Hong Kong Business (January - March 2022)

Display to 31 March 2022 HK$40

Issue No. 65

INVESTMENT IDEAS FOR

Hong Kong’s Best Selling Business Magazine

2022

ASIAN SPACS TO ENTER THE HONG KONG MARKET THIS YEAR.

HONG KONG PROPERTY MARKET ‘ON THE CUSP OF FULL RECOVERY’ IN 2022 ISRAEL AND HONG KONG FORGE FERTILE BUSINESS BONDS SHOULD HONG KONG’S BRICK-ANDMORTAR RETAILERS RIDE THEECOMMERCE WAVE? HOW LIVI BANK AIMS TO MAKE BANKING MORE REWARDING

MULTI-GENERATIONAL ESTATE PLANNING MULTI-GENERATIONAL ESTATE PLANNING ARE YOU LEAVING A LEGACY OR A TAX BURDEN FOR YOUR LOVED ONES? ARE YOU LEAVING A LEGACY OR A TAX BURDEN FOR YOUR LOVED ONES? British Nationals are exposed to IHT on worldwide assets and could be taxed at 40%*.

British Nationals are exposedwith to IHT worldwide assets be taxed at 40%*.

All Nationalities UK on assets are subject toand IHT could on death**.

All Nationalities with UK assets are subject to IHT on death**.

PROPERTY PROPERTY

£ INVEST £ MENTS INVEST MENTS

Soteria Trusts utilise bespoke solutions to protect yourutilise wealth and legacy, such as: Soteria Trusts bespoke solutions to protect your wealth and legacy, such as: Trusts Accounts Trusts Accounts International Retirement Planning International Retirement Planning Stamp Duty Land Tax Refunds Stamp Duty Land Tax Refunds

£

STOCKS STOCKS

ART ART

£

CASH CASH

Contact us for a FREE Tax Review Contact us for a FREE Tax Review www.soteriatrusts.com www.soteriatrusts.com

* ** Subject to individual domicile and marital status.

IHT is charged at 40% on net estate value above the Nil Rate Bands of £325k & £650k for singles and couples. * ** Subject to individual domicile and marital status.

IHT is charged at 40% on net estate value above the Nil Rate Bands of £325k & £650k for singles and couples.

www.soteriatrusts.com | Tel: +852 2168 0626 | enquiries@soteriatusts.com www.soteriatrusts.com | Tel: +852 2168 0626 | enquiries@soteriatusts.com C2

HONG KONG BUSINESS | Q1 2022

HONG KONG

FROM THE EDITOR

BUSINESS

F

Established 1982 Editorial Enquiries: Charlton Media Group Hong Kong Ltd Room 1006, 10th Floor, 299 QRC, 287-299 Queen’s Road Central, Hong Kong. +852 3972 7166

or a prosperous New Year, we give you six ideas on where to best invest your money in 2022. Hong Kong’s brick-and-mortar retailers should consider riding the e-commerce wave, especially after the global events of the past two years. Meanwhile, the Hong Kong property market is on the cusp of full recovery this year thanks to the strengthened demand in the retail and industrial property sectors.

PUBLISHER & EDITOR-IN-CHIEF Tim Charlton ASSOCIATE PUBLISHER Louis Shek PRINT PRODUCTION EDITOR Jeline Acabo COMMERCIAL EDITOR Janine Ballesteros COPY EDITOR Tessa Distor PRODUCTION TEAM Charmaine Tadalan Djan Magbanua Lucia De Guzman Frances Gagua Vann Villegas Noreen Jazul GRAPHIC ARTIST Simon Engracial ADVERTISING CONTACTS Louis Shek +852 6099 9768 louis@hongkongbusiness.hk Karisse Coderes karisse@charltonmediamail.com

ADMINISTRATION ACCOUNTS DEPARTMENT accounts@charltonmediamail.com ADVERTISING advertising@charltonmediamail.com

China’s new foreign-friendly financial market is promising, but recent regulatory crackdown may have driven foreign firms to take a wait-and-see approach. Experts also weigh in on why banks need more tech experts in their boardrooms.

