On the heels of the Finance Secretary’s 2016 budget speech, Professor K C Chan, Secretary for Financial Services and the Treasury, discusses how Hong Kong plans to maintain its edge in the unsteady global economic climate.
”I consider myself an academic, who had the good fortune of joining government,” Professor Chan said as he adjusted his glasses. It was a chilly Monday afternoon, but in just a few short exchanges, the windowless drawing room in the Central Government Offices was brimming with warmth. Professor Chan’s convivial demeanor and patience in explaining technical issues created a sense of ease that stood in stark contrast with the room’s austere décor.
In less than an hour, Professor Chan seamlessly steered the conversation from his academic background to the Financial Services and the Treasury Bureau’s (“FSTB”) plans to face global economic paradigm shifts, specifically by supporting the Belt and Road Initiative and by introducing new measures to assist a variety of players in innovative and established markets, including FinTech (or financial technologies) developers and cross-boundary financial services providers. Before setting off for his next meeting, he reiterated his hope for solicitors’ continued support in assisting the FSTB in its efforts to further develop Hong Kong’s economy. Then, with a smile, he quickly offered his best wishes.
Politics is Politics
When asked how his academic background colours his public policy-making decisions at the FSTB, Professor Chan explained that he relied on it in a number of ways. “Clearly, when it comes to financial regulation, a good understanding of how the markets work is very important.” In this respect, he has drawn upon his understanding of finance and economics to gauge the likely macro-economic effects of certain policies or regulations. Although, finding workable regulatory solutions requires much more than academic analysis. It also requires an understanding of what will work politically. You have to be able to anticipate how different governments will respond to new situations and what will be required, politically-speaking, to get certain things done, he noted.
Fortunately, as a professor at Ohio State University and the Dean of Business and Management at the Hong Kong University of Science and Technology, he had to navigate the field’s political terrains when working with market participants and dealing with a variety of stakeholders. “My faculty members were my stakeholders, the university management, as well, so I got a lot of experience dealing with different pressure groups.” While the politics involved in academia can be “one of the worst … politics is politics.” It’s all about “managing the expectations of diverse stakeholders and working well with different pressure groups to get things done,” he said. Whether in academia or in government, it requires cultivating similar skills.
The Belt, the Road and the Bank
Professor Chan indicated that the Central Government is taking the Belt and Road Initiative forward as a strategy for “long-term development”, with the aim of redirecting domestic overcapacity and capital for regional infrastructure development. The overarching goal is to improve its trade relations with a variety of emerging and established markets across an economic land belt (which will cut through countries along the original Silk Road), and a maritime route (which will link China’s port facilities with the African coast, pushing up through the Suez Canal into the Mediterranean).
Honing in on Hong Kong’s status as an important financial, commercial and maritime centre, Professor Chan echoed the Finance Secretary’s sentiments that Hong Kong is well-equipped to help with the Belt and Road Initiative. Among other things, he indicated that it could provide Mainland enterprises that seek to “go global” with a wide range of professional services in the financial and legal markets, including international investment, cross-border trade settlement, Renminbi (“RMB”) bond issuance and asset and risk management services. Professionals will be “integral” and will “play a big role” in everything we plan to do with this project. We will be “especially dependent on lawyers” to help with evaluating deals and tackling a variety of legal challenges, he said. But even before concrete legal issues arise, lawyers can help by developing a basic understanding of relevant Belt and Road markets as well as their laws and institutions in anticipation of assisting business people, who will need to navigate in them.
With the expectation of emerging markets along the Belt and Road routes becoming a new impetus for developing Hong Kong’s economy, the Finance Secretary and the FSTB have been leading delegations to a number of strategically important countries and hosting seminars and conferences, such as the Asian Financial Forum, to promote the City’s core industries. They have also been pursuing trade and investment agreements to expand Hong Kong’s commercial and trading networks. Professor Chan indicated that the primary goal was to create more favourable conditions for Hong Kong enterprises to access the Mainland and overseas markets. From entering into Free Trade Agreement negotiations with ASEAN to pursuing and concluding Comprehensive Agreements for the Avoidance of Double Taxation with Belt and Road countries, the Government has been diligently working to build up more “government-to-government links”. But he also noted that more must be done. To maximise Hong Kong’s potential to tap into opportunities in new markets, he encouraged lawyers to reach out to the legal sectors in other countries to try and develop more ties. We need everyone on board to help us “drum up interest” and strengthen our economic and trade ties.
