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Monday, September 19, 2016, 23:33

Putting Hong Kong onto the fast track of fintech race

By Luo Weiteng
Putting Hong Kong onto the fast track of fintech race
Students type on laptop computers during a coding class at the First Code Academy in Hong Kong. The SAR is expected to join the bandwagon of fintech developments on the Chinese mainland, which is inching closer to an economy of creation and innovation. (Xaume Olleros / Bloomberg)

As the world focus shifts to Beijing and Shenzhen, which have emerged as major hubs for financial technologies (fintech) aside from Silicon Valley in the US and the M4 corridor in the UK, Hong Kong is still grappling with the perception that the city lags behind its counterparts in the high-profile fintech race.

Hailed as a dynamic hub for international finance, Hong Kong has long jostled with cities, including Singapore, London, Shanghai, Tokyo and New York, for the leading edge in traditional financial industries such as equities, banking and currency exchange.

With a new race well underway, the territory is racing to defy the belief that the development of fintech in the local financial services sector is stuck in the slow lane.

“I do not subscribe to this view, at least as far as the banking sector is concerned,” Chief Executive of the Hong Kong Monetary Authority (HKMA) Norman Chan Tak-Lam said at a summit in Hong Kong last week.

The Chinese mainland and Hong Kong gobbled up a whopping 94 percent of all fintech investments in the Asia-Pacific region, totaling $9.01 billion in the first half of the year, according to data from consultancy Accenture.

The region’s top 10 fintech investment deals were inked in Hong Kong or the Chinese mainland, garnering $8.75 billion overall. The total fintech funding in Asia-Pacific more than doubled from $4.27 billion a year earlier to $9.62 billion.

This dwarfs the $4.58 billion in North America as a whole, and Europe’s $1.85 billion — both over the first six months of 2016.

The record amounts, however, are not evenly distributed between Hong Kong and the mainland. The lion’s share of funding, worth as much as $8.85 billion, was secured by the mainland, with the remaining $165 million going to Hong Kong.

Analysts have joined a growing chorus of optimism over the mainland’s role to set the pace for the fintech race in the region and across the globe.

“There is no doubt that the Chinese mainland is far ahead of the region’s other jurisdictions in the fintech competition,” said Alokik Advani, managing director of principal strategic investments of securities division at Goldman Sachs (Asia).

“The country is going from the ‘unbanked and under-banked’ stages to exploring the next big thing of fintech, which creates a wealth of opportunities for innovation, electronic payments, cross-funding and the like.”

University of Hong Kong adjunct associate professor Henri Arslanian said: “I am 100 percent sure that the Chinese mainland is at least two to three years ahead the rest of the world.”

As the world’s second-largest economy loses its interest in retaining the crown of the global manufacturer of clothing and toys, the magnitude of fintech investments is a glimpse of the country’s determination to shift its reliance on heavy industry toward creation and innovation.

This is a bandwagon that Hong Kong could join, as the city seeks to diversify its economy and sharpen its edge as the region’s fintech hub ahead of its major regional rival Singapore.

Arslanian believes the main obstacle that obscures Hong Kong’s brand as a fintech center lies in local parents, after seeing some of his students refuse promising offers to work in Shenzhen just across the border — a city dubbed the mainland’s Silicon Valley and tech capital. This is because their parents want them to land plum jobs in property or financial sectors back in Hong Kong, he said.

“On the Chinese mainland, internet tycoons like Alibaba’s founder Jack Ma Yun and Tencent’s founder Pony Ma Huateng make the role models young people are looking up to, while in Hong Kong, we still have the majority of youngsters admire the movers and shakers in real estate and financial industries,” Arslanian said. “The city is crying out for a change of mindset.”

Putting Hong Kong onto the fast track of fintech race
People check their mobile phones in Beijing. One-third of job opportunities in traditional banking institutions across the world would disappear over the coming decade due to the sweeping power of fintech, experts say. (Giulia Marchi / Bloomberg)
Such a change depends on the city’s regulators, said an analyst who wished to remain anonymous, adding that the current fintech regulatory regime should allow a bigger say for the technology industry, rather than let financial regulators run the show.

“With the conflicting interest between fintech and traditional financial institutions standing as a sure thing, how can we be made to believe that financial regulators have sufficient motivations to push for fintech business in Hong Kong?” the analyst asked.

Currently, it is the city’s de facto central bank, the HKMA, which plays a vital role in directing a hive of fintech activities on a regulated track, mainly in the banking industry.

The old-fashioned idea that fintech is a disrupter has already been dismissed, with the banking sector pinning high hopes on fintech for cost reductions and their growing use of fintech making financial regulators feel the dire need of regulations, Advani said.

But the disrupting power is always there, with internet behemoths, including Facebook, Alibaba and Tencent, becoming a catalyst for the booming internet finance and poised to redefine the traditional concept of banks in the foreseeable future, Arslanian said. He noted an estimate from Goldman Sachs that roughly one-third of job opportunities in traditional banking institutions across the world would disappear over the coming decade due to the sweeping power of fintech.

Fintech companies voting with their feet may speak volumes about whether Hong Kong makes an attractive fintech destination.

Xu Mingxing, founder and CEO of OKCoin — one of the Chinese mainland’s largest bitcoin exchange platforms — told China Daily he doesn’t expect his business to thrive in Hong Kong for the next few years although the company’s Hong Kong office was just set up last month after Xu founded his business in Beijing three years ago.

“Everything concerning fintech moves at a relative slower pace in Hong Kong, compared with the mainland and other oft-cited rival cities. While mainland regulators take the attitude of ‘letting the bullet fly for a while’ toward fintech innovations, Hong Kong policymakers are known for their prudence and conversations to give fintech a shot,” Xu said.

“So regulatory hurdles really ring true in Hong Kong, where I could hardly see regulators map out a clear regulatory landscape for bitcoin business. For the time being, I have no idea how to play the game in the city,” he added.

The disappointing tone comes as there’s no shortage of mainland fintech firms betting big on listings in the former British colony.

Ant Financial, Alibaba’s $60-billion affiliate dominating the mainland’s online payment market through its Alipay service; Lufax, the mainland’s largest peer-to-peer lender; and Zhongan Online P&C Insurance, the country’s first online-only insurer backed by Ant Financial and Tencent, are considering floatation in Hong Kong.

This trio, which make up some of the world’s most valuable fintech enterprises, are looking to replicate the valuation story of Tencent, which went public at about $2 billion in 2004, and is now worth almost $255.8 billion. This even exceeds the $248.6 billion of New York-traded Alibaba.

However, the city’s regulator has yet to give the green light to allow some shareholders more voting rights after Alibaba gave up Hong Kong in favor of New York for its whopping $25-billion initial public offering in 2014. The market is still waiting to see whether Hong Kong is a natural fit for these mainland-based tech firms.

“All in all, cementing Hong Kong’s position as a fintech center comes on the premise that we have tech in Hong Kong,” Advani said. “That’s the most convincing and compelling reason that makes fintech companies migrate to Hong Kong.”
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