Hong Kong Business (August - September 2018)

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THE IMMINENT ICO BOOM IN HONG KONG Hong Kong is one of the top 10 countries in 2018 for ICOs with $223m raised across 20 deals and 15 more in the pipeline.

DEvELOPERS HIT BY vACANCY TAX wHERE ARE HONG KONG’S MEGA-IPOS? TRENDY DORMS ARE THE NEw NORM RETAIL BANKS EMBRACE OPEN API 49

MICA(P) 244/07/2011 KDM No: PPS1645/3/2008

HONG KONG

FROM THE EDITOR

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This issue’s cover story deep dives into the ICO scene in Hong Kong. Roughly a year since China moved to ban all initial coin offerings, Hong Kong has enjoyed a surge of issuers and has gathered momentum as a top ICO centre in Asia. In fact, the territory was one of the top 10 countries in 2018 for ICOs based on funding volume, with $223m raised across 20 closed ICOs and 15 more in the pipeline.

Meanwhile, the US-China trade spat and its potential economic fallout have shaken up markets, with analysts admitting that Hong Kong’s economy will likely feel the pinch especially if a full-blown trade war erupts in the second half of 2018.

But another pain point in the making could end up hurting the territory more: a correction in the territory’s red-hot property sector.

In the IPO front, Hong Kong is currently holding the fifth spot in the global IPO rankings with a 59% increase in new listings and total funds raised at HK$54.8b. However, a big question begs to be asked: where are Hong Kong’s mega-IPO deals?

Enjoy the issue!

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HONG KONG BUSINESS | SEPTEMBER 2018

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CONTENTS

22

COVER STORY Hong Kong’s ICO proceeds hit $223m

FIRST 06 Will condos slash prices

as new taxes roll in?

07 Developers hit by vacancy tax 08 Trendy dorms are the new norm 10 Public hospitals reach tipping point 12 What drags Hong Kong’s

smart city push?

16

fINANCIAL INSIGHT Will the lack of mega-IPOs push Hong Kong out of the global IPO rankings?

26

Industry insight Hong Kong’s retail banking scene embraces Open API Framework

REGULAR

ANALYSIS

20 Economy Watch 42 Marketing Briefing 44 Legal Briefing

sECTOR rEPORT

36 Banks go mobile-first

to attract digital natives

38 Vibrant Asian market

to buoy insurance sector’s investment in technology

40 How do Asian banks respond

to the digital wallet boom?

34 Food delivery platforms

in SEA are not threatened

by GrabFood’s dominance

OPINION 46 Keeping track of the MTR 48 Hong Kong’s cram-more-stuff

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FINANCIAL SERVICES

Weakening dollar is making Hong Kong cheaper for expats

Hong Kong can expect at least 15 more blockbuster IPOs

Xiaomi hit by $8.58b loss in Q1 ahead of blockbuster IPO

Hong Kong has plunged from second to 11th place in the global cost of living rankings for overseas workers in a mere span of 12 months, according to a report by ECA International, representing the city’s lowest position in three years.

Hong Kong can expect at least five more mega-value IPOs from the new economy sector which is expected to raise $10b each in addition to the listing of 10 unicorns, according to accounting firm Deloitte, fueling the city’s ambitions to battle New York.

Reuters reports that Chinese smartphone maker Xiaomi was hit by a whopping $8.58b (7b yuan) loss in Q1 ahead of its public debut that widely expected to be the world’s largest listing in almost four years.

FINANCIAL SERVICES

Banks wage war over fixed deposits as interbank lending rates surge Hong Kong banks are continuing their battle for HKD fixed deposits as interbank lending rates surge anew with the one-month Hong Kong Interbank Offered Rate (HIBOR) climbing for the ninth consecutive day to 1.457%, according to OCBC Treasury Research.

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FINANCIAL SERVICES

HONG KONG BUSINESS | SEPTEMBER 2018

FINANCIAL SERVICES

IPOs surge 33% to US$725m in first half of 2018 With a greater number of issuers embracing domestic exchanges as their listing destinations, total funds raised via IPOs in Hong Kong hit US$725m in the first half of the year, according to law firm Baker McKenzie. For one, medical provider C-Mer Eye Care raised over US$80m in early January.

ECONOMY

Hong Kong is the second largest offshore wealth center Hong Kong trails behind Switzerland to score the second spot in the global offshore wealth management rankings, according to an annual study from Boston Consulting Group. The Asian Financial Center manages US$1.1t in offshore wealth, which is half of the Alpine country’s US$2.3t.

FIRST the second quarter. At the end of June, the government announced a new vacancy tax, levied at 200% of a property’s rateable value. This translates to twice the annual rent, or roughly 5% of the property price. This tax applies to units in the primary market that are either not leased or unsold a year after the issuance of the Occupation Permit.

Banks hike mortgage rates

For those looking to purchase a new home in Hong Kong, brace yourselves as top banks — HSBC, Bank of China (Hong Kong), and Hang Seng Bank — are hiking their mortgage rates by 10 basis points (bp) effective August 13 in a move that signals the end of the city’s ultra low interest rate environment and more pain for aspiring homeowners. New mortgage borrowers from these banks will have to shell out an additional $50 per month for every $1m of loan for a 30-year tenure.The move comes on the heels of Citibank’s first mortgage rate increase in over ten years of 10bp. Hang Seng Bank is raising its prime-based mortgage rate to prime minus 2.75% and for Hibor-based mortgage to prime minus 2.65%.

Bank of China (Hong Kong) said it would hike the cap for Hibor-linked new mortgage applications to the best lending rate minus 2.65%, whilst it will also increase prime rate-linked new mortgage plan to best lending rate minus 2.75%.

Coping with the increase Standard Chartered is increasing the rate for Hibor-linked mortgage plan to prime minus 2.9% and also increase the cap for the best lending rate to prime minus 3%.Wing Lung Bank and China Construction Bank (Asia) are also raising their mortgage rates starting August 9.

The one-month interbank interest rates, which is often used as a benchmark for building mortgages, has grown from 0.22% in 2015 to 0.85% in April. Banks like Bank of East Asia, ICBC, HSBC, and BOCHK have already scrapped their fixedrate mortgage plans in response to surging interbank lending rates.“We should not expect that the ultralow interest rate environment will continue unabated. We must carefully consider whether it is possible to cope with the increase in interest expense on loans, and we must also pay attention to the increase in interest rates to asset prices,” said Financial Secretary Paul Chan.

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HONG KONG BUSINESS | SEPTEMBER 2018

7 in 10 Hong Kongers expect more home price hikes

Will new taxes work?

“With the new tax in place, the runup in housing prices is likely to ease.

A reversal in housing prices, however, remains unlikely given the underlying strength of buying demand in the market,” said Denis Ma, head of research at JLL Hong Kong. This is in line with Citi’s findings that the percentage of respondents who expressed considerable interest in buying a home has remained consistent at 19%.

According to official data, residential prices have grown for 26 consecutive months, the longest period of price rises in Hong Kong’s history, rising 25% from the previous peak in September 2015. David Ji The government head of research and consultancy at announced a Knight Frank Hong Kong, expects new vacancy tax, that housing prices will continue to levied at 200% rise despite the new measures. of a property’s “With the possibility of developers’ rateable value. marking up prices in order to shift the vacancy tax burden to buyers, prices of primary flats may be further pushed up. The conversion of private lots to affordable housing uses could also reduce private home supply in the coming 3 to 4 years, reinforcing the uptrend of private home prices,” he said. “With the new housing measures in place, we expect residential prices to increase steadily during the second half of the year.”

Will condos slash prices as new taxes roll in?

A

staggering 7 out of 10 Hong Kong residents expect that property prices will continue to rise over the next 12 months, despite a new vacancy tax aimed at curbing the runaway growth of property prices. A new survey by Citi and The University of Hong Kong Social Sciences Research Centre revealed that 69% of respondents believed that housing costs will continue to increase over the next 12 months, the highest since the survey was introduced.

This marks a significant increase from 64% in the first quarter of the year, and a sharp rise from 57% in the second quarter of 2017. The percentage of respondents who expected housing prices to drop over the next 12 months fell to 9%, compared to 12% in the first quarter of 2018.

However, much to the disadvantage for developers, the survey also found that the number of respondents who felt that it was not a good time to purchase a home increased from 69% in the first quarter of 2018 to 73% in

Smaller and smaller homes

FIRST Other developers are starting to slash home prices in an effort to dispose of unsold flats.

Swire Properties’ City Plaza

Developers hit by vacancy tax

W

hen Hong Kong developer Swire Properties announced their earlier decision to convert a block of its serviced apartments into homes for sale, they may have miscalculated the risks amidst the government’s efforts to cool the housing market. With the recent roll out of the vacancy tax in place, Swire Properties is at risk of additional costs if it fails to dispose of its units fast enough before the vacancy tax bites.

In apparent contrast, Sun Hung Kai Properties has been converting

a tower of luxury units into serviced apartments to avoid the levy which could yield up to $140m in potential savings, which may have prompted its rival Swire to rethink its actions.

“We put an announcement in preparation but it might not happen.

We might decide there’s a better use for the building,” Guy Bradley, Swire CEO said at an earnings briefing.

Other developers are starting to slash home prices in an effort to dispose of unsold flats with Paliburg Holdings and Regal International trimming as much as $10m off the

selling price of one of their 12 unsold Yuen Long villas to $29.4m.

Another private developer owned

by Kwok Kwei-wo and Tang Yukkwei have also discounted two units of their village houses in Yuen Long by about 20% after holding on to the units for two years.

The new vacancy tax could also urge developers to build smaller flats as shield against the sell-through rates, JLL said. The firm noted that the average size of new flats shrank about 40% over the past 6 years.

Smaller units have pushed strong sales in the primary market in H1 2018 as developers were able to sell over half new launches. “Under the new tax, developers will adopt a more cautious pricing strategy in new luxury launches to ensure all units are sold,” JLL managing director Joseph Tsang said. “Mass residential projects are likely to be less affected given the sustained demand for smaller units.”

Transactions over HK$50m

Source: EPRC, JLL

The Chartist: Hong Kong loses crown to singapore as asia’s top fintech hub Singapore has overthrown Hong Kong as Asia’s top fintech hub with fintech funding hitting 1.6 times higher than in Hong Kong in 2016 and 2017, according to FinTech Global. The Lion City broke Hong Kong’s two-year dominance in 2014 and 2015 after recording fintech funding worth US$983.6m in 2017 versus Hong Kong’s US$596.8m.

Singapore is well-placed to maintain its lead for the year ahead after fintech funding from 34 deals in the first half of the year has ballooned to over 10 times that of Hong Kong.“Singapore takes a simpler regulatory approach to FinTech than Hong Kong which has a multi-layered regulatory structure. As a result, Singapore may be more attractive to FinTech companies trying to avoid the red tape,” Fintech Global noted.

Fintech investments in Singapore vs Hong Kong

Source: FinTech Global

FinTech in Hong Kong, 2014 - H1 2017

Source: FinTech Global

HONG KONG BUSINESS | SEPTEMBER 2018

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FIRST Hong kong beats singapore

H

ong Kong rose by 10 places in the global liveability rankings to nab the 35th most liveable place in the Asia Pacific in an annual survey compiled by research and analysis firm The Economist Intelligence Unit.

Amidst improvements in political stability, the SAR was able to steal the 35th place from the Lion City who previously held the seat but has since dropped two spots to flop at 37th place in this year’s rankings.

Hong Kong performed better on cultural and environmental issues than the Lion City although housing supply and healthcare services in Singapore was of better quality, according to Simon Baptist, global chief economist and managing director of The Economist unit in Asia.

For instance, home ownership in space starved Hong Kong has plunged to 49% in 2017 whilst Singapore levels have exceeded 90% on the back of accessible government housing supply, according to a Bloomberg report.

“The regional role of Hong Kong will become smaller, and Singapore is [becoming the choice of AsiaPacific headquarters for multinational companies] because of its quality of life,” he said.

Room for improvement Lower levels of social unrest boosted Hong Kong’s through the liveability rankings after a stabilising political situation four years after the prodemocracy Occupy movement.

The most liveable city in the world is Vienna with an overall rating of 99.1.. Meanwhile, Australian cities Melbourne, Sydney and Adelaide dominated the top ten most liveabile cities along with Canadian cities Calgary, Vancouver and Toronto.

Japanese cities also made a strong performance with Osaka and Tokyo nabbing third and seventh place respectively. On the other hand, the ten least liveable cities are conflicttorn Pakistan, Nigeria, Bangladesh and Syria.

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HONG KONG BUSINESS | SEPTEMBER 2018

Trendy dorms are the new norm

F

or young professionals priced out of Hong Kong’s real estate market, coliving is fast becoming the only viable option when it comes to securing accommodation. This prompted Yoan Kamalski, CEO of coliving startup Hmlet to expand their operations in Hong Kong.

In July, Hmlet acquired Hong Kong startup, we r urban which currently manages a portfolio of 30 coliving spaces, housing 70 members across 15,000 square feet on Hong Kong Island. “The sad reality perhaps, is that coliving is often the only option for young people now to be able to afford to move out of the family home,” said Daniel Beck, CEO of coliving.com.

Beck believes that the demand for coliving is poised to increase beyond young professionals aged 25-35, who currently drive the demand for shared spaces. “People quickly see the benefits of community and convenience as soon as they move in. Because living costs are very high, coliving has the opportunity to attract a huge group of people.”

Upscale homes for yuppies Whilst the coliving setup is cheaper than renting a flat, coliving rates are by no means cheap. For instance, rooms at M3 International Youth Community in Central district are available from

Hmlet’s co-living space

$25,000 to $50,000.

Many developers are now investing in coliving projects. For instance, Shanghai-based Future Land Development has forayed into Hong Kong’s coliving market with new projects aimed at college students and young professionals in search of affordable rent.

