic risks materialize, involving a collapse in the prices of financial assets and insolvency of financial institutions, in the form of a financial crisis, payback time comes. Investors suffer large losses, borrowers have to pay very high costs for raising money, if money is available at all. In other words, the intermediation spread paid by users of financial services widens sharply, wiping out the benefits of high investment gains and low cost of funds enjoyed in the past. A financial crisis is, in effect, a brutal and sudden manifestation of the inter-temporal shift of the intermediation spread that had occurred. ISIS has struck [Note 8]! This is perhaps why CRISIS is spelt with ISIS behind it. As to the financial intermediaries, losses are incurred, some to the extent of requiring bailouts by the authorities, using taxpayers’ money. At the management level of these financial intermediaries, however, the musical chair starts. The majority of them, having already pocketed fat bonuses in the “good” times, will still land fat jobs elsewhere. Thus I have developed this simple theory of mine for consideration by those with responsibility over the financial system: whenever you notice an anomaly between the two measurements of the intermediation spread, from the users’ side and the service providers’ side, an inter-temporal shift of the intermediation spread may be occurring, implying the possibility of a financial crisis looming.

The time dimension urges me now to move on quickly to the last of the nine highly problematic Cs in finance, some kind of a crescendo to sum it all. This C stands for CULTURE. Put simply, finance is a service industry that has sadly become self-serving. The industry abuses its privileged position protected by licences to determine where money comes from and where it goes to in the economy for its own benefit. It has enormous political clout in ensuring that the rules of the game in finance work in its favour. It energetically waves the attractive banner of the free market, seize the moral high ground and condemn intervention by the authorities. It puts the private interest of profit and bonus maximization over the public interest of ensuring financial integrity and efficiency. It goes for complexity and adopts business models that erode standards and create systemic risks. It is run on an incentive system that condones institutional malpractices and individual misconduct by employees to the disadvantage of users of financial services. It breeds financial crises that cause extreme hardship to users of financial services and hurt the economy. This self-serving culture is simply not in the public interest.

What then is the cure? If my diagnosis is correct, we need major surgery, not so much a cultural revolution, but certainly a fundamental change of culture from being self-serving to one that has an overriding emphasis on serving well the economy. This should involve a comprehensive review of the governance of the financial system, on the one hand, to put financial authorities in a position more proactively to promote and protect the public interest in finance, and on the other hand, to ensure that the financial intermediaries recognize clearly the purpose of their existence, behave and be remunerated accordingly. This, in effect, means going back to basics in finance. This means less complexity, less cutting edge finance that cut off the limbs of users of financial services, a lesser and less expensive role for Big Brother, lower cost for financial intermediation, greater financial efficiency and safety, and less regulation. Elsewhere I have articulated in a little more detail two recipes for financial culture reform, one for the financial authorities and one for the financial intermediaries. As I think you probably had enough of me this evening, I will leave those of you with an interest in the subject to find these in the website of the Institute of Global Economics and Finance at the Chinese University of Hong Kong.

Let me end, however, by saying that I am not hopeful that we will see quick changes in financial culture in the near future. This is a global problem that requires global efforts to resolve. The combination of capitalism and western democracy will limit progress on this front, if there is initiative to do anything at all. Donald Trump is surrounded by wise men from Wall Street. Soon we will see whether he will pick an additional one to be Chairman of the Federal Reserve Bank. On Wall Street, which in reality is the source with the strongest influence on global financial culture, there is more talk on de-regulation than, for example, on the regulation of compensation practices in the industry. There is also talk about repealing rather than strengthening the Dodd-Frank Act, which was enacted as a response to the financial crisis of 2007-08 principally to prohibit proprietary trading by banks. But I am pleased that in the socialist, market economy up north, which is now the second largest in the world, there is in financial governance a strong emphasis in finance serving the economy. Perhaps that was one reason why the Mainland was never quite affected as badly by the two financial crises of the last two decades. For Hong Kong, as the international financial centre bridging the Mainland and the rest of the world, in financial affairs we are certainly in a challenging position, requiring vigilance, foresight, clarity of purpose, preparedness in response and decisiveness in action.

Thank you.

Joseph Yam
13 October 2017

Note 1: I used a block of fir, measuring 6x6x15 cm, I bought from Tokyu Hands in Osaka. Fir has fairly tight grains and it is not too hard; just the right texture for this type of craving. I spent three months on it, working on and off after retirement.

Note 2: Earlier in June 2006, Juan Diego Florez with Teatro Commale Di Bologna was in Tokyo to perform the same opera. His “Ah Mes Amis” was such a show stopper that he had to sing the last part with the nine high Cs again before the usually conservative Japanese audience allowed the show to go on. My wife and I were fortunate enough to be there!

