Exclusive: ‘Crossing The Bay’ – in “The Fintech Magazine”

Hong Kong is the West’s golden ticket to the Greater Bay Area. But at what cost? What would persuade you
to move your startup to Hong Kong right now?

How about the Hong Kong Treasury’s HK$10,000-a-month wage subsidy, available for a year to businesses registered in the city that hire a local fintech developer? Or the estimated US$49billion that’s available through various innovation grants and venture capital schemes to tech firms? Or the up-to-US$1million investment sweetener announced by Hong Kong Fintech Week for every successful project selected through a virtual pitch event in November 2020?

If these incentives to attract international businesses don’t overcome any queasiness you might feel about China’s current policy towards Hong Kong and its pro democracy supporters, then there’s an even bigger prize that’s difficult to ignore: Hong Kong’s integration with the Greater Bay Area, an economic zone of such potential that it’s been described as ‘like putting Silicon Valley next to New York’.

Hong Kong is one of the few places in the world that attracts and connects fintech companies from both East and West – a melting pot of tech and culture that has thrived under the ‘one country, two systems’ arrangement agreed between the UK and China when the former handed back its colony in 1997. While earlier this year, Hong Kong chief executive Carrie Lam said there was no reason that arrangement  could not continue beyond its 2047 expiry date, evidence would suggest it’s already being eroded. The imposition by the Chinese government of a Hong Kong security law in response to pro-democracy protests has met with worldwide condemnation and major banks like HSBC and Standard Chartered have found themselves in the international crossfire.

Both publicly supported the law, which critics say erodes fundamental freedoms and China says restores stability. In July, Standard Chartered’s group chairman José Viñals, issued a statement in which he said the bank was ‘convinced that more collaboration – not less – is the best way to find a sustainable equilibrium’, adding that it believed  ‘Hong Kong will continue to play a key role as an international financial hub and we are fully committed to contributing to its continued success’.

The current threat of disruption to banking business, however, is real. In the face of more punishing US sanctions, the Bank of China International has recommended increased use of its Cross-Border Interbank Payments System (CIPS) – China’s financial messaging network for crossborder transactions on the mainland, Hong Kong and Macau – in place of the world’s biggest messaging system, SWIFT. Should a move away from industry standard SWIFT happen, it could have a major impact on the operations of international banks in the region.

Such actions inevitably raise questions around the future of financial services in the Special Administrative Region (SAR) of Hong Kong. China’s actions more broadly raise not just questions, but fears about the future of individuals there.

Many anticipated a ‘brain drain’ of professionals and a downgrading of Hong Kong’s reputation as an easy place to do business and trade in the wake of the new law. International businesses have long trusted Hong Kong’s independent legal system, but this trust may now have been compromised. Its reliability as a secure datacentre host in particular has come into question. Datacentre revenue was forecast by Structure Research to top £1.7billion by 2023, but many data handlers are now talking of offshoring in the face of client nervousness over privacy.

They’re not leaving yet, however. Neither has capital taken flight. And for those financial institutions that have been integrated into Hong Kong for decades, it’s easy to understand why they might choose to remain. Hong Kong’s status as a global financial hub has so far shown itself to be resilient during to political and civil unrest and a coronavirus pandemic. Meanwhile, there is deepening and ongoing financial cooperation between Hong Kong and mainland China.

In June this year, the People’s Bank of China, the Hong Kong Monetary Authority, and the Monetary Authority of Macao announced the launch of a pilot scheme to facilitate crossborder investment by individuals in the Greater Bay Area, which comprises China’s mainland Guangdong province and the special administrative regions of Hong Kong and Macau. The Wealth Management Connect pilot is just the latest initiative to encourage the flow of capital in the GBA. Stock Connect already links the Hong Kong Stock Exchange (HKEx) with those of Shenzhen and Shanghai, while Bond Connect links HKEx with the mainland China bond market. As with the previous schemes, Wealth Management Connect is seen as a way to internationalise China’s currency the renminbi (RMB) and bolster Hong Kong’s status as both a global financial centre and offshore RMB hub.