Meanwhile, local developer District15 is leasing out coliving spaces for as low as $15,000 (US$1,911) to as much as $25,000. Over in Mini Ocean Park Station, a private room of 80 to 100 square feet can set a renter back by $8,500 (US$1,086) a month. The property is made up of 18 converted luxury apartments in Shouson Hill, and Rooms at M3 the ground floor features a common International area with couches as well as vending and washing machines.“The coliving Youth Community in concept is a necessity. It creates a new Central district type of real estate that allows people to match their lifestyle, finances, and their are available from $25,000 desire to connect with people whom may change their lives,” Kamalski said. to $50,000.

Mobile App Watch

Ride-hailing platform WETAXI HK butts heads with Grab Being the newest player Hong Kong’s ride-hailing service scene, WETAXI HK has a lot of catching up to do with heavyweights like Didi Chuxing and Grab. Through its partnership with Octopus Cards Limited, however, around 800 urban and New Territories taxi drivers are now accepting taxi fare payments through the widely accepted O! ePay, giving it considerable ammunition against incumbents.

WETAXI HK matches taxi drivers to nearest passengers needing transport. It also features a driver rating system to ensure safe and good userexperience to its user.“AI technology will enable us to understand individual taxi drivers’ driving behaviour and the areas where they prefer to go, so that we can enhance the app’s features and help drivers match taxi-hailing orders according to their routines,” Michael Wai, Wetaxi Technology Company founder said.

HKSTP’s Peter Mok; WeTaxci’s Michael Wai and Octopus’ Sunny Cheung

WeTaxi launched in August 2018

FIRST

Public hospitals reach tipping point

W

hen a deadly bout of influenza hit Hong Kong last winter, emergency rooms were filled to bursting as occupancy rates in public hospitals skyrocketed. Over in the 526-bed United Christian Hospital in Kowloon East, for instance, occupancy rates hit a peak of 136%. Patients waited for as long as eight hours in some of the busiest emergency rooms, and government figures showed that all but four public hospitals were running over capacity.

The winter rush highlighted a painful truth: Hong Kong’s public hospitals are under strain due to underfunding, a crippling manpower shortage coupled with rapidly increasing demand.

Chronic underfunding “Public hospitals operate even on normal days with a shortage of 700 nurses and 250 doctors,” noted BMI Research in a report.

“As such, Hong Kong’s public hospitals face human resource constraints to meet the greater demands from its ageing population.

This along with the chronic underfunding within Hong Kong’s public healthcare system will continue to undermine access to care,” it warned.

Public hospitals account for roughly 15%-17% of annual government spending,

and provide comprehensive and heavily subsidised services to local residents. For example, the cost of childbirth in public hospitals ranges between $300 and $1,500, whilst those looking to give birth in private hospitals can expect a bill exceeding $100,000.

Private sector shift As a result, BMI expects that the Hong Kong government will continue to shift healthcare provision towards the private sector due to the growing financial strain and an overburdened public healthcare system. In fact, the government has launched a new Voluntary Health Insurance Scheme (VHIS) to enable more residents to avail of private healthcare services.

Under the scheme, the participating insurance companies will offer hospital insurance plans that are certified by the Food and Health Bureau (FHB). “The VHIS encourages more people to use private healthcare services through hospital insurance, thereby relieving the pressure on the public healthcare system in the long run,” noted a spokesperson for the FHB. A report by international healthcare group Bupa revealed that actual out-ofpocket health expenditure has more than quadrupled to $43b over the last 25 years,

Chronic shortage: Hospitals need 700 nurses and 250 doctors

whilst the real wage indices that actually indicate changes in purchasing power saw only incremental change. This means that individuals were able to buy fewer products and services in the healthcare space with their money. Bupa projects that out-of-pocket expenditure will more than double to $94b by 2024-2025 if no improvements in the current system are put in place. The remedy, according to the report, is more efficient price legislation in the private healthcare market.

“The lack of financial transparency is inhibiting the functioning of an effective market: an inability to measure the true costs of various hospital procedures stops purchasers from fully comparing prices of providers and therefore interferes with normal competitive practices.”

“The efficient growth of the private system will ultimately impact the sustainability of Hong Kong’s healthcare ecosystem.

Transparency is a vehicle to improve quality and manage cost, whilst shining a light on the importance of the overall patient journey,” the report noted.

OFFICE WATCH

Check out ATLASPACE’s new Harbour City hub With a 180 degree panoramic view of Victoria Harbour that revolves around a cruise sailing design concept, ATLASPACE at Harbour City has certainly made a splash in its debut at Hong Kong’s crowded office market.

With a gross floor area of 50,000 sq ft, ATLASPACE can accommodate up to 30 employees of small companies and large enterprises. It also features a break-out area, lounge bar, quiet room (Magic Hub), and six multi-functional conference rooms equipped with comprehensive IT communication facilities to foster a unique office experience.

“With the opening of the Hong Kong Section of the Guangzhou-Shenzhen-Hong Kong Express Rail Link at the West Kowloon Station and support from our workplaces in key cities across China, our current and potential members will find it more convenient and accessible to build and expand their businesses across the border and to the overseas market,” said Chen Sze Long, CEO of ATLAS. 10

HONG KONG BUSINESS | SEPTEMBER 2018

Reception and concierge service desk

Flexible office setting

Meeting room

Boardroom

FIRST NUMBERS

the drive for the digitallyworkplace

Technology alone will not make a city smart.

What drags Hong Kong’s smart city push?

W

Source: IDC Asia/Pacific Employee Sentiment Survey 2018, commissioned by Workday, IDC Asia/Pacific Digital Transformation Pulse Survey 2017, IDC FutureScape: Worldwide IT Industry 2018 Predictions – APEJ Implications

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HONG KONG BUSINESS | SEPTEMBER 2018

hen Jia Zhou first visited Shenzhen, she was surprised at how efficient the city’s cashless payment system was.

“I found that people barely use cash.

Instead, they use mobile phone to pay for everything. I found it exciting and spent a whole day in Shenzhen and I survived from my smartphone payment and without any cash,” said Zhou, the CEO of mobile security startup PIN Genie. “In Hong Kong, I am tired of carrying change all the time and often get myself in trouble as I always forget my wallet.”

Whilst other Asian metropolises are rapidly transforming into smart cities, Hong Kong remains unable to shake off its traditional mindset. “Hong Kong is very good at infrastructure, but we are lagging behind on the policy side in areas such as electronic payments and open data,” said Eric Leung, president of the Smart City Consortium. “The key to being a smart city is connectivity—not just locally, but globally.”

Hong Kong turned in an unimpressive performance in the 2017 Smart Cities Index by the EasyPark Group. The territory ranked 68th out of 100 cities surveyed—a far cry from its rival Singapore, which ranked 2nd.

Culture is a major roadblock hindering Hong Kong from becoming a smarter city. A report by KPMG revealed that 73% of executives and 45% of the general population are of the view

that Hong Kong falls behind other developed cities in terms of fostering a technology and innovation culture.

The key to being a smart city is connectivity— not just locally, but globally.”

When tech is not enough “The city faces challenges around liveability. Many of its younger people express frustration at the lack of opportunities. Furthermore, many of its neighbours—both in mainland China and elsewhere across Asia—are moving ahead rapidly, and increasing the competitive landscape in the region,” said Julian Vella, ASPAC regional head of global infrastructure advisory, KPMG China. “For a city to be smart, its government will have to be acutely conscious of the needs and wishes of its population, the economic interconnectedness of its businesses with surrounding regions, and the potential impact—both positive and negative—of technological developments,” he said.

FinTech invests Hong Kong by Sector, 2014-H1 2017

Source: FinTech Global

startups

Digital bank Neat scores US$2m

H

ong Kong digital banking alternative Neat closed US$2m funding round from Singapore-based Dymon Asia Ventures and Portag3 Ventures as it aims to jumpstart onboarding and hire tech talent for its mobile banking solution.

Founded in 2015 by former Citibank Asia Pacific managing director David Rosa, Neat provides businesses with a flexible alternative from tedious paperwork and long waiting times associated with obtaining financing support from traditional banks.

To provide credit for cash-strapped SMEs, the startup has developed Neat Business that provides businesses with

a dedicated Hong Kong bank account number and a Mastercard debit card which can be used to pay for items like bills, services, flights, and hotels.

Customers can also link to third-party services such as Stripe or PayPal and deposit cash and cheques.

Neat customers also get access to the fintech’s comprehensive dashboard which provides a comprehensive overview of the state of their finances and features mechanisms for employee payroll, business invoices, expense management and monthly payments all through the click of a button and without having to resort to using a personal credit card.

All banking services are done within the app. The company is also aiming to introduce more advanced features including detailed company reporting, automated accounts, and multicurrency solutions in the coming years.

“Neat is committed to meeting the financial needs of an increasingly mobile and digital workforce. Thanks to our investment partners we can continue to address issues faced by early-stage and non-traditional businesses when they deal with traditional banks,” Rosa added.

Quantifeed raises US$10m in series B funding financial institutions transform themselves into providers of this service on a large scale. The additional funding allows us to fulfill this mission,” Ypsilanti said.

The fintech’s wide range of services include goal-based investment advice, analytics platform and sales and customer engagement tools. With a team of experienced quantitative analysts who Automated investment platform monitor market activity, Quantifeed is Quantifeed has closed US$10m series also able to offer a library of portfolios B funding round in June to accelerate across major global markets for asset its regional expansion plans and open allocation, thematic investments and a new office in Singapore. Founded other trading strategies. in 2013 by former investment banking With operations in Hong Kong, executives Alex Ypsilanti and Ross Milward, Quantifeed provides B2B robo- Malaysia, Singapore, Taiwan, and advisory services for banks, online brokers Australia, Quantifeed hopes that the recent round of funding will jumpstart ,and wealth managers including Cathay United Bank, whose parent firm, Cathay its plans to expand into other markets and double down on research and Financial Holdings, led the latest capital development efforts in data science and injection into the startup.

“We are bringing about wealthcare, a behavioural analytics segments.

US-based asset management firm Legg service aimed at helping everyone make the most of their savings to achieve their Mason also participated in Quantifeed’s series B funding round. financial goals. Our mission is to enable

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HONG KONG BUSINESS | SEPTEMBER 2018

Origami Labs raises US$2.5m to reshape the wearables market

Hong Kong-based Origami Labs has raised $2.5m in its recent funding round last June to help jumpstart its vision of reshaping the consumer electronics market with its inventive smart ring ‘Orii’.

Drawing inspiration from his visually impaired father, founder Kevin Johan Wong along with Marcus LeungShea and Yan Shun Li, developed Orii to help visually challenged people operate their phone through voice assistance technology.

As the ring communicates with the phone via Bluetooth, users are then able to receive notifications, make and take phone calls, send text messages, and handle daily tasks all without taking out their phones as Orii “put the power of the smartphone on your finger,” according to Wong. This is achieved through Bluetooth and advanced bone conduction technology widely used for medical-grade hearing devices that transforms sound into physical vibration that proceeds to travel via the finger.

After the user presses a button, the ring will either read out the information like an audible text message or users can jump in on a current call. Orii enables users to engage with their smartphone seamlessly as it communicates with Siri or Google Assistant whilst the user is on-the-go and unable to access the phone.

Screen-free technology Launched in 2017, Orii has already sold 5,000 boxes with orders coming mainly from Singapore, Hong Kong, Japan, and Taiwan as well as Europe and the United States. A set of rings sells for $160 after production in Taiwan and final assembly in China. “Orii breaks us away from our screens: almost all our interactions with technology involve a screen. We are screen addicts, distracting us from our environment and from people around us. Orii is the first device to deliver screen-free technology in a wearable,” added Wong.

The founders of Orii got the idea as students at the Hong Kong University of Science and Technology in November 2015. Tracing its origins, Orii was a result of 17 prototypes that could provide up to 1.5 hours of talk time and 45 hours of standby.

Wong believes there is a wealth of opportunity in the wearables market beyond smart watches and fitness bands as the technology has since moved from being considered a fad to a global movement that has seen 21% of online adults in the US adopting the technology.

“Advances in voice interfaces means that we are on the cusp of a voice interface revolution,” he added.

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FINANCIAL INSIGHT: IPOS & EQUITIES

Deal #1: Chinese smartphone maker Xiaomi’s lacklustre IPO raised $4.7b in late June.

Deal #2: medical provider C-MER Eye Care Holdings Limited raised $83.99m in proceeds.

Will the lack of mega-IPOs push Hong Kong out of the global IPO rankings?

With a 59% increase in new listings and total funds raised at HK$54.8b, Hong Kong is currently holding the fifth spot in the global IPO rankings. Can Hong Kong still lure the mega-deals to propel it up the ladder?

H

ong Kong’s IPO activity and performance continued to be vibrant in the first half of 2018 with a total of 108 new listings, which is around a 59% increase in volume compared to the 68 new IPO listings from the same period in 2017. In terms of value, however, total funds raised of the new listings in the first half of 2018 reached $50.4b, which is around an 8% decrease from the $54.8b funds raised from the listings in the first 6 months of 2017.

Hong Kong’s GEM board, meanwhile, posted a stronger performance, which recorded 50 IPOs that raised $3.4b of total funds, according to data from PwC. This is a significant increase of 43%, in volume of companies listing in the bourse, whilst the increase in total funds raised from the same period last year is 31%. The main board, on the other hand, raised a total of 58 new listings in the first 6 months of 2018, with total funds raised reaching $47b, which is a 57% increase in the number of Main Board IPOs but a 10% decrease in total funds raised.

“Looking back at the market performance in the first half of 2018, we can see the IPO activities are very active, with the number of IPOs reaching a new record high,” Ringo Choi, EY Asia-Pacific IPO leader said. “Whilst in terms of funds raised, due to the lack of mega-IPOs, the

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HONG KONG BUSINESS | SEPTEMBER 2018

All the top 10 IPOs were not listed in Hong Kong.

global IPO ranking of the Hong Kong market reaches only the fifth place temporarily. As a matter of fact, all the top 10 IPOs were not listed in Hong Kong.”