We chatted with Livi Bank CEO David Sun on making banking more rewarding with its buy now, pay later services (page 14). We also sat down with Peter du Pont, Managing Partner for Asia Clean Energy Partners to discuss direct power purchase agreements and why they should be scaled up in response to the lack of open access to grid generators (page 32). Finally, we chatted with Charles Hung, CEO of Blue, Hong Kong’s first digital life insurer, to discuss how the company has revolutionised Hong Kong’s stagnant insurance industry (page 36).

Happy reading!

EDITORIAL editorial@hongkongbusiness.hk

PRINTING Gear Printing Limited Flat A, 15/F Sing Teck Fty. Bldg., 44 Wong Chuk Hang Road, Aberdeen,Hong Kong

Can we help?

Tim Charlton Hong Kong Business is available at the airport lounges or onboard the following airlines:

Editorial Enquiries: If you have a story idea or just a press release, please email: hkb@charltonmedia.com. and our news editor will read it.

For Media Partnerships, please email: hkb@charltonmedia.com and put “partnership” in the subject line and it will forward to the right person.

Subscriptions email: subscriptions@charltonmedia.com Hong Kong Business is published by Charlton Media Group.

All editorial is copyright and may not be reproduced without consent. Contributions are invited but copies of all work should be kept as Hong Kong Business can accept no responsibility for loss.

We will however take the gains.

Sold on newstands in Hong Kong, Macau, Singapore, London, and New York. *If you’re reading the small print you may be missing the big picture    

HONG KONG BUSINESS | Q1 2022

1

CONTENTS

16

COVER STORY WHERE TO INVEST YOUR MONEY IN 2022

FIRST 06 Best online influencer platforms in Hong Kong

07 How does the digital ecosystem transform HK’s industries?

08 HK expects $233.9b public sector investment for green energy

09 HK 2022 IPO funds to reach $400b: PwC

BRIEFINGS 20 Should Hong Kong’s brick-andmortar retailers ride the e-commerce wave?

22 Hong Kong property market ‘on the cusp of full recovery’ in 2022: JLL

26 HKSAR joins the Global Powers of Luxury Goods Top 100 Published Bi-monthly on the Second week of the Month by Charlton Media Group Pte Ltd, 19th Floor, Yat Chau Building 2 HONG KONG BUSINESS | JANUARY Q1 2022 2019 262 Des Voeux Road Central

COVER STORY 16 Where to invest your money in 2022

COUNTRY REPORT 30 Where is Hong Kong now in its carbon neutrality target?

18

COUNTRY REPORT ISRAEL AND HONG KONG FORGE FERTILE BUSINESS BONDS

22

INDUSTRY BRIEFING HONG KONG PROPERTY MARKET ‘ON THE CUSP OF FULL RECOVERY’ IN 2022: JLL

INTERVIEW 14 How Livi Bank aims to make banking more rewarding

32 Direct power purchase agreements should be scaled up: Asia Clean Energy Partners

36 Blue revolutionises HK’s stagnant insurance industry

ANALYSIS 34 Asia leads the charge to digitalised insurance industry

OPINION 44 The Next Pedestal of the Payments War for Banks and FIs: Buy Now Pay Later

46 Could vaccine passports move the economic needle?

48 Hong Kong can do more in fight against rising cybercrime in financial sector

For the latest business news from Hong Kong visit the website

www.hongkongbusiness.hk

HONG KONG BUSINESS | Q1 2022

3

News from hongkongbusiness.hk Daily news from Hong Kong MOST READ

COMMERCIAL PROPERTY

RESIDENTIAL PROPERTY

Architects to remodel Hong Kong into a greener, more future-ready city

Green finance in APAC to grow amidst data and disclosure gaps

Decline in expats drags luxury residential market

Sustainability drives have long emerged in an attempt to mitigate the worsening climate crisis, a lesson learned in the hard way. In light of this, Hong Kong architects expect that the city will be remodeled to have a greener design.

Green finance is proving to be a rapidly growing sector in 2021.

Based on data from the Climate Bonds Initiative (CBI), 2021 green bond issuances might exceed that of last year, with $219.7b issued for the first half of 2021 compared to the US$290.1b issued in 2020.

The luxury residential rental market saw a huge decline in the last three months of 2020 as border closures became a hindrance for potential buyers, as well as capital inflow. Q2 of 2021 saw the end of eight consecutive quarters of decline as luxury residential rents recorded an increase of 1.4%.