According to a KPMG report this summer: “The growing demand for wealth management in the GBA will continue to present significant opportunities for financial institutions. Wealth Management Connect is expected to drive greater product innovation, and may attract more international financial institutions to set up or expand their presence in Hong Kong and the other GBA cities to capitalise on these opportunities and tap into a large investor base.”

It pointed out that, as of February this year, foreign banks from 13 countries and regions had already established 155 businesses in Guangdong province, encouraged by the Chinese government’s plans to liberalise financial controls.

For any fintech wanting access to the world’s biggest single market and some of the most advanced technology, Hong Kong is still its best bet. It’s just a short bullet train ride away from Guangdong province and the beating heart of China’s fintech industry in Shenzhen – home to tech giants including Tencent, Huawei and ZTE. And the GBA itself has a population of more than 71 million and $1.6billion in gross domestic product.

The GBA is a mini version of the even more ambitious, trans-continental Belt and Road Initiative (BRI), a long-term policy and investment programme that seeks to boost infrastructure and the economy along the historic Silk Road trading route. By  integrating financial services, shipping and innovation, the BRI will create a high-tech megalopolis on Hong Kong’s doorstep.

Launched by President Xi Jinping in 2013, it is very much a global project, with 71 countries said to be taking part. It is also now seen as a route out of the current recession, and fintechs, like many others in the GBA, stand to benefit from the stimulus.

Standard Chartered is among those financial organisations already looking to leverage the GBA’s digital development expertise, seeing it as a huge opportunity to support and provide services to its Greater China and North Asia clients. In fact, the bank is investing $4million in setting up the Standard Chartered Greater Bay Area Centre in the Tianhe District of Guangzhou, which will also seek to strengthen development of innovative financial solutions and crossborder banking services. It expects to employ 1,600 people by the end of 2023.

HSBC, meanwhile, is continuing to up its investment on the mainland, including a joint venture mobile wealth management and insurance planning service for clients in Guangzhou and Shanghai.

Belt and Road to recovery
As the country where the coronavirus pandemic started, China was inevitably one of the worst-hit by the outbreak, and economic and industrial recovery remain some way off. However, a recent Standard Chartered report indicated that small- and medium-sized companies are bouncing back as China slowly resumes business activity. The long-term outlook appears to be reasonably optimistic. Given that China has the world’s largest mobile payment market, with 765 million domestic users – up from 583 million in 2018, according to Statista – that’s encouraging news for any financial services provider with an eye on the main chance.  It’s a digital trend that has helped propel Ant Group – owner of the superapp Alipay – to become one of the richest privately owned businesses on the planet. Last valued at $150billion, as The Fintech Magazine went to press, it was preparing for an initial public offering via a joint listing on the Hong Kong and Shanghai stock exchanges – an event that will focus worldwide attention on, and signals confidence in, Hong Kong’s financial centre.

Everyone from the respected fintech author Chris Skinner to the UK’s Foreign Secretary Dominic Raab have castigated bankers who support China’s security law. At the same time, we’ve heard from financial services providers genuinely worried that being associated with overt or even implied criticism of the authorities will backfire on their staff.

According to a version of one Chinese myth, the Pearl Dragon was among four dragons that were sanctioned by the all-powerful Jade Emperor when they defied him and caused rain to fall on a drought-blighted Earth. In retaliation for being punished by the Emperor, the dragons created vast rivers so that people would never lack water again and would prosper. That is how the Pearl River, whose bountiful delta is otherwise known as the Greater Bay Area, came into being. The dragons apparently did the right thing, even though they attracted the Emperor’s wrath: the delta and its cities are still prospering. Now others must decide the right course of action.

This article was published in The Fintech Magazine: Issue #17, Page 64-65

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José Viñals standard chartered

Author: Lauren Towner