Small players dominate Edward Au, co-leader at the National Public Offering Group of Deloitte China, noted that part of the decline in terms of value in most new IPO listings in Hong Kong is because of the dominance of small and medium-sized issuers in the territory’s local bourse—something that may eventually be a boon for Hong Kong’s equity market in the long-run.

“Hong Kong’s IPO market remained vibrant in the first half of 2018. The keen public enthusiasm from small and medium-sized enterprises was not dampened by a rise in the listing requirements for both the Main Board and GEM and events like a reduction of the U.S. balance sheet, and the trade clash between U.S. and China,” he said.

“However, the strong domination of small and mediumsized issuers also resulted in the average deal size.”

Some of the top deals in the Hong Kong equity market in the first half of 2018, as mentioned previously, have mostly been dominated by local issuers preferring domestic listing. Analysis from Baker McKenzie showed

FINANCIAL INSIGHT: IPOS & EQUITIES that during the first half of 2018, 53 Hong Kong-based companies went public by listing on the HKEx and HK GEM, which is a 33% year-on-year increase, and raised total capital reaching $725m.

Notable deals Some of the largest domestic IPOs by Hong Kong issuers in the first half of 2018 include Chinese smartphone maker Xiaomi’s lacklustre IPO that raised $4.7b in late June.

Another anticipated deal was China Tower’s mega-IPO priced at $6.9b in August. Other notable deals include medical provider C-MER Eye Care Holdings Limited’s $83.99m in proceeds in HKEx in early January. C-MER closed at $5.11, which was 76% higher than its opening price of $2.90 and the marketed range of $2.35 to $2.90, according to Baker McKenzie. Other top deals include the $66.74m in proceeds from Tsit Wing International Holding in the consumer staples sector; the $29.42m in proceeds from Time Interconnect Technology Limited in the industrials sector; the $28.53m in proceeds from Thing On Enterprise Limited in the real estate sector; and the $28.04m in proceeds from LH Group Limited in the retail sector.

In terms of sectors, the most active issuers were from retail, with 9 IPOs raising $111m during the period, whilst in terms of capital raising, consumer staples was the most active sector, with 8 deals raising $141m in the first half of 2018. For the Main Board, PwC data noted that the top industries in terms of number of new listings include industrial products (36%); retail, consumer goods, and services (35%); financial services (14%); information technology and telecommunications (12%); and energy and mining related (3%).

As for trends, industry experts and observers are in agreement that new economy unicorns or enterprises, particularly those from mainland China, will largely benefit Hong Kong’s equity market and IPO activities for the rest of 2018 and the coming years.

“The mainland enterprises are going towards the Hong Kong market. New economy enterprises in healthcare, technology, and mobile payment sector listed in the first half of the year,” said Choi. Some of the largest IPOs so far, he further added, came from Ping An Healthcare and Technology, which raised $8.77b, along with Jiangxi Bank and Bank of Gansu ranking second and third, raising $7.37b and $6.84b, respectively.

New listing regimes This trend is likely brought by the new listing regimes and regulatory breakthroughs that have been implemented in Hong Kong’s equity market last April. The Stock Exchange of Hong Kong Limited announced a proposed list of new rules to Hong Kong’s listing regime, which took effect on 30 April. The reform includes allowing the public listing of issuers in the biotech sector that do not have a track record of profitability as well as listing of companies with weighted voting right structures.

In an earlier report by Hong Kong Business, the biotech sector was said to have been chosen as the initial focus in

Ringo Choi

Edward Au

Maggie Lee

Eddie Wong

widening market access as they make up a majority of companies in the pre-revenue stage seeking a Main Board listing, and activities like clinical trials tend to be highly regulated under the current regime that sets external milestones on development progress.

Another effort put in place was allowing for a concessionary secondary listing route for Greater China and international companies seeking a secondary listing in Hong Kong. Industry experts and observers are in agreement that these new listing reforms, considered monumental in certain aspects and significant since the last few decades, will propel Hong Kong’s local bourse as an attractive venue for international listings, and putting the territory at the top of global IPO rankings.

Maggie Lee, KPMG China’s head of Capital Markets Development Group for Hong Kong, explained that the implementation of the new listing rules for emerging and innovative companies has driven market sentiment and attracted the attention of companies which were previously seeking US listings, particularly in the New York Stock Exchange. As a result of these new rules, Lee forecasted the possibility of at least 10 biotech companies to apply for Hong Kong IPOs by year-end. “In addition, a number of TMT firms are also eyeing large Hong Kong listings,” she said.

“The market response regarding listing opportunities has been very encouraging following the implementation of the new listing regulations for Hong Kong’s IPO market in April 2018,” said Eddie Wong, partner of Capital Markets Services for PwC Hong Kong. He added that, currently, the Hong Kong IPO pipeline is looking strong for the rest of the year with around 200 IPO applications already being processed by HKEx, across both the Main Board and GEM. “In the second half of the year, there will be several large-scale IPOs with targeted fundraising in excess of $10b,” Wong noted. “They will help cement Hong Kong’s global leading IPO market position.”

Deloitte China’s Au echoed these sentiments, saying that through diversifying the listings to the new economy and new sectors, removing certain listing “obstacles” like companies with different voting classes that are in general accepted by other international markets such as the United States, and allowing H-share issuers to fully

2018 H1: Top 5 sectors - by numbers of IPOs

Source: KPMG

HONG KONG BUSINESS | SEPTEMBER 2018

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FINANCIAL INSIGHT: IPOS & EQUITIES convert their domestic shares, Hong Kong’s IPO market status as an international fundraising centre is poised to elevate to a new level. Its role as a springboard to support the growth of Chinese small and medium-sized enterprises will also be underscored.

Deloitte, in one of its analysis, noted that the new listing regime and hot market expectation have given a strong boost to the share flotations of new economy companies in both markets, including some well-known Chinese unicorns which started in July. These trends are likely to help raise the rankings of both the stock exchanges in Shanghai and Hong Kong in the global IPO fundraising league by the end of 2018.

Some of the recently anticipated public listing in the Hong Kong equity market from companies originating from mainland China include the IPO of Xiaomi, one of the top manufacturers and sellers of smartphones in the world, and China Tower, the world’s largest mobile mast operator.

There is also the recent agreement between the HKEx and China’s National Equities Exchange and Quotations (NEEQ), which opens the door for NEEQ-listed firms to float in Hong Kong under a dual-listing model. Benson Wong, Entrepreneur Group leader for PwC Hong Kong, said that this initiative will go hand in hand with the listing reform to drive HKEx’s ambition of attracting more Chinese tech and innovative companies to the local bourse. “It will also establish a more open and multi-layered capital markets and promote mutual access between the financial markets of mainland (China) and Hong Kong,” he added.

Outlook and risks KPMG noted that, with more IPOs in the pipeline, Hong Kong’s equity market is forecast to have total fundraising of $250b in 2018 and ending the year amongst the top three (at the very least) IPO destinations globally. There is also the emergence and proliferation of cross-border IPOs, which, according to Choi, may also become a supporting force in promoting prosperity of the Hong Kong market. For instance, a total of 29 Singapore-based companies have successfully listed on the Hong Kong Exchange, particularly on the back of plans to expand operations in the Greater China Market, as well as to tap on the multi-trillion dollar investor market in China.“Cross-border listings will become more active.

Singapore and the United States will go public in Hong Kong, and Singapore companies will be the major force of cross-border listings,” he said, whilst adding that the retail and consumer products, TMT, financials, construction, and healthcare sectors will launch IPOs this year.

Choi concluded that whilst optimism is permeating all throughout Hong Kong’s equity market and IPO landscape with the more benign and competitive landscape and proximity with new market unicorns and companies from mainland China, there remain risks including the territory’s exposure to a complex and volatile global market environment, particularly the increasing trade tensions between the United States and China, amongst others.“We should realise the threats brought by the Sino-US trade war, the current trend of net outflows of funds in the Asian market, and competitions from other markets around the world,” he said. “These will have different degrees of impact on the prosperity of the Hong Kong IPO market.”

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Hong Kong’s equity market is forecast to have total fundraising of $250b in 2018 and ending the year amongst the top three (at the very least) IPO destinations globally.

Singapore view

Why are local firms listing abroad?

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ith a growing number of Singapore companies choosing to list abroad, the number of crossborder listings ballooned 300% in terms of volume and 166% in terms of value compared to the 64% increase in domestic capital raising. Singapore is also losing out on profitable tech companies as gaming technology company Razer chose to list in Hong Kong last year. Less than eight months after delisting from SGX, OSIM International relisted as V3 Group in the Asian financial hub. The Hong Kong GEM has emerged as the top destination for local companies seeking outside listings after accounting for two-thirds of total number of issues from Singapore with market experts attributing the close proximity of Hong Kong to China’s massive market diminishing Singapore’s attractiveness. As a result, Singapore has been steadily rolling out programmes to boost the competitiveness of the local bourse and lure tech companies to list.

Rolling with the punches Overall IPOs by Singapore issuers ballooned 78% YoY to raise US$459m in the first half of 2018 although this represents weaker activity compared to their Asian counterparts. The 12 listings in Singapore, which indicates a 20% YoY increase, also represents a gradual decline in number of listings in the last ten years, according to law firm Baker Mckenzie.“SGX’s domestic IPO activity and performance remains stable and strong,” said Tay Hwee Ling, Global IFRS and Offering Services leader for Deloitte Southeast Asia and Singapore.

Some of the top cross-border IPOs by Singaporean issuers in the first half of 2018, according to data from Baker McKenzie, include the $22.42m in proceeds by HPC Holdings Limited and the $14.01m in proceeds from Hke Holdings Limited for the industrial sector; the $20.45m in proceeds from ZACD Group Limited for the real estate sector; and the $8.95m in proceeds from ISP Global Limited. Meanwhile, the top domestic IPOs by Singaporean issuers in the first half of 2018, are Sasseur Reit’s $300.68m in proceeds, through Real Estate Investment Trusts (REIT), and the $41.82m in proceeds from SLB Development Limited in the real estate sector; the $14.93m in proceeds from LY Corporation Limited in the consumer products and services sector; and the $8.22m in proceeds from Asian Healthcare Specialist in the healthcare sector. All of the mentioned domestic IPOs were listed on the Singapore Exchange (including Catalist).

Singapore ECM by Issue Type

Source: http://dmi.thomsonreuters.com/

·

economy watch and continuous deleveraging in China could lower transaction count.

Property and trade: twin threats to the economy Analysts reckon that the property sector has been holding up better than expected, but forecasts of a correction may hamper growth in 2019.

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he US-China trade spat and its potential economic fallout have shaken up markets, with analysts admitting that Hong Kong’s economy will likely feel the pinch especially if a full-blown trade war erupts in the second half of 2018. But another pain point in the making could end up hurting the territory more: a correction in the territory’s red-hot property sector.

“Whilst the trade war between China and the US commands the headlines, we think the risks to Hong Kong are overstated,” said Juliana Lee, chief economist at Deutsche Bank. “We’re still more concerned about risks from a property market correction.”

Correction concerns Lee said that whilst the 8% decline in housing prices from September 2015 to April 2016 was reversed within a year, it had significantly dampened aggregate demand in Hong Kong. She reckoned Hong Kong’s property has been holding up better than expected, but forecasts a correction to hamper growth in 2019.

“We expect another such correction 20

HONG KONG BUSINESS | SEPTEMBER 2018

The ultimate question on the impact is about the determination by the U.S. on targeting trade and investment rerouting

by Chinese corporates, or whether Hong Kong will be treated as a separate tax zone from China.

and 6 months ago, it looked like it was happening, but the market recovered immediately,” said Lee. “This has been a long-standing concern of ours, and we’re not unhappy to have been wrong so far.”

In its mid-year review of the property market, Colliers International remained positive in its outlook for full-year 2018 growth.

However, for the second half, the research firm anticipates the city’s price and rental growth to decelerate due to “several adverse factors on the horizon, including rising capital costs and increasing interest rates that could cap aggressive price increases.”

It also flagged that tightening liquidity

Trade fears overblown?

The second half of 2018 may also carry greater economic risks for Hong Kong if the US-China trade dispute escalate even further, but Lee said the first round of tariffs that the two countries imposed on each other’s goods will likely have “only a marginal impact, especially given the yuan depreciation in recent weeks.”

The yuan had fallen more than 3% throughout the month of June.

“Higher tariffs are damaging to growth for both the US and China, but with only $100b of bilateral trade now (or soon to be) subject to a 25% tariff, the immediate impact on these economies is about 0.1% of GDP,” said Lee. “Hong Kong, as an intermediary between these two giants, would suffer collateral damage. But the effect shouldn’t be exaggerated.”

Prior to the escalation of trade tensions in July between the world’s two largest economies, Hong Kong exports were expected to sustain their level of growth in the near term, according to the Hong Kong Trade Development Council Export Index for the second quarter of 2018, which jumped into expansionary territory to a 29-quarter high of 54.1.

“Whilst the ongoing ChinaUS trade dispute may be casting something of a shadow over Hong Kong’s future export prospects, few businesses have, as yet, suffered any undue consequences,” HKTDC Economist Doris Fung said in late June when the index was released.

Lee estimated that the first round of the trade war could hit Hong Kong by reducing re-exports by 4%, or about 0.08% of GDP.

Hong Kong exports to selected countries (YoY)

Source: Bloomberg, Natixis

cover story

Hong Kong’s growing appeal amongst issuers stems from its strengthening support ecosystem for the development of blockchain

Hong Kong’s ICO proceeds hit $223m The territory was one of the top 10 countries in 2018 for ICOs based on funding volume, with $223m raised across 20 closed ICOs and 15 more in the pipeline, according to a joint report in June.