Note 3: For the top 10 locally incorporated banks in Hong Kong, average NIM in 2016 was 1.43 percent. (Source: Hong Kong Banking Survey 2017 by KPMG)

Note 4: Where there is a market return, or what is called “beta”, trading to beat the market, or to achieve a positive “alpha”, is a zero-sum game, in that the sum of alphas must be zero.

Note 5: One senior person in finance in Hong Kong lectured me privately in the late 1980s when I, as a young monetary official, raised strong objection to insider dealing. He said: “young man, wake up! If there are no insiders, there won’t be any dealing at all and you will have no market!”

Note 6: One research firm recently put global spending among banks on compliance at almost US$100 billion in 2016, growing from 15% to 25% annually over the past four years.

Note 7: According to a study by the Boston Consulting Group, financial institutions have paid US$321 billion in fines related to the financial crisis of 2007-08.

 
Note 8:
IS(P) is the intermediation spread measured from the service providers’ side, which is the total cost, including profits, of having financial intermediaries performing financial intermediation.
IS(U) is the intermediation spread measured from the users side, which is the difference between the rate of return for investors and the cost of funds for fund raisers.

高興見到金管局在7.75和7.85兩個兌換保證匯率的範圍內，運用酌情權，增發外匯基金票據。雖然金管局説增發票據「是為了應付銀行在流動資金管理方面對外匯基金票據的龐大需求」，這個行動在貨幣管理方面是有着積極正面作用的。在兌換範圍內，港美息差與港元匯價水平之間的關係，不一定與理論或主觀意願相符。港息比美息低不一定立即會令匯率轉弱，匯率接近弱方兌換保證水平也不一定會令港息立即上升至超過美息水平。認為有需要的時候，金管局是有空間、工具和手段在兌換範圍內理順兩者之間的關係，令匯率制度更暢順地運作的。是否有需要，當然是由金管局酌情決定的。我在這裏只是偶抒己見，希望可收集思廣益之效。

美聯儲加息及縮表在即，美元貨幣市場已作出反應，但香港貨幣市場好像反應滯後，或許已經有理順的必要。當然，港美息差擴闊，最終是會引發資金外流而將港元匯價推至7.85弱方兌換保證水平的。當金管局依兌換保證沽售美元，便會令總結餘下降和港息上升。但如果這是一個突發的過程，鑑於現在總結餘的量似乎是遠遠超出便利同業支付作需，是有可能引發巿場恐慌或震盪的。所以，現在或許有需要在兌換範圍內運作，管理好市場預期，以減低有關風險。在兌換範圍內主動將總結餘水平回復正常和減少港美息差，以維持匯率穩定，是有不同貨幣市場運作選擇的。相信金管局在這方面是有充份掌握的。

任志剛
2017年9月28日

香港國際金融中心地位與貨幣金融穩定

保持香港的國際金融中心地位是《基本法》的要求。保持香港貨幣金融體系的穩定健全是維護大眾利益的重要環節。兩者雖然表面上關係不明顯，但實際上互相影響，需要留心在同時兼顧這兩項重要目標時的挑戰。有見及此，早在九七前已經作出部署，修改了《外匯基金條例》，列明第3(1A) 條「可為保持香港作為國際金融中心的地位，按其認為適當而運用外匯基金以保持香港貨幣金融體系的穩定健全」。

我曾指出香港國際金融中心地位的獨特性，與其他國際金融中心相比，香港的國際化程度可以說是最高的。原因是投資者和集資者兩個資金融通的組成部份，都主要是來自境外。現時香港已是內地企業籌集外地資金的首要場地。當內地對資金外流的擔心減退，也讓投資者規範地多走出去，香港亦有望成為外地企業籌集內地資金的重要場地。

在這環境下，挑戰會出現。先從「相對流量」的角度分析：香港是個細小的經濟體，但在香港以港幣作為交易單位所進行的國際金融活動的成交量，卻相對地遠遠大於本地經濟的規模。因此，國際金融活動的流量變化對香港經濟的影響，尤其是在貨幣金融穩定方面，是強大和不容忽視的。隨著內地投資者及集資者在資本項目進一步放寬下多走出去，這個差距將會越來越大，隨之而來對貨幣金融穩定的風險亦會增加。

再從「波動性」的角度分析：外地投資者和集資者的活動，不單受香港的各種因素影響，更大的影響會源於他們本土各種不同的變化，包括複雜的地緣政治、經濟及政策等。香港國際金融中心的國際化程度極高，面對外資流入及流出金融體系和港元所產生的波動，會較其他國際金融中心所面對的為高，這亦為香港保持貨幣金融穩定帶來較大和不尋常的挑戰。