Before moving to the next discussion point, Professor Chan briefly commented that the FSTB will also continue its efforts to actively engage the Asian Infrastructure Investment Bank (“AIIB”) and the Central Government in discussions on Hong Kong’s participation in AIIB as a non-sovereign territory. He said Hong Kong plans to continue to support the work of the AIIB and intends to “leverage its expertise” to service AIIB in capital markets financing, asset management and dispute resolution. He specifically pointed to fundraising as a “very natural area” in which Hong Kong could help; and with the City being so physically close to Beijing, he said Hong Kong could also serve as a good “logistics point” for any kind of operations that the AIIB sees fit.
Breakthroughs in technology are bringing about paradigm shifts in different economic and social spheres, connecting far-flung markets and revolutionising how we do business. To capitalise on the way these new forces are disrupting conventional modalities and reshaping traditional and emerging markets, Hong Kong has pledged to uphold its long-held principles of technology-neutrality and protect consumer rights as new technologies are adopted. The Government’s aim is to ensure the healthy development of local industries while maintaining adequate regulatory oversight.
The FinTech Surge
Hong Kong plans to take advantage of the FinTech surge, which is disrupting industries such as mobile payments, money transfers, loans, fundraising, asset management and insurance. “We think FinTech presents great opportunities,” Professor Chan said, not only because they can make our banks and financial institutions more efficient, but also because they can enhance the experience of customers and generate many new business opportunities.
Government-led Initiatives & Incentives
Last year, the Finance Secretary tasked Professor Chan with forming and chairing a FinTech Steering Group to identify ways to drive FinTech’s development and application in Hong Kong. New measures being introduced to further this end include:
- the establishment of a HK$2 billion Innovation and Technology Venture Fund by the Government to co-invest with private venture capital funds on a matching basis in local technology start-ups;
- the expansion of the Science Park to provide additional space for start-ups and other technology companies by 2020; and
- the Cyberport setting aside a dedicated space of 3,000 square metres in its Smart-Space for FinTech activities and rolling out a designated incubation programme for 150 FinTech start-ups over the next five years.
The Government is also coordinating its efforts with those in the private sector that have chosen to establish laboratories and incubation programmes in Hong Kong. For instance, it has set up a dedicated team under Invest Hong Kong (“InvestHK”) to organise international events and assist start-ups, investors and R&D institutions with establishing their presence in the City.
It is hoped that the Government’s active support of FinTech coupled with the City’s highly-international trade networks, its transparent and open market, its clean and law-abiding society, and its world-class professionals and financial services providers will not only revolutionise the way Hong Kong’s financial sector operates, but also transform the City into a FinTech hub.
Coordinated Regulatory Efforts
The FSTB is “at the centre” of coordinating a variety of efforts among different regulatory bodies, including encouraging the Hong Kong Monetary Authority (“HKMA”), the Securities and Futures Commission (“SFC”) and the Office of the Commissioner of Insurance to engage in a dialogue with the industry. Specifically, Professor Chan indicated that each regulator will set up FinTech dedicated platforms to liaise with the industry to ensure that the market will balance between market demand and investors’ understanding and tolerance of risk when introducing innovative financial products and services. He specifically noted that the FSTB and other regulators were making it a priority to clarify with the industry and businesses interested in setting up in the City which regulations may apply to their FinTech operations, including those involving “peer-to-peer lending” and “equity crowd funding activities”.
Another crucial step for regulators will be to bring the current regulatory framework in line with new business practices. Professor Chan indicated that the FSTB is studying developments in overseas jurisdictions. However, he believes that most of the regulatory work will be logistical in nature, in that it will involve figuring out how to apply regulations designed for a physical world to a digital one, as opposed to introducing major changes in regulatory policy.