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oughly a year since China moved to ban all initial coin offerings, also known as token sales, Hong Kong has enjoyed a surge of issuers and has gathered momentum as a top ICO centre in Asia.

Whilst the territory still trails Singapore in overall activity and concerns remain on token sales that turn out to be scams, analysts and industry players observe progress in regulatory clarity, issuer quality, and investor education that should help drive growth in the coming years.

In September 2017, the People’s Bank of China, the country’s central bank, banned all ICOs, criticising its disruptive effect on the country’s financial system and calling it “a form of unapproved illegal public financing.”

It also forbid all financial institutions and non-bank payment institutions from conducting any business related to token financing transactions, as the world’s secondbiggest economy continues its campaign to reduce risky lending.

The China ban has led issuers to flock to Hong Kong, which has emerged as one of the most favourable countries in Asia for ICOs. The territory was one the top 10 countries in 2018 for ICOs based on funding volume, with $223m raised across 20 closed ICOs and 15 more in the pipeline, according to a joint report in June by PwC and Crypto Valley Association, an independent and Swiss government-supported industry body.

“Across Asia, Singapore is the main ICO hub, followed

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Fusion Foundation, a startup building an “inclusive cryptofinancial platform,” raised US$110m.

by Hong Kong,” the PwC and Crypto Valley report said, noting that the territory has “gained significant ground” in recent months to catch up to leaders like the US and Switzerland. Hong Kong still lags significantly behind Singapore—which placed top three in the 2018 rankings, with $1.19b raised across 53 closed ICOs and 52 additional in the planning stages—but the territory’s entry to the top 10 rankings shows it is gaining some steam.

Aside from benefiting from the exodus of issuers from mainland China following the ban, Hong Kong’s growing appeal amongst issuers stems from its strengthening support ecosystem for the development of blockchain, cryptocurrencies, and ICOs, according to analysts and industry players.

“Over the past 12 months, we have seen many industryled best practice initiatives where the ecosystem has come together to agree on best practices that many want to follow,” said Henri Arslanian, PwC fintech & crypto lead for Asia and chairman of the FinTech Association of Hong Kong, citing the best practice guides launched by the FinTech Association of Hong Kong for ICOs and the Asia Securities Industry & Financial Markets Association for cryptocurrency exchanges.

There has also been greater regulatory clarity in the past year. Hong Kong’s Securities and Futures Commission in September 2017 issued a statement specifically on ICOs on how they are regulated under the territory’s securities

cover story laws, providing greater clarity for issuers and token holders.

“The statement clarifies that not all digital tokens are necessarily securities, but where the tokens are, in substance, a share, debenture, or interest in collective investment scheme and are being offered to the Hong Kong public, the securities and prospectus regimes in Hong Kong will need to be considered,” said Slaughter and May’s Roger Cheng in a note after the statement’s release. “The approach taken by the SFC follows the approaches adopted by the US and Singapore regulators (with the key exception of mainland China which has banned ICOs) and shows an emergence of a global consensus on how to regulate ICOs.” Like in Hong Kong, other regulators are weighing their regulatory approach as ICO activity continues to soar.

ICO volumes reached new highs in the first half of 2018, amounting to already twice as much as it was during the entire year of 2017, according to CoinTelegraph. Reports of scams and increasing concerns to protect investors have also been key factors in how regulators are navigating the new ICO frontier.

Greater compliance focus Industry players noted that amidst the clearer guidelines and greater investor scrutiny amongst the raft of available ICOs, issuers have shifted gears and are paying more attention to compliance and business longevity. “In the past, people are in fear-of-missing-out stage and contributions flowed into token sales regardless of their nature, market impact, and long-term potential business growth. It’s easy to hear some sort of golden formula to make a token sale successful: a stunning website, a project explanation video, a white paper, a cool mixture of advisors, plus community marketing. The situation has changed,” said Jack Cheng, managing director of MegaBlock.

“Projects nowadays pay much attention to compliance and regulation, a detailed technical white paper to explain from a technical perspective, and sometimes a prototype or workable alpha release of applications before going into token sales,” he said, noting that more token holders are starting to evaluate projects on a long-term perspective rather than speculative. “At the end of the day, deliverability is more important than a fancy idea. This is the key for a project to be successful in the long-run.”

In 2017, over $5.6b was raised through token sales, not Biggest ICO raisers by country

Source: icowatchlist

Henri Arslanian

Roger Cheng

Jack Cheng

to mention “some from unrecorded private and over-thecounter contribution,” as well as thousands of different tokens being generated, according to Jack Cheng. He said regulators have stepped up their rules surrounding ICOs in response to the bad eggs in the burgeoning basket, and the regulatory tightening could be viewed as a positive for the industry as a whole.

“Some companies or projects leverage multi-level marketing schemes to capture the money from mass market; they do good marketing to generate interests, but not really deliver the true value in terms of technology,” said Jack Cheng. “These are so-called scam projects around the market and that is one of the reasons why regulation has to come in apart from anti-money laundering, tax, and remittance concerns.”

“Having said that, token sales could be seen as a new and efficient way for start-up company to raise funds their projects, products, and services. Regulations actually is a good thing for the industry. Real projects and companies that deliver true value are able to stay in the market whereas scam projects will be wiped out,” he added.

Arslanian said that whilst there are many cryptocurrency companies aiming to build gamechanging business for the long term, “there are unfortunately still some bad apples that are trying to make a quick buck.”

Due to growing regulatory scrutiny, the legal aspects of token sales are becoming increasingly important, especially with regards to the rights which attach to tokens, as well as anti-money laundering/know-yourcustomer and corporate governance matters, ASIFMA noted in its best practice guide for digital asset exchanges.

“In order to ensure credibility of a token sale event and its anti-money laundering/counter-terrorism financing compliance, issuers increasingly put in place mechanisms to comply with securities and other laws, verify purchaser’s identities and/or exclude investors from certain jurisdictions,” the association said.

Roger Cheng noted that given the potential criminal liabilities, including imprisonment, for breaches in Hong Kong’s securities law, “parties involved in ICOs cannot simply treat this as a ‘grey area’ of law and should consider obtaining regulatory advice when planning or developing ICOs and virtual token projects going forward.” The SFC has warned it will be monitoring the market and will be on the lookout for ICOs and exchanges that would require some regulatory oversight.

Trust and credibility Whilst ICOs are continuing to rise in popularity, there are vocal criticisms both from regulators and token holders, including the sustainability of ICO businesses. “Projects that fizzled out may have many reasons such as the insufficiency of market validation, regulation of token economy model, lack of the ability for user acquisition or business penetration, or technical development capacity,” said Jack Cheng. “Apart from that, the deliverability is the most important key to success. To do that, it requires not just technical expertise, but also multiple sets of skills, HONG KONG BUSINESS | SEPTEMBER 2018

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cover story New archetypes of fundraising

Number of projects by categories, %

Source: icowatchlist

including but not limited to business operation control, marketing, and people management.”

Jack Cheng stressed that at the heart of ICOs, the real value lies in the people and working together to achieve the goals. “A correct team matrix will contribute a lot towards the milestones. In addition, the culture of competition is good to see in the blockchain industry,” he said.

Arslanian noted a “significant” improvement in quality and professionalism of crypto projects in the past 12 months. “Today, most projects we see have experienced management teams, well thought through business models and an institutional mindset. This was not the case in the early days of the ICO craze,” he said.

Other key trends Key trends shaping the sector include Hong Kong venture capital firms also getting in on the ICO game, such as GSR Capital agreeing in June to purchase $160m worth of tZero security tokens, which run on the Ethereum blockchain.

Whilst the tokens do not constitute company equity and do not confer any voting rights, they pay out dividends to investors at a rate of 10% of tZero’s adjusted gross revenue on a quarterly basis from tZero’s regulated trading platform, which will list ICO tokens and other blockchain-based securities. tZero said that it has obtained $168m worth of token sale commitments, which when combined with GSR Capital’s investment, brings its total fundraising to $328m, exceeding the $250m it had targeted when it first filed to inform the US Securities and Exchange Commission of the offering. The HKMA is also set to launch a live blockchainbased trading platform in September, which could further support the local environment for ICO issuers.

Jack Cheng also noted the potential of Initial Token Distribution as an alternative way to manage the token economy. “The main purpose of token sales is fundraising.

In certain extents, it may not unleash the true potential of the project if the token sales fall into a small group of investors and there is no significant amount of utility token holders there to consume the token for the products or services,” he said. The goal is to trigger network effect and boost awareness, with the monetary value coming in the later stage. “Because of the giveaway nature, it also helps the project to lower the associated compliance risks in some jurisdictions,” Jack Cheng added.

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Key trends shaping the sector include Hong Kong venture capital firms also getting in on the ICO game.

Source: PWC

INDUSTRY INSIGHT: BANKING

A new era of smart banking awaits Hong Kong banks

Hong Kong’s retail banking scene embraces Open API Framework The HKMA’s vision for the Open API Framework is a more competitive, innovative, and technologicallyadvanced retail banking environment.

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he Hong Kong Monetary Authority (HKMA) on July 18, 2018 published its much-anticipated Open Application Programming Interface (API) Framework for the Hong Kong retail banking sector. The Open API Framework is one of the key planks in the HKMA’s “New Era of Smart Banking” initiative launched in September 2017. The HKMA’s vision for the Open API Framework is a more competitive, innovative, and technologically-advanced retail banking environment for Hong Kong, to be achieved through financial institutions opening up their data through new digital interfaces, including those intermediated by fintechs and other third party service providers (TSPs) who are not licensed under the banking regulatory regime. The increased flow of bank product and customer data is expected to encourage greater flexibility for consumers to make informed choices amongst competing products and ultimately encourage innovation in the design and delivery of financial services in Hong Kong.

There are synergies and important touch points with the reboot of the HKMA’s virtual banking licensing regime, the expected launch of the faster payments system in the autumn of this year and the introduction of the stored value facility (SVF) licensing regime in 2016, which 26

HONG KONG BUSINESS | SEPTEMBER 2018

A number of leading financial institutions in Hong Kong have already opened APIs to TSPs.

introduced a separate authorisation regime for non-bank payment accounts to Hong Kong.

But the Open API Framework does not actually represent regulatory change for financial institutions — it calls for the application of existing regulations to new data-driven business models. A number of leading financial institutions in Hong Kong have already opened APIs to TSPs, and the introduction of licensed SVFs to the Hong Kong ecosystem precipitated a flurry of similar commercial collaboration and data exchanges through digital wallets in recent years. The Open API Framework formalises regulatory expectations around changes to banking business that are already well underway.

Key features of the Open API Framework The HKMA has come out in favour of a phased introduction of the Open API Framework and has chosen not to impose a mandatory requirement for institutions to make data available to TSPs. In a fundamental divergence from the example set by the UK Competition and Market Authority’s “Open Banking” initiative, the Open API Framework is not a “forced opening” of bank data, and it does bring about a fully regulated ecosystem in which TSPs are also subject to licensing. Hong Kong financial

INDUSTRY INSIGHT: BANKING should be opened in each phase (as outlined in Annex A to the framework). Each institution is responsible for providing the HKMA with a road map of the APIs it proposes to open, including justification for any gaps against the recommendations. Annex C to the framework supplements the approach with illustrative examples of product and service information data fields which institutions may wish to include in their APIs. In the same vein, Annex B of the framework sets out the HKMA’s recommendations for architecture, security and data standards.

Open API is just the beginning

Sources: Celent

institutions releasing data through API will remain fully responsible for this data. TSPs will not be vetted or licensed by the HKMA. This role is allocated to the institutions. Of course TSPs misusing personal data obtained through APIs may be held to account under the PDPO, and it continues to be the case that TSPs cannot carry on regulated business in Hong Kong without a licence.

However, it is equally clear that Hong Kong’s licensed banks will be the gatekeepers responsible for judging that TSPs are suitable for handling their customer data, and for ensuring that contracting arrangements with TSPs are effective in “flowing down” banking regulatory requirements in key areas such as technology risk management (TRM), the handing of customer payment instructions and AML-CTF. Banks are required to ensure TSPs operate as if they were part of the bank.

Phased approach to Open API The Open API Framework retains the phased approach to implementation outlined in the HKMA’s consultation papers:The phasing above reflects increasing risk for API implementation at each stage. The release of static product information to TSPs in Phase 1 obviously entails much lower risk than an institution’s reliance on a customer’s payment instruction intermediated by a TSP, as envisaged in Phase 4. Recognising the increasing complexity and risk, the HKMA has indicated that it will closely monitor the progress of the implementation of the Open API Framework and take into consideration local and international developments in coming to a decision on the Phase 3 and 4 implementation dates in the coming 12 months.

The HKMA has come out in favour of a phased introduction of the Open API Framework and has chosen not to impose a mandatory requirement for institutions to make data available to TSPs.

No regulatory vetting of TSPs As noted above, the Open API Framework places institutions in charge of regulating the TSPs they interact with in the open environment. The Open API Framework requires banks to establish a formal TSP governance process for managing risk. In relation to Phase 1 Product and Service Information APIs, banks are required to establish a simple TSP registration process that allows the institution to keep track of its data flows primarily for general consumer protection purposes, but also to support capacity planning for the volumes of bank data being drawn through the APIs. The HKMA also expects banks to have terms and conditions in place with TSPs that address a number of risks arising in Phase 1: (i) the TSP uses the API information to misrepresent the bank’s products; (ii) the TSP separately collects personal data from bank customers in a manner that breaches the PDPO; and (iii) the TSP does not fully disclose the risks involved in their own products. Even in Phase 1, then, there are important risks for banks to manage.

In relation to Phase 2 Subscriptions and New Application APIs (and beyond into Phases 3 and 4), the HKMA expects that institutions will mobilise through the Hong Kong Association of Banks (HKAB) or otherwise to develop a common baseline set of criteria for TSP governance, with the objective of streamlining banks’ engagement with TSPs. The Open API Framework sets out a number of areas for due diligence into TSPs for Phases 2 through 4, including financial soundness and various operational risk areas, with examples being data protection, cybersecurity and business continuity.