我曾經說過，要求一個700萬人經濟體的貨幣，為一個13億人屬全球第二大經濟體的內地與外地之間的資金活動，提供融通服務，作為交易媒介，是不切實際的。因此，香港保持貨幣金融穩定所面對的挑戰日益增加，需要小心處理。其實，內地與外地的投資者和集資者，也許亦會關心他們自己利用港元作交易時承受的貨幣風險和進行貨幣對沖的有效性。假如他們有憂慮的話，將會局限香港國際金融中心進一步的發展。

這一個貨幣穩定的挑戰需要及早思考，不能等到危機出現才處理。如果投資者及集資者是利用港元以外的貨幣，例如他們的本土貨幣來作為交易單位，在香港進行國際金融活動，便不需要承受任何貨幣風險。現時香港的人民幣、美元及歐元即時支付系統已經運作多年，使用這些貨幣如同使用港元一樣方便。作為處理貨幣穩定挑戰的第一步，除港元外，香港的股票市場可以引進用人民幣計價、交易及結算。此舉亦會有助人民幣進一步國際化，跟內地的政策目標一致，還有助香港銀行更有效率地配對他們的人民幣資產和負債。

任志剛
2017年9月14日

International Financial Centre and Monetary and Financial Stability

The maintenance of the status of Hong Kong as an international financial centre is a requirement laid down in the Basic Law. The maintenance of monetary and financial stability is absolutely in the public interest. It is not obvious that there is a relationship between the two tasks. But there is, and we need to be alert to the dilemma between the two important objectives. I can remember recognizing this and amending the Exchange Fund Ordinance before 1997 to make it possible, with a view to maintaining Hong Kong as an international financial centre, to use the Fund to maintain the stability and the integrity of the monetary and financial systems of Hong Kong.

I have argued before that Hong Kong, as an international financial centre, is special, in that it is probably, or has the potential to be, the most international of financial centres in the world. Both the two legs of financial intermediation – investors and fund raisers – are, or are becoming, predominantly foreign. Hong Kong is already the centre for Mainland enterprises to raise money from the rest of the world. And hopefully when there is less concern about uncontrolled capital outflow from the Mainland, Hong Kong can also be the choice centre for enterprises from the rest of the world to raise money from the Mainland.

The domestic economy of Hong Kong is small. The volume of international financial activities conducted in Hong Kong and denominated in the Hong Kong dollar is huge. Behaviour of the latter has significant effects on the former and these should not be overlooked. Assuming further relaxation of capital account controls on the Mainland, allowing investors to access overseas investment opportunities and fund raisers to tape foreign money through the use of financial markets in Hong Kong, the volume contrast between the two will become even more pronounced.

The behavior of foreign money, whether in the hands of investors or fund raisers, is understandably influenced by foreign considerations as well as those of Hong Kong. Consequently, it is prudent to assume that the volatility and volume of capital flows in and out of the financial system of Hong Kong are higher than in other jurisdictions, presenting higher risks to financial stability. And if much of the financial activities of such foreign money conducted in Hong Kong are denominated in Hong Kong dollar, then there are risks for monetary stability in Hong Kong as well. Herein lies the dilemma between the objectives in the maintenance of the status of Hong Kong as an international financial centre and in the maintenance of monetary stability.

All international financial centres are exposed to these risks and face such a dilemma, but it is a matter of degree. The circumstances of Hong Kong are such that this dilemma is much more pronounced. I have said before that it would be unrealistic to expect the currency system of an economy of seven million people to have the capacity to serve well the international financial activities between an economy of 1.3 billion people (second largest and soon to be the largest) and the rest of the world. Users of our financial services may soon become concerned about that capacity, specifically the currency risk that they are assuming and the effectiveness of the hedging, if any, that they can undertake. These concerns may well constrain our further development as an international financial centre. And we ourselves, as we work to expand our role as an international financial centre, should also be alert to our increasing vulnerability to monetary stability.

This monetary dilemma should be addressed ahead of time, and certainly not in the context of a crisis. There is no need for foreign investors and fund raisers to take currency risk if their international financial activities can be conducted in other currencies of their choice, for example their home currencies, as conveniently as they are now conducted in Hong Kong dollar. Most of the financial infrastructure to facilitate this is already in place – the Real Time Gross Settlement (RTGS) systems for the renminbi, the US dollar and the euro, for example, were built years ago. As a start in addressing this monetary dilemma, it may be wise to make it conveniently possible for stocks listed in Hong Kong to be priced, traded and settled in the renminbi as well as in Hong Kong dollar. This move would have the added advantage of facilitating the further internationalization of the renminbi, in accordance with the declared policy objective of the Mainland. It would also enable banks in Hong Kong to manage their renminbi assets and liabilities more effectively.