One area of concern for regulators will be the safety and security of certain digitised services. While there is no need to verify that a person is real when a transaction is concluded face-to-face, he explained, this will likely be an issue when certain transactions can be completed entirely in the digital sphere. Another issue will be ensuring the adequacy of authentication methods used – will a finger print or other biometric authentication be safe enough or should additional authentication be required? “Regulators will need to look at different methods and see if they are actually safe enough,” he said. Other regulatory issues will involve setting limits for new systems. Take mobile payments, for instance. Regulators had to draw a line as to the daily limit for these types of transactions. This was done for consumer protection purposes. Only time will tell if the limit is too low or too high or just right – but a limit had to be selected to get things started.
The Buzz on Blockchain
Professor Chan said that while blockchain and distributed ledger technology seem to hold “huge potential” to transform public and private sector activities, the FSTB has yet to develop any “formal regulatory policy” or “opinion” on it, as it is still in its “infancy”. While the Government would like to see more developers developing this type of technology and exploring how it may be applied to the financial services industry, he said it is just “too early to tell” what Hong Kong’s regulatory position on it will be.
For those unfamiliar, “blockchain” is the distributed ledger technology that underpins Bitcoin. As explained by Steven Norton, blockchain is a data structure that makes it possible to create a digital ledger of transactions and share it among a distributed network of computers. “It uses cryptography to allow each participant on the network to manipulate the ledger in a secure way without the need for a central authority.” Currently, more than 40 top financial institutions and a growing number of firms across industries have reportedly been experimenting with distributed ledgers as a secure and transparent way to digitally track the ownership of assets. Other companies are also reportedly exploring its viability to track the movement of assets throughout their supply chains or electronically initiate and enforce contracts.1 This algorithmic technology not only has the power to transform the financial services industry, but also enhance productivity through a wide range of applications in both the public and private sectors.
Hong Kong’s RMB Market
When asked if there were any additional developments that he wanted to discuss, Professor Chan’s eyes lit up. While it’s “not a new story”, he said leaning in, “Hong Kong’s RMB market is worth mentioning”.
It has been over 10 years since Hong Kong was given the opportunity to build the RMB’s presence and acceptance internationally. He noted that most of his Bureau’s intellectual capital and potential has been dedicated to developing the City’s RMB market since. While London and Singapore trade RMB, Hong Kong is by far the “most important market” for RMB, with the world’s largest pool of RMB liquidity.
With the wide use of RMB internationally, Professor Chan indicated that there will be growing demand for RMB trade settlement, RMB assets and related financial services which will drive various types of transactions in Hong Kong’s offshore market. He indicated that the Government will continue to explore ways to open up more channels for the two-way cross-boundary RMB fund flows, including the possibility of increasing the investment quota for Hong Kong under the RMB Qualified Foreign Institutional Investors (“RQFII”) Scheme.
Other key milestones that have increased mutual capital market access between Hong Kong and the Mainland include the successful implementation of the Shanghai-Hong Kong Stock Connect and the Mutual Recognition of Funds Arrangement. He also noted that the Government is in an on-going dialogue with Mainland authorities regarding the upcoming launch of the Shenzhen-Hong Kong Stock Connect and potential enhancements to the Shanghai-Hong Kong Stock Connect; and that the Government stands ready to implement the programmes as soon as it receives further instruction from the Central Government.
Message for Solicitors
“When we look at the strength of Hong Kong’s financial market, it is strong because of the people that comprise it. The legal sector is of course a key component of our professional sector – our financial markets remain strong because of the number of skilled legal professionals that are a part of it.”
“When we promote Hong Kong’s financial market, we are not only speaking about our bankers, we are also holding out all professionals in the market. So I hope solicitors continue helping us to promote our industries and businesses to their clients, as well as to new markets,” he said optimistically.
1. Steven Norton, CIO Explainer: What Is Blockchain?, The Wall Street Journal (2 February 2016), available at http://blogs.wsj.com/cio/2016/02/02/cio-explainer-what-is-blockchain/.
Professor Chan was the Dean of Business and Management at the Hong Kong University of Science and Technology (“HKUST”) before being appointed Secretary for Financial Services and the Treasury in July 2007. He also spent nine years teaching at Ohio State University in the US before joining HKUST.
Professor Chan received his bachelor’s degree in economics from Wesleyan University and his MBA and PhD in finance from the University of Chicago. He specialised in assets pricing, evaluation of trading strategies and market efficiency.
Professor Chan held a number of public service positions before joining the Government, including Chairman of the Consumer Council and Director of the Hong Kong Futures Exchange.