No API standardisation Another key issue discussed as part of the Open API consultation is the matter of standards. Imposing standard API datasets and universal technical standards could mean greater interoperability between institutions, and could also set a clearer course for TSPs and others taking risk investing in infrastructure that functions in the open environment. As foreshadowed in the consultation papers, however, the HKMA has concluded that it would be cumbersome to reach agreement in these areas in advance.

The HKMA has recommended certain APIs that HONG KONG BUSINESS | SEPTEMBER 2018

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INDUSTRY INSIGHT: BANKING Who’s ready for open banking?

Source: Data from IDC Financial Services

The HKMA is clearly motivated to ensure that TSP assessments do not become a bottleneck for the Open API Framework. The HKMA is encouraging a common approach, potentially with banks recognising each others’ assessments so as to avoid duplication or even structuring TSP assessments through a centralised assessor working to the banks’ common principles of assessment.

As with the Phase 1 APIs, there is significant focus by the HKMA on banks’ approach to contracting with TSPs as part of Phase 2 and beyond. Further, the HKMA expects each institution to publish a list of partnering TSPs and their relevant products, with the regulator encouraging the industry to centralise this aspect of the open environment in a public registry. The HKMA has also cautioned banks that they must now be vigilant in this new open environment, keeping watch for those who may trade on the guise of being API collaborators, when in fact they are not. Finally, the HKMA has suggested that API facilitation should take place through a centralised repository or “dashboard” of APIs, recommending that the Data Studio of the Hong Kong Science and Technology Parks be used for this purpose.

The Open API Framework is ultimately about datadriven collaboration between banks and fintechs. The key hurdle is in meeting the banks’ risk management and customer data regulations, with primary considerations being the onboarding of TSPs and settling contract terms that are flexible but sufficiently protective of each side and the consumers that they serve.

TSP due diligence The HKMA has recommended that banks seek a common set of standards for vetting TSPs in respect of Phases 2 through 4, perhaps even establishing a centralised assessment body that would certify TSP suitability for API collaboration on an industry-wide basis. This is clearly a worthy objective as it will ease the path to opening APIs and help ensure a critical mass of attractive TSP offerings.

Certification would not eliminate the need for banks to evaluate the specific risk factors raised by a particular collaboration model, but it would streamline matters to certify a TSP against basic eligibility criteria. The HKMA’s list of considerations for TSP vetting is, however, rather 28

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The HKMA is clearly motivated to ensure that TSP assessments do not become a bottleneck for the Open API Framework.

long. The list is consistent with (but in some respects goes beyond) the considerations for selecting an outsourced service provider found in the HKMA’s “Outsourcing” Supervisory Policy Module SA-2 (“SA-2”). The HKMA’s vetting criteria for TSPs takes the SA-2 criteria and supplements these with additional TRM and data protection topics.

The focus on TRM and data protection is appropriate to the context, but it can be foreseen that the basic eligibility criteria for TSPs could in themselves become a bottleneck to TSP onboarding. A risk-based scaling of criteria would be appropriate. Not all API collaborations will be in the nature of an “outsourcing” where the TSP is literally carrying on regulated banking business on behalf of the bank. It is clear that TSPs bringing payment instructions to banks as part of the Phase 4 Open APIs need to be very carefully vetted against a wide range of risk factors.

However, there may well be implementations of Phase 2 APIs, in particular, that do not involve the same degree of intermediation between bank and consumer and so do not raise all of the same risk factors. The onboarding criteria should naturally be fewer in number and set at a lower baseline in lower risk categories of API collaboration.

Taking another example where risk profiles may vary significantly, customer data varies in its sensitivity, with, for example, customer email contact details generally being less sensitive than detailed listings of transaction data. A proportionate, risk-based approach to TSP vetting is consistent with the requirements of Data Protection Principle 4 of the PDPO and would ensure that the right risk factors are looked at in the context of the specific collaboration model. Contracting with TSPs In many cases, the open environment will call for new contract forms that reflect new types of collaboration.

Getting the basics right: As with any contract, being clear on “which party does what” is key. From a banking regulatory perspective, the boundary between regulated banking business and unregulated activity is fundamental.

API collaborations can blur this boundary and so care is needed to ensure that the bank is exercising the control it needs to exercise in order to ensure the collaboration is compliant.

A practical oversight model The project governance applied to Open API collaborations from a tech perspective, appears to be more intensive and rigorous than data-driven collaborations in other sectors. From the bank’s perspective, the seemingly heavy-handed approach is necessary in order to ensure that the bank can meet regulatory requirements to ensure that it remains fully on top of how its customers are being treated, how the integrity of its systems is being maintained, and how customer data is being handled.

Bank’s standard material outsourcing agreement will certainly not be the right solution in every case, and in many cases it won’t get signed. Finding practical accommodations that reflect a proportionate, risk-based approach to project governance will be the key. From Mark Parsons, Partner at Hogan Lovells

ANALYSIS 1: wealth report

The impact of Chinese government policy has affected Hong Kong and Macau

Map of the money: Tracking the movement of wealth around the globe This analysis from Knight Frank provides a unique perspective on the movement of money around the globe, helping to confirm the direction of travel of wealth and investment flows.

O

ne of the critical issues considered each year in The Wealth Report is where money is coming from – and where it is going to. It is this issue that ultimately helps to drive market performance in the 100 luxury residential markets we consider in our Prime International Residential Index (PIRI) and the commercial property markets we examine. Helpfully, figures just released enable us to give an intriguing snapshot of global monetary flows.

In 2016, the Bank for International Settlements (BIS) started to release data provided by 29 reporting locations on the aggregate level of foreign deposits by “non-banks” in their financial institutions. Of the reporting locations, 27 also analyse deposits on a location-by-location basis.

Non-banks include individual, corporate and government deposits. This provides a unique perspective on the movement of money around the globe, helping to confirm the direction of travel of wealth and investment flows.

Understanding wealth flows, Chinese funds deposited in reporting locations rose by US$172 billion, a staggering 721%, in the three years to June 2017. Over the same period, deposits held by Russian non-banks grew by US$6 billion, up 21%. The outbound flow of funds from China in particular, but also from other locations including 30

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Hong Kong has become increasingly popular as an investment destination, with mainland Chinese investors increasing their deposits here

by US$19.5b.

Russia, has been a key trend affecting global asset markets over recent years. Despite official attempts to rein in these flows, the BIS data confirms that the trend looks likely to continue.

One subject we discuss at length later in this article is the growth of legislation aimed at improving financial and tax transparency globally. The OECD inspired Common Reporting Standard (CRS) leads the way in this area.

Anecdotally, some investors appear keen to remain outside the scope of the regulations. The US and Taiwan are in the minority of major economies that have not committed to the CRS, and over the three years to June 2017, ahead of its implementation,non-bank deposits held in each of these places increased by US$122 billion and US$25 billion respectively. In the US there was a rise of US$90 billion in the 12 months to the end of June 2017 alone.

The impact of Chinese government policy has affected Hong Kong and Macau in different ways. While Macau has seen a 10% decline in deposits in the 12 months to June 2017, Hong Kong has become increasingly popular as an investment destination, with mainland Chinese investors increasing their deposits here by US$19.5 billion over the same period.

Bahamian non-bank deposits, in the locations that

analysis 1: wealth report Change in non-bank deposits from q2 in the year shown to q2 2017

Sources: Knight Frank Research, Bank For International Settlements

report on them, fell by 25% in the past year. The data shows that deposits held by Panamanian non-banks also dropped by 20% in the last year. Deposits held in the Channel Islands declined markedly in the three years to June 2017, falling by 31% in Guernsey and 14% in Jersey. In the Isle of Man, the drop was 28%. The above changes can in part be explained by currency shifts, in particular for the Channel Islands. But some commentators interpret these declines as supporting the narrative that the advent of the CRS and other transparency measures is eroding some of the benefits offered by traditional low-tax jurisdictions, leading to an outflow of funds. Over the three years to June 2017, the amount of money held in Switzerland covered by this analysis has fallen by 8%. Once again, the introduction of the CRS and wider moves against bank secrecy could be contributory factors. In addition, it should be noted that Switzerland’s interest rates became negative in 2015, meaning that investors were effectively paying to keep money in the bank, prompting an exodus of funds.

As more countries join the CRS and its scope potentially widens, the global pattern of wealth movements is likely to become ever more tangled.

Keeping control Our annual analysis of global wealth and investment trends shows that the desire of wealthy individuals to move their money – and themselves – across borders shows no signs of abating. And, if the continued development of transparency regulations is anything to go by, the same is true of the desire from governments to at least monitor, if not direct, the flow. The scale of the challenge they face is considerable, to say the least. Money is moving at a record rate. An analysis of data from the BIS confirms that foreign non-bank deposits rose by US$97 billion in the year to June 2017 in the 29 locations that provide detailed reporting.

For some, this cross-border activity is being spurred on by the prospect of tighter capital controls. As David Ji, Knight Frank’s Head of Research for Greater China, notes, there is a real belief that the Chinese government is planning to tighten controls further. To take just one example, while Chinese citizens are currently allowed to buy up to US$50,000-worth of foreign currency each year, there are signs that regulators intend to lower this limit.

Indeed, it is apparent that stricter rules are already being brought in. Since July 2017, Chinese banks are required to report on any customers depositing or withdrawing more than US$10,000-worth of foreign currency in a single day, and from the beginning of this year the Chinese government capped annual overseas withdrawals from Chinese bank accounts at US$15,400.

With authorities aiming to maintain a weaker yuan to promote exports, overseas investments, including property, have become more expensive. Any prospect of a further weakening may act as an additional push factor for investors.

In India, the Liberalised Remittance Scheme (LRS) allows US$250,000 per head per year to be moved out of the country. The pace of money transfers increased by 60% in the year to September 2017, and by almost 1,800% over the past decade. The rapid growth in transfers coincides with increased scrutiny by the Reserve Bank of India of dealings under the LRS. Targeted taxation The growth of global wealth flows has also led a number of jurisdictions to introduce or extend taxes targeting affluent investors. In July 2017, the government of New South Wales, Australia, raised the stamp duty surcharge from 4% to 8% for foreign buyers, as well as increasing its annual land surcharge from 0.75% to 2%. In the same month, Australia’s treasury released a draft paper detailing proposed legislation to remove the main residence exemption for capital gains tax for foreign residents.

The government of New Zealand has proposed changes that will require property investors to pay tax on capital gains if they make disposals within five years of purchasing, up from the current two. And in November 2017, the UK government announced plans for capital gains tax to apply to non-residents on commercial as well as residential property.

Transparency drive Increasingly, government action is moving beyond taxation and into attempts to map the extent and movement of global wealth flows. The OECD’s big idea, the CRS, was launched in September 2017. Almost

Change in non-bank deposits from q2 in the year shown to q2 2017

Sources: Knight Frank Research, Bank For International Settlements

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ANALYSIS 1: wealth report UHNWI citizenship trends

Sources: The Wealth Report Attitudes Survey 2018, Knight Frank

50 countries formed the first wave with more joining earlier this year, bringing to more than 100 the number of nations now automatically sharing data on foreign accounts.The CRS may be an important step towards revealing where wealthy people, as well as businesses, are placing their investments – but it is only the beginning of the story. The standard does not currently cover property ownership, but the support recently stated by the OECD for property ownership registers suggests that future iterations may well do so.

Trends at a national and intergovernmental level point towards a more comprehensive shift in the power of governments to identify who owns what. Both the UK and Germany have taken action aimed at providing greater clarity on the ultimate beneficial ownership of trusts and international companies. In addition, both the EU and the Financial Action Task Force have echoed the OECD’s call for a register of property owners.

As we stated in last year’s edition of The Wealth Report, full transparency and total disclosure is coming. But for now, the desire for privacy remains a factor influencing UHNWI behaviour. In some cases, this is prompting individuals to reconsider their place of residence.

Citizenship for sale This trend is reflected in the growth in demand for second passports and residencies. Data from our Attitudes Survey reveals that 34% of UHNWIs already hold a second passport and 29% are planning to purchase one, while 21% are considering migrating permanently.

The result has been a bidding war, as more countries seeking new sources of revenue try to encourage foreign direct investment in return for citizenship. Some, including the UK, require a significant level of longterm financial commitment; but there are others with less onerous programmes or which are relaxing their requirements.

In the Caribbean, for example, several islands have recently slashed the level of investment required by as much as 50%, or linked citizenship to oneoff contributions to hurricane relief or economic development funds.

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Safe havens As the sector matures it will provide a major source of future revenue for countries that lack alternative exports – but, as we discuss overleaf, reputational risks are rising too. Less drastic than a change of residence but perhaps similarly effective, at least for now, is to place money in a country outside the CRS net. Switzerland, for example, has delayed the exchange of information with Middle East countries. BIS data confirms that financial non-bank deposits from Saudi Arabia and the United Arab Emirates into Switzerland rose by 44% and 53% respectively over the past three years, running counter to the trend of an overall fall in global deposits held there.

This urge for privacy is also steering flows within the CRS countries, with those offering high standards of data security emerging as favoured investment hubs. It is one thing for data to be disclosed to your home government; it is quite another for it to be sold on to third parties with questionable motives.

Some commentators have linked the growth in price and demand for Hong Kong property in the months leading up to September 2017 to a rush by mainland investors to prepare themselves ahead of CRS reporting.