Joseph Yam
14 September 2017

我有收藏特别鈔票的習慣，這是在 1983 年 9 月港元危機時，一位親戚用面値轉讓給我的。保存了 34 年，現在仍然是全新一樣的，不知道値多少錢呢？

任志剛
2017 年 9 月 7 日

Sent from my iPad

是 1995 年的 9 月 5 日，也是星期二。

對我來說是難忘的一天。

地點是釣魚臺國賓館的同樂園。裏面吃飯的地方叫養源齋。

場合是時任國務院副總理朱鎔基先生會見和宴請晩飯，是陳元先生的安排。

會談的課題是香港的印鈔安排。結果是香港動用外匯基金，買下當時一家英國公司在香港擁有的印鈔廠，確保香港的印鈔權和保留在香港印鈔。

很高興在 22 年後的今天，有機會和陳元先生在香港再見面。

Monetary Relationship between the Mainland and Hong Kong

The recent 20th anniversary celebrations on the establishment of the HKSAR led me to reflect on the monetary relationship between the Mainland and Hong Kong in the past 20 years. I am actually quite pleased with how well it has developed, so well that I have almost forgotten about the efforts that all concerned had put in over a long period before the Handover in 1997 to ensure such outcome.

These efforts were encapsulated in the “Seven Principles Governing the Monetary Relationship between the Mainland and Hong Kong” spelt out by Chen Yuan, then Deputy Governor of the People’s Bank of China, on a joint roadshow with me, then Chief Executive of the Hong Kong Monetary Authority, that covered London, New York and Tokyo as we turned into 1997. The title of the roadshow was “Hong Kong’s Monetary Arrangements through 1997” and the speeches made were published in three booklets.

The Seven Principles covered:

1. The relationship between the two currencies and between the two monetary systems;
2. The relationship between the two monetary authorities;
3. Cooperation in prudential supervision;
4. People’s Bank of China will support the currency stability of Hong Kong;
5. Treatment of financial business between the Mainland and Hong Kong;
6. The standing of Mainland financial institutions in Hong Kong; and
7. Complementarity between Shanghai and Hong Kong.

Those interested in this aspect of the monetary history of Hong Kong may wish to read those booklets, which should be available in the library of the Hong Kong Monetary Authority open to public. The gist of these principles is that under “one country, two systems” there are two currencies, two monetary systems and two monetary authorities. Chen Yuan said: “The two monetary systems are of equal importance to China in its reform and liberalization. One does not precede or be subsidiary to the other. They will operate in a mutually independent manner… It follows from the two mutually independent monetary systems of the Mainland and Hong Kong that the two monetary authorities will also be mutually independent.”

These principles have served Hong Kong very well in the past 20 years.
Joseph Yam

31 August 2017

內地與香港的金融關係

香港回歸祖國20周年的一連串慶祝活動，勾起我對內地與香港之間金融合作的點點回憶。在過去20年，兩地在貨幣金融領域上維持著良好的關係。香港貨幣金融順利過渡，令人渾然淡忘在回歸路途上各方的努力不懈，當中全國政協副主席、國家開發銀行原董事長陳元先生扮演了關鍵角色。

猶記得當年他是中國人民銀行副行長，我是香港金融管理局總裁。在過渡前我們一起到訪倫敦、紐約及東京，進行題為「香港跨越一九九七的金融安排」的路演，合作無間。當時，陳元先生闡述的「處理兩地金融關係的七項原則」，正是各方努力的成果。該七項原則包括：

1. 兩種貨幣和兩個金融體制；
2. 兩個金融當局；
3. 在風險管理方面進行合作；
4. 中國人民銀行將對香港的貨幣穩定提供支持；
5. 兩地間的金融事務安排；
6. 內地金融機構在港的地位；及
7. 上海與香港之間的互補性。

對香港貨幣金融歷史有興趣的朋友，可以透過公開渠道了解有關的資料。這七項原則的精髓，就是在一國兩制下，有兩種貨幣、兩個貨幣制度以及兩個金融當局。陳元先生當時強調說：「這兩種制度對於中國實行的改革開放事業具有同樣重要的意義，這兩種貨幣制度之間沒有先後關係，也不存在主導與附屬的關係。它們之間是一種相對獨立的關係……在兩個相對獨立的貨幣制度下，兩地的金融監管當局也要保持相對獨立的關係。」

這七項原則在過去20年一直保障香港在金融領域上的優勢！陳元先生即將訪港，出席一個有關香港下一個二十年暨一帶一路倡議與香港機遇的活動，期望再聚！

任志剛
2017年8月31日

Fiscal Stance

There has been interesting discussion at the professional level on public finance in Hong Kong. I have been asked to elaborate on what “fiscal stance” is all about. I am happy to do so.