An increase in exposure to the US may be another consequence. There are no reliable figures available on the amount of capital coming into the most notable non-CRS signatory, but portfolio managers and fiduciaries put it in the hundreds of billions of dollars. This looks realistic in the light of data from the National Association of Realtors, which confirms that foreign buyer activity increased by over US$50 billion year on year in the 12 months to March 2017. As money becomes more mobile and scrutiny of offshore wealth increases, governments are trying to encourage money back onshore. Tax amnesties have raised tens of billions of dollars for governments across the world. From Indonesia to Italy, France and Fiji, at least US$66 billion has been clawed back. The tension between the growing globalisation of wealth and the desire for governments to provide controls will not easily be resolved, in large part because governments are conflicted in their desire to protect existing tax revenues at the same time as attracting new sources of wealth. From Knight Frank’s The Wealth Report 2018 Money on the move

Sources: Knight Frank Research, Bank For International Settlements

analysis 2: real estate

Healthy office demand puts the global leasing market on track for another strong year

Will real estate markets maintain their momentum to seal a robust 2018?

Transactional volumes in the second quarter rose by 10% year-on-year to US$173b. This brings first half activity to US$341b, a 13% increase from 2017 and the strongest performance since 2007.

G

lobal real estate markets have maintained their momentum from the start of the year despite intensifying economic and political risks, with investment and corporate occupier activity at their highest levels for more than a decade in the first half of 2018. Healthy office demand puts the global leasing market on track for another strong year; leasing volumes are likely to at least match last year’s impressive tally, although vacancy is expected to edge higher as the office development cycle peaks.

In the logistics sector, robust absorption is still holding vacancy rates at record lows despite increasing new supply, driving a further acceleration in rental growth. Investor demand remains robust with growing allocations to real estate and strong appetite for large transactions, with global investment volumes

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Asia Pacific witnessed the sharpest rise in activity, up an impressive 45% year-on-year in Q2 2018.

anticipated to remain elevated and equal to 2017 levels.

Global property markets have held their positive course in 2018 as transactional volumes in the second quarter rose by 10% year-on-year to US$173 billion. This brings first half activity to US$341 billion, a 13% increase from 2017 and the strongest performance since 2007.

Investor demand remains robust with a growing number of groups increasing their allocations to real estate thanks to its defensive qualities, steady income stream and relative performance compared to other asset classes. Shifting demographic and technological trends are driving appetite for scale, especially in the logistics and alternatives sectors.

Given this, we project global investment in commercial real estate over the full year to broadly match 2017 levels at around US$715 billion,

despite the supply of product coming to market remaining limited relative to previous years.

Q2 leasing volumes at highest level Strong leasing conditions continue across the globe. At 11.3 million square metres (across 96 markets), Q2 2018 saw the highest second quarter of leasing activity since our global records began in 2007, with volumes 15% higher than a year ago.

Asia Pacific witnessed the sharpest rise in activity, up an impressive 45% year-on-year in Q2 2018, to hit 2 million square metres for the first time. The European office leasing markets also broke a Q2 record with levels 5% higher than a year ago, while gross leasing volumes in the U.S. were up 14%, despite a cooling in net absorption.Positive secondquarter results put the global leasing market on track for another strong

analysis 2: real estate 5% increase on last year’s H1 activity.

North American investors were the largest purchaser of international hotel real estate, with the majority of their investment directed towards Europe.

Global commercial real estate market prospects, 2018 Capital values

Investment

4-5%

Flat

Leasing Flat

Higher

2018

Rents

prospects Vacancy rate Rising

3-4%

Higher

Development Peaking

Sources: JLL, July 2018

year, with 2018 volumes likely to at least match last year’s impressive tally.

Despite high levels of new deliveries, vigorous occupier demand pushed the global office vacancy rate to a new cyclical low of 11.5% in Q2 2018, 20 bps beneath the Q1 rate.

Rates fell by 30 bps in both Europe and Asia Pacific to 6.7% and 10.6% respectively, but remained unchanged in the Americas at 14.8%. With the global office development cycle expected to deliver 17.8 million square metres this year, the global vacancy rate is predicted to edge higher to just under 12% by the end of the year.

Rental growth for prime offices across 30 major markets is steady at 3.6%, with annual rental growth remaining within the 3%-4% range since the beginning of 2017. For the full-year 2018, rental growth is projected to remain stable at 3.4%, with top performances likely to be in Singapore, Sydney, Toronto and Sao Paulo. Only a few major markets with large supply pipelines are expected to show rental corrections for the full year, notably Jakarta and Mexico City.

Selective retailer demand Retailer demand remains selective and directed towards existing strongerperforming stores in many markets, as various traditional retailers continue to downsize store portfolios. This is leading landlords to look for new ways to differentiate themselves, while also opening opportunities for some smaller retailers to expand into newly vacated space. The U.S. retail market has been showing signs of a

slowdown, as major metros move from a cyclical peak to a falling market and fundamentals soften.

By contrast, the strengthening employment market in Europe is supporting a positive retail sales outlook, although retailer demand for prime space is still selective across markets. In Asia Pacific, landlords continue to focus on finding new ways to differentiate, with limited rental growth across the region.

Strong demand for logistics spaces Global logistics markets have maintained their momentum from the start of 2018, with robust demand holding vacancy levels near historic lows despite a growing supply pipeline. Propelled by an increase in absorption, Q2 rents in the U.S. industrial market rose by over 6% on an annual basis.

Meanwhile, occupier activity in Europe is on track for record levels in 2018. New supply continues to be met with strong demand in Asia Pacific, with rents inching higher in most markets across the region. With strong pre-leasing trends in newly delivered stock, we expect continued competition for quality space to add pressure on rents globally through the rest of 2018.

Optimism in hotels Healthy hotel operating performance, combined with growing demand for travel, paint a positive outlook for the hotel industry. Global hotel transaction volumes during the first half of 2018 totalled US$29.2 billion, a

Government tightening measures were introduced in Hong Kong and Singapore in the second quarter in a bid to cool markets.

Multi-family markets Multifamily rental fundamentals in the U.S. continued to be held back from any major movements as elevated deliveries persisted through the second quarter of 2018. Despite the added supply, vacancy levels held steady at 5.2% and rental rates continued to appreciate, climbing 2.4% over the past 12 months.

With higher delivery levels expected through to mid-2019, significant increases in rental growth will remain constricted throughout the coming year. Thereafter, we anticipate more robust rental growth as quarterly deliveries regress to normal levels. Institutional investor demand continues to be robust in Europe, with above-average transaction activity over the first half of the year in Germany and the Netherlands.

In Asia Pacific, government tightening measures were introduced in Hong Kong and Singapore in the second quarter in a bid to cool markets. In China, price caps were kept in place in Q2 for new launches in Shanghai, while developers offered more competitive prices in a bid to increase sales against a tight policy environment in Beijing. From JLL Global Research, Global Market Perspective 2018

Rental Growth for Prime Offices, 2010-2018

Sources: JLL, July 2018

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ANALYSIS 3: Retail Banking IN ASIA

Service convergence on mobile devices appeal to modern banking customers

Banks go mobile-first to attract digital natives They expect real-time information and responsiveness at their fingertips.

W

hen Asian banks map out their plans to attract the next generation of investors and wealthy individuals, it became clear that a mobilefirst strategy was key to winning over these cohorts that grew up accustomed to digital technology.

Industry observers reckon that the emerging waves of banking clients are increasingly expecting the same exacting standards in digital responsiveness in their banking transactions as they do in sectors such as e-commerce, helping push banks to accelerate investments in mobile platforms, cybersecurity, and technologies such as artificial intelligence (AI), and application programming interface (API).

“Millennials and Generation Z expect to have real-time information at their fingertips on their mobile devices,” said Charles Wong, head of retail banking, Citibank Singapore, 36

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New operating models should seek to transform customers’ financial interactions into an organic part of their daily activities.

which led the bank to bolster its Citi Mobile app over the past year with tools such as eBrokerage and foreign exchange. The app also has access to Total Wealth Advisor (TWA), which provides an expansive view of portfolios and financial insights and includes the Citigold Diversification Index, which tells users whether their portfolio matches their risk appetite and have sufficient diversification in both asset classes and products.

Wong reckoned that whilst the emerging affluent segment is distinctly digitally active— demanding accessible solutions and global markets insights on mobile or online—they still require assistance in reaching traditional financial goals such as investing for their children’s education or for their own retirement. He noted that the bank’s digital and mobile efforts have led to increased traction amongst the younger, investment-savvy banking

clients, with the Citi Priority segment growing 20% and Citigold segment expanding nearly 10% in 2017.

“As customers become increasingly digitally savvy, they will expect banks to interact with them based on the exacting standards set by more digitally progressive sectors, like retail e-commerce,” said Jan Bellens, citing the 8th EY/IIF survey of leading banks both globally and within APAC. “New operating models should seek to transform customers’ financial interactions into an organic part of their daily activities, such as shopping and entertainment, and help them achieve personal goals, like funding a wedding, home ownership, or education.”

Bellens reckoned that service convergence is an appealing factor for modern banking customers, where they prefer to manage all aspects of their financial lives within robust platforms, without having to switch between different financial portals or channels. By more actively participating in digital financial platforms, banks can also collect a richer set of customer information to better understand their clients, identify new market opportunities,

ANALYSIS 3: Retail Banking IN ASIA and develop personalised or contextual offers, he said.

Over the immediate to mid-term horizon, especially in developing Asia-Pacific markets like China, Bellens flagged the significant impact of digital disruptors on retail banking’s competitive landscape.

Retail banks face increased pressure not just from specialised fintechs, but also BigTech e-commerce firms and platform players that boast of their own, well-established, integrated financial ecosystems.

“To compete, retail banks will need to refresh their traditional product and marketing strategies,” said Bellens. “As more customers live their life digitally, particularly Millennials and Generation Z, incumbent banks need to consider how best to leverage the digital platform infrastructure and its participants to emulate the BigTechs and provide more integrated customer experiences within the financial services ecosystem.”

Evolving risks However, as mobile-centric and digitally-powered retail banking booms, cybersecurity risks threaten customer data and bank reputations.

Peter England, CEO of RAKBANK, which is based in the United Arab Emirates, said ransomware and crypto-mining malware are two of the fast-rising threat vectors, enabling attackers to extort money or simply mine cryptocurrency using computing power of targeted technology infrastructure.

Attackers are also developing capabilities to target critical payment systems such as SWIFT through low-and-slow attacks that can avoid detection for longer periods, which led the bank to develop isolation strategies to cordon off payment systems from generic network elements.

With cybersecurity threats becoming increasingly complex and threatening to inflict high monetary and reputational damages to institutions, England said RAKBANK has been using machine learning and AI techniques to bolster its cybersecurity defence, particularly enabling it to define what is “normal”

and identify “anomalous” behaviour.

This has helped the bank create a system that detects and prevents attacks and fraud attempts instead of reacting only when such an incident occurs. To enhance the capability to predict risks, England said the bank has also participated in initiatives such as generation of private threat intelligence and collaboration with peer banks.

Highest risk priority The intensive efforts by banks to strengthen their cybersecurity was ranked as the highest risk priority by both chief risk officers and boards for the coming 12 months, said Bellens, whilst data-related risk was identified as the leading emerging risk over the coming five years.

“In practice, there is significant interdependency between cyber, data, and fraud risks. For example, investments in cybersecurity are in large part designed to protect both the institution’s most sensitive data and the infrastructure most vulnerable to fraud, such as payment systems,” he said.

Bellens reckoned that Asian banks operating in the more developed markets are ramping up their investments in cyber threat management and resiliency capabilities. “The less developed markets in Asia-Pacific have in fact been fast to adopt some of the more innovative banking technologies, which necessitates investment in cyber, data, and fraud risk mitigation,” he noted. “So we are seeing rapid evolution in the sophistication of some local banks.”

However, banks can be vulnerable to the weakest link operating in a given local market and the current levels of investment and capability in some developing markets is “inconsistent.”

In enhancing their security measures, banks are under pressure to keep up with their rapid evolution in terms of digital banking applications, cloud technologies, and the use of third-party vendors, Bellens warned. The shortage of suitably skilled and experienced professionals in the Asia-Pacific region provides further challenges.

The introduction of General Data

Protection Regulation (GDPR) has also generated considerable activity, and Bellens expects the broader data agenda to be “a major area of focus in coming years.”

Charles Wong

Jan Bellens

Peter England

Transformative AI and API Amongst the emerging technologies, AI and API are two elements with the highest impact potential in retail banking in Asia-Pacific in the next 12 months, according to Bellens.

Aside from its security applications, AI technology is being used by banks to enhance business insights and customer experiences.

“In terms of AI, whilst it is not easy to quantify the return from AI investments specific to retail banking, customer fronting components can have a high impact on operations,” noted Bellens. “AI is not new and has gone through several stages of hype, but recently it has started to deliver real-life business benefits and the ingredients for a breakthrough are finally in place.”

A notable AI application is in credit scoring assessments assisted by leveraging on social behaviour and big data analytics technology.

Other core applications of AI, such as improved chatbots, are also helping raise the level of customer experience, noted Bellens.

Meanwhile, open banking is being mainly driven by regional regulatory requirements but the technology paves the path towards new platform models crucial in winning customers.

“The most obvious return on investment from open architectures is that nudging banks to collaborate with the developer community helps to build-out existing applications and create greater customer value propositions,” said Bellens.

Digital channel satisfaction has signicant potential to grow

Source: McKinsey Asia Personal Financial Services Survey 2017

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37

ANALYSIS 4: INSURANCE

There is always huge potential for insurance growth in underserved Asia

Vibrant Asian market to buoy insurance sector’s investment in technology The growing economy bodes well for the insurance industry with the rising prominence of blockchain and AI.

T

he insurance sector in the Asia and Pacific region is expected to maintain its growth momentum as the region continues to experience economic expansion, underpinned by strong economic fundamentals, rising middleincome population, increasing domestic and regional demand and purchasing power, as well as rising interest rates. Research from the Asian Development Bank forecasts economic growth for developing Asia and the Pacific to average 6% over the next couple of years, which bodes well for the insurance sector for people in the region will ideally have higher disposable income—as a result of higher take home pay from increased economic activities—that can be allotted to insurance policies.

Boriwat Pinpradab, partner and managing director of Boston Consulting Group in Bangkok, shares this optimism, saying that

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the overall market in Asia remains vibrant, with compound annual growth rate doubling that of Europe and North America. “Life insurance will take the lion’s share of profits in Asia—making up around 75% ($50b) of Asia profit pool,” he said.

Dustin Ball, EY insurance transactions leader for AsiaPacific, echoes this sentiment, noting that there is an expectation for the insurance markets across Asia to continue their current growth trajectory, with underlying growth continuing to be driven by rising household incomes. There is also a significant case about growing innovation, particularly in distribution, as insurers continue to invest in digital capabilities.

“We are seeing more digitalfriendly regulation and government support, which will be critical in bringing new capabilities to the market,” Ball added. “New

We are seeing more digitalfriendly regulation and government support, which will be critical in bringing new capabilities to the market.

opportunities will also come from advances in telematics, robotics, and Internet of Things, which will create a need for new or enhanced insurance products.”

This optimism is also grounded on the fact that most markets in the region remain underserved, with insurance penetration and usage remaining low—opening up a huge space for opportunities and improvement in the region’s insurance sector. For instance, nonlife insurance penetration rates in Asia-Pacific amounted to 1.4% on average in 2013.

“Asia is still an underserved region for insurance, hence, there’s always a huge potential for growth,” said Maureen Nova Ledesma, CEO and co-founder of VESL, a Singaporebased insurance protection platform for trade invoices. “In the past year, we’ve seen a lot of consolidation of traditional insurance players in

ANALYSIS 4: INSURANCE developing Asian countries, but this also means strong players prevail.”

Sector activities will also be intense and fierce, according to Alan Wilson, regional CEO for MSIG Asia, as the soft market continues to expand, and digital disruption maintain its effects in the insurance sector. “There is definitely opportunity for growth in most markets and especially in markets such as Vietnam, the Philippines, and Indonesia, where insurance penetration is still relatively low as compared to more mature markets in Asia,” he said.

Disruptive technology Industry experts and practitioners are saying that technology will play a more central role in the next few years, with the rising prominence of insurtech and artificial intelligence.

Ball noted that part of the charm of “disruptive” technology is that it allows a whole firm and a whole industry to find ways to simplify their overall processes and operations. In insurance, for instance, technology has allowed the industry to simplify the process of buying an overall insurance policy, find new and innovative ways to connect with consumers whilst enhancing efficiency across the board.

“This includes finding commercial uses for new technologies like blockchain, as well as developing broader ecosystems around their insurance offerings,” he noted.

“Further, developments like driverless cars will have insurers rethinking many of their product and system design principles to accommodate the new technology.”

Part of the prominence of technology in the insurance sector in the region is the rise in the availability of data and the way firms process and digest this treasure trove of information—apart from the fact that technology making access a lesser challenge than it is years ago. This is also the basis of many of insurtech startups in the market today.

Pinpradab noted that this availability of data will greatly assist insurance companies in building relationships with customers. He said that the data provided by such technologies can be used by insurance

companies to not only study the habits and behaviours of their customers, but also change them for the better.

For Ledesma, another disruptive nature of technology is that it levels the playing field, especially in an industry like insurance where incumbents usually dictate the progress (or lack thereof) of the whole brood. “Technology plays a big part in challenging and changing the insurance landscape with a particular focus on distribution,” she said.

“For example, the sharing economy trend continues to grow and could give rise to more shared policy/ mutual insurance concepts as long as the clients get enough coverage (risk reward of such products) at a competitive price.”

Other trends Apart from technology, there are other products that can be expected in the next 12 months for the insurance sector in the region. Ball reckoned that retirement and health insurance policies will likely continue their growth momentum as people in the region continue to enjoy greater longevity and health vitality.

“Retirement is also becoming increasingly important as Asian societies age and life expectancy increases,” he said. “There is currently a shortage of retirement savings across the region, and we expect that companies will be finding ways to address this issue.”

Ball noted that there is a continuing focus on expanding health insurance offerings and leveraging technology to grow the market whilst, at the same time, improving margins. This includes the use of advanced techniques to identify and reduce fraud, as well as increase efficiency through automation and robotics.

Anupam Sahay, partner and head of insurance practice in Asia-Pacific for Oliver Wyman concurred, saying that heightened interest in the health insurance sector is expected as reforms accelerates in large markets like India, China, and Indonesia, alongside greater experimentation with health-tech and insurer-medical provider linkages.

Alan Wilson

Anupam Sahay

Boriwat Pinpradab

Dustin Ball

Maureen Ledesma

“Healthcare continues to have potential for growth partly based on the increasing ageing demographic in much of Asia, including Singapore and Hong Kong,” said Wilson, adding that China’s One Belt One Road initiative, an infrastructure masterplan, will also usher in a surge of insurance opportunities given that majority of the infrastructure investments under the initiative will most likely be insured.

Sahay added that some of the other expected trends for the next 12 months include faster development of core underwriting/pricing capabilities; direct-to-customer propositions; digital partnerships in the general insurance sector; potential uplift in the life sector from rising interest rates and multichannel distribution; and ongoing restructuring of portfolios by certain multinationals.

Challenges moving forward Looking ahead, customer engagement will remain a major challenge for many insurers, according to Pinpradab. “Most insurers do not engage their customers more than once a year (if at all). They do not know much about their customer information and the interaction except when there is a claim” he reckoned.

Ball, on the other hand, said that despite the industry’s evolution and the rise in interest and investment in technology and innovation, there is still a need to focus on the basics. “Insurance companies need to expand distribution and improve productivity. Across the region, there are still many markets where agent turnover and productivity are impacting results. At the same time, new distribution partnerships and tie-ups require considerable effort to get the desired outcome,” he said.

Wilson, meanwhile, emphasised the need for insurance firms and companies to adopt to the digital life. “Companies need to adapt, or risk having their business left behind as the industry evolves,” he noted.

“It is always important for us to constantly innovate, and know that we, ourselves, should and can disrupt our own business.”

HONG KONG BUSINESS | SEPTEMBER 2018

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ANALYSIS 5: E-PAYMENTS

UOB rolled out more than 10,000 contactless unified POS terminals which accept cashless payments

How do Asian banks respond to the digital wallet boom?

Their own digital wallets were built around customers’ payment preferences.

W

hen Citibank launched its Citi Pay app for Android devices in Singapore, the bank made sure the digital wallet supported both Apple Pay and Samsung Pay in line with the island’s growing demand for a wider range of payment options. This thirst for flexibility when it comes to transaction payments has made digital wallets a critical battleground for banks that want to defend their cards and payments businesses.

Like Citi, some Asian banks are fast-tracking the development of their own digital wallets to catch up and compete with rivals, whilst others are exploring ways to work together with wallet providers, according to Varun Mittal, ASEAN fintech leader at EY. “We are seeing a transition period where banks are starting to adapt not just more fintech-like services, but also more ‘FinLife’ ones that 40

HONG KONG BUSINESS | SEPTEMBER 2018

Both globally and in the AsiaPacific region, wallets are gaining wider acceptance in the market and the line between wallets and card schemes are blurring.

are specifically designed to fit into a customer’s lifestyle,” said Mittal. “By engaging customers with lifestyle products that encourage them to interact with the bank more often, they are also lowering the risk of disintermediation.”

Citi, for example, dug deep into the payment preferences that are unique to its Singaporean clients and built the digital wallet around those key considerations. “We are seeing an increasing trend of customers preferring to use their mobile wallet when contactless payment is available,” said Vikas Kumar, head of cards and personal loans at Citibank Singapore.

He adds that the Samsung Pay service in its mobile wallet incorporates the bank’s Pay with Points programme, which accounts for more than one in three redemptions of points or miles.

Both globally and in the Asia-

Pacific region, wallets are gaining wider acceptance in the market and the line between wallets and card schemes are blurring, noted Mittal. “Some of the large Chinese wallet companies focusing on competing with card networks not just on data, but by becoming a more holistic service and expanding their infrastructure,” he added.

Interoperability arena The encroachment of wallet rivals into traditional banks’ cards and payment business is further complicated by the issue of interoperability, where Mittal said banks are demanding to a see a more level playing field.

“At the moment, the cost of compliance is significantly higher for traditional banks than it is for smaller wallet players,” he said. “So, banks are asking the regulators to streamline compliance models and make the requirements similar across the board to make it a fairer game.”

However, questions remain around who should provide QR code technology to merchants and whether wallet companies should pay a service fee to use the banks’

ANALYSIS 5: E-Payments existing infrastructure, according to Mittal. The commercial model also continues to provide uncertainties, especially on who amongst the stakeholders—the issuer, providers, merchants, or end customers— should ultimately pay the fees for it.

Some banks are taking a more proactive stance, with UOB building an interoperable cashless acceptance network in Singapore as part of its thrust to grow its e-payments.

The bank has rolled out more than 10,000 contactless unified pointof-sale terminals, which accept various forms of cashless payments, including for transit.

Jacquelyn Tan, head of personal financial services Singapore at UOB, said a majority of Singapore residents rely on public transport for their daily commute, which convinced the bank to seek tie-ups with the Land Transport Authority, TransitLink, and Mastercard to facilitate contactless credit and debit card payments for public rides in Singapore. Industry efforts to move towards unified digital payments should also further support the growth of such transactions on mobile devices.

“As the industry works together on common e-payments standards, such as SGQR, the digital payment journey will become seamless across different mobile phone operating systems and payment apps,” said Tan. “This means that consumers can expect the same simple, safe, and intuitive experience when they make e-payment transactions—no matter where they are or whichever e-payment service they choose.”

Targeted, specialised offers The competitive pressure from wallet companies comes on top of the heated rivalry in the traditional cards market, which Mittal reckoned is increasingly crowded. Customers are constantly bombarded with advertising and offers in social media and other digital platforms, which presses banks to go beyond cookie-cutter services.

“In this environment, even smaller players are able to compete, so Asian banks need to look for new and innovative ways to stand out from

the crowd,” Mittal said.

Sourcing alternate revenue streams through more targeted and specialised offers that go after a particular lifestyle need will be key. For example, tailoring cards that provide particularly good offers around transportation or telecommunications merchants could help engage targeted customer groups, according to Mittal.

Kumar said an open architecture approach has helped boost Citi’s digital acquisition efforts even amidst this glut for card offers. Through API integration, customers can apply for Citi credit cards directly on SingSaver, MoneySmart, and BankBazaar as well as receive quick in-principle approval. The bank estimates that such partnerships and collaborations with large e-commerce brands such as Lazada now account for more than half of its digital card sign-ups.

UOB, meanwhile, discovered that most consumers do not like to take up their phone’s storage space with too many apps. This insight formed the basis of its banking app UOB Mighty, which seeks to integrate all digital payments within a single app.

“Customers do not need to toggle between multiple apps to send money to their friends and family through PayNow, scan and pay with NETS QR Code, or to tap their mobile phones at contactless pointof-sale terminals to make payments,” said Tan. “They can do all this easily from the home screen of our app.”

Lifestyle approach UOB also drew on data to guide its digital efforts to deepen customer engagement. Having observed a shift to online options in the way people plan and book their travel, the bank created a travel-oriented online marketplace called The Travel Insider in March. The initiative— which UOB said is the first by a bank in Southeast Asia—assists customers when they search, plan, and book their holidays.

Tan said UOB card members spent 20% more in 2017 than the previous year on travel-related spend online, which includes e-commerce spend on airlines, cruises, online

Vikas Kumar

Varun Mittal

Jacqelyn Tan

travel agents, hotels, tour packages, and land packages. “However, whilst people are using online travel resources more, the experience of researching and booking the best deals online can still be quite time consuming and tedious,” she said, noting that users no longer had to search through different online websites to research and compile a travel itinerary and best travel deals for their trip.

The bank tapped into a broad range of partners to set up The Travel Insider, which currently offers 350 UOB card member exclusive deals, including British Airways, Cathay Pacific, Club Med, Contiki, Emirates, and Insight Vacations. UOB used the APIs of both online travel platforms Agoda and Expedia to select the best deals from more than a million hotel and flight possibilities specifically for their customers’ preferences.

Cybersecurity threats As customers start to demand wider mobile access to cards and payments services from their phones and other devices, Mittal said banks face greater vulnerability to cybersecurity threats that may already be on the device or could be inadvertently downloaded when a customer uses other apps and sites outside the bank’s direct control.

“At the same time, the risk from phishing attacks has also increased significantly as more sophisticated technology makes for easier replication of these attacks,” he added.

This has led Asian banks to work with cybersecurity and technology companies to develop software and back-end systems that bolster security regardless of which device a bank’s products or services are being accessed from.

Citi Pay in Singapore is linked to both Apple Pay and Samsung Pay

HONG KONG BUSINESS | SEPTEMBER 2018

41

marketing Briefing

How effective is influencer marketing?

Performance tracking mechanisms should be implemented to make sure you are getting what you paid for.

W

hen T-Pain shared Origami Labs’ campaign for its voice-powered Smart Ring ORII, not only did the campaign page receive significant traffic, T-Pain’s interest in the product also opened opportunities for collaboration like customising the ring with diamonds or featuring ORII in his next music video.

Influencer marketing is bringing products closer to their intended consumers, and is transforming solutions so that they become more innovative and functional along the way.

Randal Hung, CMO and co-founder of Clickful, said that influencer marketing has emerged alongside the increase in internet speeds, a factor which is critical in driving success as influencers often need frequent and on time interaction with their fans. More importantly, small brands which could not have competed with the larger ones in the past, will now be able to benefit from influencers who can help them gain trust from their target markets. However, firms must not be so quick to jump in on the influencer bandwagon.

In July, Christian Dior received backlash from Chinese netizens after Hong Kong influencer Elle Lee modeled the brand’s Saddle Bag in what was perceived to be a poorlydirected video that took away the bag’s cult status.