Let me quote again from The New Palgrave Dictionary of Economics:

“Fiscal stance is commonly understood to denote the expansionary or contractionary implications for the economy of a government’s budgetary policy. More precisely, it represents an attempt to summarize, in a single measure, the combined effect on aggregate demand, and therefore potentially on real output and income, of all the various decisions taken by government in respect of public expenditure, taxation and other sources of revenue which go to make up a national budget… The most straightforward way of producing an indicator of budgetary policy is to sum the inflows of revenue and outflows of expenditure to which they give rise and to take the difference between the two, the budget balance, as a measure of fiscal stance…”

The following personal viewpoints are perhaps relevant in examining the fiscal stance of Hong Kong in recent years.

1. Hong Kong has been running substantial annual budget surpluses in the last decade or so.

2. A budget surplus means that the government is taking away more money from society than it is spending to promote the wellbeing of society.

3. The fiscal stance of a budget surplus on the economy is contractionary, meaning that the growth rate of the economy would be higher without the budget surplus.

4. Even after the popular tax rebates, the size of the annual budget surplus in the last decade has averaged nearly 3% of GDP. On occasions, it exceeded 4% of GDP.

5. This is notwithstanding a rather rapid growth rate of government expenditure recorded during the period. The growth rate of government revenue has also been rapid, possibly even more rapid.

6. It is not easy to estimate how much the growth rate of GDP would have been higher in a particular year (and in subsequent years through the multiplier effect), had there not been a budget surplus of nearly 3% of GDP.

7. This depends on how the money, had it been left in the hands of (or returned to) the community instead of being taken by government and held in foreign financial assets, would have been mobilized by the community.

8. The contractionary fiscal stance of the past decade, while inappropriate, is not the only factor that explains why the growth rate of the economy has been slow.

9. When “leaving wealth with the community”, if a government is in a position to do so, priority should be given to initiatives with higher multiplier and productivity-enhancing effects on the economy. In this, I am quite sure that the HKSARG will act in the best public interest.

Joseph Yam

24 August 2017

財政姿態

早前發表有關香港公共財政管理的文章，誘發了不少具建設性的討論，且不乏專業精闢的見解。有提議我應該就「財政姿態」的概念作進一步闡釋，我樂意奉上愚見。

讓我再次引用《新帕爾格雷夫經濟學大辭典》有關「財政姿態」的闡述(我自己的翻譯)：「財政姿態通常被理解為公共財政政策對經濟活動所具有的擴張性或緊縮性的一個表達。更準確地說，是試圖以一個單一的指標來量度財政預算對經濟總需求、實際產出和收入可帶來的影響。換句話說，是政府在財政預算內就公共支出、稅收和其他收入作出的各種不同的決策對整體經濟的潛在總和影響的一個指標。…量度財政姿態最直接的單一指標，是政府總支出和收入的差額。…」

研究近年香港公共財政管理上的財政姿態，我建議要留意以下幾個觀點：

1. 在過去大概十年，香港每年的財政預算，均錄得龐大盈餘。

2. 財政盈餘意味政府從社會中取得的金錢多於政府用於社會以促進民生經濟發展的金錢。

3. 從財政姿態的角度而言，財政盈餘對經濟活動具緊縮性的含意，即如果沒有財政盈餘，經濟增長率應會較高。

4. 在過去十年，即使退稅後，年度財政盈餘與生產總值的平均比例仍接近3％，有時更超過4％。

5. 儘管這段期間政府支出的增長速度加快，但政府收入增長速度也同樣在加快，甚至可能更快。

6. 要估算每年有接近生產總值3％的財政盈餘的緊縮性，例如對當年本地生產總值增長率的影響，以及在往後數年因乘數效應所產生的續後影響，並不容易。

7. 這取決於如果接近生產總值3%的金錢是留在社會中，在市民或企業手上不斷流轉，而不是在政府手中以外國金融資產形式持有，會對本地經濟帶來的不同影響。

8. 過去約十年緊縮性的財政姿態，不是經濟增長偏低的唯一原因。

9. 當政府決定藏富於民及還富於民，應該優先考慮對經濟增長有較大乘數效應和有助提升生產力的項目。相信特區政府會作出最合乎大眾利益的決定。

任志剛

2017年8月24日