When asked for comment, Dior China said that Lee maintains a good relationship with the brand, but the video was not part of the official campaign for the Saddle Bag in China. Nevertheless, brands must be wary of launching huge influencer campaigns considering that influencer marketing also has its own share of risks and challenges.

According to Kim Leitzes, founder of Parklu, some risks associated with influencer marketing include, amongst others, the lack of ability to determine an influencer’s actual influence, the lack of ability to determine if an influencer’s audience is a brand’s target audience, the stigma associated with sponsored posts, and the PR risks of association to a notable individual who poorly represents the brand.

Hong Kong influencer based influencer Elle LeeElle Lee

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To set themselves up for success, Leitzes said that marketers should maximise influencer partnership. “First, the content the influencer creates has value and should be repurposed by the brand across other channels, with the content of the influencer. Second, designing an interactive campaign that generate greater engagement is a must.

Some of the best campaigns often incorporate giveaways or prizes. Third, implementing performance tracking mechanisms is a great way to make sure you are getting what you paid for,” she said.

Tommaso Tamburnotti

Randal Hung

Kim Leitzes

Emile Chan

It is important for a company to find the right influencers, not necessarily the largest ones.

For Origami Labs, relying on a pure digital marketing strategy is a no-go. Co-founder and CMO Emile Chan said that the novelty of ORII makes it hard for consumers to believe it actually works. Through the firm’s efforts to allow everyone to try the product, they were able to meet not only T-Pain, but other influencers such as Gary Vaynerchuk, Eric Migicovsky, and Metta World Peace.

On top of these, Origami Labs also strengthened its influencer network through its brand and distribution partnerships. ORII’s synergy with telcos gave it access to the HKT iOT store launch in Elements Hong Kong, where the firm met actor Vincent Wong Ho Shun who was then playing a TV drama role as a visually-impaired lawyer.

“His role correlated with our own ORII story of originally being inspired by the blind, and we immediately connected. For the rest of the event, Vincent Wong Ho Shun wore the ORII ring, which gave us some notable buzz in Hong Kong,” Chan added.

Hung said that it is important for a company to find the right influencers, not necessarily the largest ones.

Sometimes it may be more beneficial to find those with the smaller fan bases, as long as they are the right fit.

For Easyship co-founder Tommaso Tamburnotti, working with B2B influencers is a long-term investment.

Tamburnotti said that it takes time to build a relationship with a B2B influencer because the firm needs to prove that their product or service is high-quality.

According to him, influencers are more than just about the money, many of them do care about what’s in it for their audience and want to make sure that the product is good and exciting enough and they can get a good deal by following the influencer.

“Oftentimes, results may seem indirect and challenging to measure, as they can have a different role in the conversion funnel. Our approach is essentially to create win-win relationships that is organic instead of transactional ones. In the end, we just need to be creative in what we could offer to the influencers,” Chan said.

THE

ASIAN

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Legal briefing

Ushering a new era of smart banking

The proposed 2018 guideline on virtual banking focus on ownership, supervision, physical presence, technology risk and risk assessment, no minimum account balance, and exit plan.

H

ong Kong has taken another giant step towards its goal of transitioning to a new era of smart banking when the Hong Kong Monetary Authority (HKMA) announced on 30 May that it is publishing a revised guideline on the authorisation of virtual banks, which will essentially help facilitate the establishment of these financial entities in the special administrative region.

What is a virtual bank?

King & Wood Mallesons Hong Kong Partner Minny Siu explained that a virtual bank is defined as a bank which delivers retail banking services primarily, if not entirely, through the internet or other forms of electronic channels instead of physical branches (brick-and-mortar).

So what are the key changes and/or revisions to the old guideline on the authorisation of virtual banks? Gabriela Kennedy, partner at Mayer Brown JSM, noted that some of the most salient changes in the proposed 2018 guideline focus on ownership, supervision, physical presence, technology risk and risk assessment, no minimum account balance, and exit plan.

Industry experts and observers agree that the new guidelines signal a more open, inclusive, and accessible banking sector.

Ownership: The new guideline will not require a bank or financial institution to own 50% or more of the shares in a virtual bank applicant, so long as the owner is a holding company incorporated in Hong Kong.

Supervision: Virtual banks will be supervised under a risk-based and technology-neutral approach, instead of being under the same supervisory requirements as conventional banks. This signals flexibility on the part of HKMA. Physical presence: Virtual banks are not expected to establish physical branches, although it must maintain a physical office in Hong Kong as its base of operations.

Technology risk and risk assessment: Independent assessment reports on IT governance and systems may be submitted in phases.

No minimum account balance: The new guideline prevents virtual banks from stipulating a minimum account balance or imposing low-balance fees on their customers to make these financial institutions more inclusive and accessible.

Exit plan: Virtual banks are required to have an exit plan that causes the least amount of disruption to its customers.

Whilst the idea of virtual banks has been ripe and thriving in Hong Kong for the last decade or so, the new guidelines will help in the further development of this specific segment of the banking sector. KPMG noted that 44

HONG KONG BUSINESS | SEPTEMBER 2018

Minny Siu

Gabriela Kennedy

Simon Topping

the successful growth of virtual banks can be a big factor in the long-term success of Hong Kong’s banking sector.

“Our experience from working with digital banks overseas is that their strong emphasis on technological innovation requires the adoption of a new approach to risk management,” said Simon Topping, banking regulatory partner at KPMG China. The company paper further highlighted that the time is right for HKMA to encourage the development of virtual banks in Hong Kong and that the establishment of virtual banks in Hong Kong and the development of customer-focussed digital services by existing banks can be a big factor in maintaining the longterm success of the banking sector.

How will banks and other financial institutions in Hong Kong be affected by the new guidelines? Industry experts and observers agree that the new guidelines signal a more open, inclusive, and accessible banking sector in Hong Kong that is anchored on technology, innovation, and customer satisfaction—something that all financial institutions will have to inevitably take into consideration if they want to continue thriving in Hong Kong’s evolving banking and financial sector.

Siu said that the revised guideline opens a clear pathway to innovative financial platforms, particularly those with strong technology, online payments, and transaction expertise, to challenge the traditional banking model in Hong Kong. Candidates include established payment platforms that already perform virtual services and facilitate cashless transactions. “But traditional banks will also take advantage of this initiative because it enables a more efficient onboarding of customers and provision of services,” she noted. Kennedy said that whilst the new guidelines on virtual banks open a gateway for technology companies to tap into the financial market, there remain concerns. “Caution still needs to be exercised to ensure that sufficient cybersecurity measures are in place, and outsourcing arrangements do not leave virtual banks vulnerable to security breaches or liability,” she concluded.

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OPINION

tim hamlett

Keeping track of the MTR tim hamlett Former Editor of Sunday Standard and Associate Professor of Journalism

T

he MTR—once the pride of Hong Kong—seems to have come down with a nasty case of the Reverse Midas effect: everything it touches turns to dross. Its trains are unreliable, its building projects have defects (besides being over budget and late, which is normal for railway projects) its interventions in the co-location debate are tactless and its boss picks fights with the press if the weather is too hot. What is going on?

Some observers hold that the current bad press reflects a deterioration in the corporation’s performance. When there was still a separate KCR we had two competing railway systems and both had an incentive to look good. Now we have a railway monopoly and the sincerest efforts to do a good job are diluted by the knowledge that, after all, the clients have no choice.

Another controversial move is the MTR offering its services overseas. This is no doubt very exciting for the staff concerned. But whatever comes of this wanderlust it is a distraction. Talent and effort devoted to the railway needs of distant cities are withdrawn from Hong Kong’s requirements.

A kinder theory is that the MTR is suffering from what is known technically as an availability cascade, where a topic in the news becomes a sort of self-propelling typhoon. Stories make the topic newsworthy and produce more stories which attract more media attention and the public gets the impression that something major has changed.

A good local example was the Light Rail Transit system in the North West New Territories. This attracted no media attention when it opened until a van ran a red light and was hit by an LRT train, killing the van’s passenger. Suddenly any incident, however minor, on the LRT was a news story. Anything less trivial than a loose screw was front page material.

After a few months in which the new system was routinely described as “troubled”, “controversial”, or even “defective”, the government imported a railway expert who looked at the whole network and announced that there was nothing wrong with it. The incidence of defects and minor glitches was normal.

The MTR is bound to get some stick every year when it adjusts (or as we peasants say raises) fares. Delays may be rare, as the corporation says they are, but the system is close to full capacity in the rush hour, so any hold-up in the proceedings produces spectacular crowds of disgruntled commuters.

Then there was the case of the stray dog on the tracks which was sacrificed to the timetable. The dog died, and with it a good deal of the affection and respect which the public had nurtured for the MTR. Reporters are paid to remember these things. There’s blood on those tracks.

A quite different theory has it that the MTR is performing no worse than it did, but 46

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Hong Kong’s MTR

is making a mess of its public relations. Personally I am reluctant to believe that PR is that important, but this theory has some facts going for it.

The MTR has a PR department, of course. Most of the people in it were apparently recruited from TVB. This is the sort of thing that looks a good move if you are a non-journalist staffing a PR department. Journalists, on the other hand, know that television people are widely regarded by their peers as a bunch of overpaid prima donnas who, because of the need for pictures with everything, spend most of their time covering events staged for their benefit.

The relations between journalists and ex-journalists in PR are always a bit prickly anyway. The poacher turned gamekeeper thinks he should still be on warm sociable terms with the other poachers.

This doesn’t seem obvious to the poachers.

One of my colleagues has recently been struggling with the MTR’s PR department, which seems to suffer from that delusion common amongst amateur PR people that their job is to avoid at all costs giving a straight answer to a simple question.

For the question, we need a bit of background. Until last year, the government adamantly refused to recognise internet-only websites as media. This meant they were not sent official releases, were not admitted to press enclosures at events like elections, and were not invited to press conferences where the government lies, I beg your pardon the government lines, were expounded.

Our new Chief Executive promised before her election to do something about this, and something has been done. Suspicious minds may wonder if this was in any way connected with the appearance of a small fleet of pro-government news websites.

Well, news websites can now, if they wish, register with the government, pay a small fee, jump through some awkward bureaucratic hoops and get the same service from the Information Services Department as their print counterparts.

Airport express

OPINION

Hemlock

Hong Kong’s cram-more-stuffin policy

H

ong Kong’s economic policymakers largely serve the needs of established, especially local, business interests. Thus we avoid change. As one author noted, the big tycoons of 20 or 30 years ago are the same big tycoons (well into their 80s) of today. Despite constant talk of innovation and tech and creative blah-blah, officials’ actions are strictly “more of the same.”

The policy is simple. Pack more tourists in, host more conferences, build more pointless white elephants, list more obscure mainland Chinese companies. Cram more stuff in, skim off the top, repeat. And up the rents, obviously. In fairness to our bureaucrats bleating empty slogans about tech—with hot money pouring in desperate for intermediaries’ tender loving care, why should Hong Kong do anything different or original, or focus on economic quality rather than quantity?

Strolling around Exchange Square/IFC Mall early one morning last week, I noticed an above-average number of youngish, smartly dressed men and a few women who looked like they didn’t quite belong. They were in small and medium-sized groups and had ID cards clipped to their jackets. They chattered excitedly in Mandarin.

They took group selfies in front of Elizabeth Frink’s sculptures and Hong Kong Lands’ skyscrapers. One delegation took up half the tables in Pret a Manger, comparing exotic pastries and yogurts as bumpkins from across the border would have in the 80s. It was a mega-IPO day. So many companies were launching on the Stock Exchange that the institution apparently ran out of the tacky gongs it uses as opening-bell props for listees’ PR photos. (It was Thursday, when eight companies were listed, including the oh-so digitalsounding Fingertango.)

Like most Hong Kong cram-more-stuff-in-and-skim industries, the stock market assiduously shoe-shines Beijing. Specifically, it grovels for favours in the guise of “helping internationalize the yuan,” or whatever baloney (Belt and Road!) hits the Communist Party’s spot. One supposed win-win concession was the Stock Connect, allowing mainland Chinese to buy Hong Kong-listed stocks, kind of.

Now, in an extra kick-in-the-teeth embarrassment, Beijing is forbidding mainland Chinese from investing in Xiaomi via this much-lauded visionary channel.

HKEx are putting a brave face on it. Chinese officials are unhappy that companies like Xiaomi aren’t listing on the mainland, and are already jittery about possible bigger economic-mayhem looming. But officially, they are declaring Xiaomi stock off-limits to domestic

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investors on those “crappy company/shareholder rights” grounds. Which is, of course, doubly humiliating to HKEx and their bureaucrat buddies.

A weekend stroll around the old Central Police Station/Victoria Prison compound – now open to the public, after HK$3 billion of work, as the Tai Kwun arts-heritage-hub-zone. The site’s primary role is to serve as a cultural venue, with the impressive exhibition space at the art gallery (already done) and various performance facilities. So essentially the place will be as successful as the content it hosts.

Open spaces, notably the prison courtyard and the old police station parade ground. They could use more or better seating, and maybe little tables, some shade, and even ideally some greenery. Presumably, the bosses made a conscious decision not to make the areas too park-like, either for the sake of authenticity or to discourage too much lounging around, fun, etc.

Still, residents of this neighbourhood are grateful for even a square foot of extra concrete, and a group of Indonesian amahs had managed to devise a halfway decent picnic setup, so we shouldn’t complain.

Historic buildings, which are obviously the main static attraction. The exteriors have been so painstakingly refurbished that they have a sterile, Disnewy-like appearance, but maybe the weather will sort that out. The original interior structures are intact, but thoroughly refitted with modern arts-centre/ airport-terminal-style trimmings, signage, babyfeeding rooms, etc. This is a renovation rather than preservation project (contrast with this). As well as cultural areas, you have historical displays, including a handful of preserved prison cells and a token creepy artefact – the mortuary slab.

by hemlock www.biglychee.com Email: hemlock@hellokitty.com

Tai Kwun, Hong Kong

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