FINANCIAL TECHNOLOGY

4

FINANCIAL SERVICES

COMMERCIAL PROPERTY

COMMERCIAL PROPERTY

Currenxie’s long road for a better cross-border payment platform

How Hong Kong’s real estate scene will fare in agents’ eyes

Office property market to recover despite high vacancy rates

It was from a personal painful encounter with foreign exchange that ignited the first sparks in founder and chief executive officer Riccardo Capelvenere to start Currenxie, a Hong Kong-headquartered crossborder payments and business account services startup.

Investment activity in Hong Kong’s real estate sector has picked up as seen in both the residential and commercial property market.

Realtors in the city expect this trend to continue in 2022, provided current economic conditions persist.

Hong Kong’s office property market is in a state of recovery although vacancy is still high as corporate downsizing continues.

According to JLL’s Hong Kong Property Market Monitor, the overall net absorption in July was -89,000 square feet.

HONG KONG BUSINESS | JANUARY Q1 2022 2019

Fidelity MPF Tax Deductible Voluntary Contributions (TVC) Apply for TVC via SmartRetire Pay less tax and save more wisely The Fidelity SmartRetire mobile app makes setting up your TVC account easier and quicker. Upon successful application, you can save up to HK$10,2001 on contributions yearly.

Download SmartRetire now to set up your TVC account or make additional TVC contributions!

3 key benefits of managing TVC via the SmartRetire mobile app Streamlined and convenient process The entire online application process can be completed in 15 minutes! Best yet, you can conveniently make contributions by selecting various payment methods including Faster Payment System for instant online payment.

Debut launch of remote identity verification capability The identity verification process no longer has to be done face-to-face2. You can now complete the required identity verification anytime, anywhere with our mobile app.

Change or make additional contributions to your TVC account anytime You can make additional lump sum/monthly contributions or change your current monthly contributions to your TVC accounts easily.

Download the SmartRetire mobile app today Fidelity.com.hk/TVC 1

2

The actual tax savings depend on personal income level, entitled tax allowances and deductions as well as the amounts of qualifying deferred annuity policy premiums paid or the amounts of TVC made. Based on the prevailing highest tax rate (i.e. 17%) and the maximum tax deductible limit of HK$60,000, the maximum tax savings can be HK$10,200.

Applicable to HK permanent identity cardholders only.

FIL Limited and its subsidiaries are commonly referred to as Fidelity or Fidelity International. Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. Investment involves risks. Fidelity only gives information about its products and services. Any person considering an investment should seek independent advice on the suitability or otherwise of the particular investment. The third party marks appearing in this material are the property of the respective owners and not by Fidelity. This material is issued by FIL Investment Management (Hong Kong) Limited and it has not been reviewed by the Securities and Futures Commission.

HONG KONG BUSINESS | Q1 2022

5

FIRST (micro-influencers).

HONG KONG RETIREMENT SYSTEM SLIPS TO 18TH RANK

There is still “work to be done” to address HK’s gender pension gap

H

ong Kong’s ranking in the annual Global Pension Index dipped one spot in 2021 despite an increase in its index value from 61.1 in 2020 to 61.8.

In 2020, Hong Kong ranked 17th on the index.

The city however was able to maintain its ranking amongst Asian countries for the third year at number two, just behind Singapore.

Hong Kong also showed improvement in its scores across the sub-indices measured, even receiving the highest integrity score in Asia and fourth globally with 87.7. For adequacy ​​ and sustainability, the city scored 55.1 and 51.1, respectively.

The Mercer CFA Institute gave HK’s pension system a C+ grade which connotes that it “has some good features, with areas that should be addressed over time.”

Hong Kong received the same grade as the USA, France, and Belgium.

More work to be done The institute however noted that there is still “work to be done” to address the gender pension gap in Hong Kong.

Citing data from The Women’s Foundation, a non-profit organisation, there is an average gender pay gap of 22% in Hong Kong, and about 30% of working mothers “confront biases at work and drop out of the workforce due to caring responsibilities.”

Women also account for only 13.9% of directors in Hong Konglisted companies.

“The pension gap between genders is arguably a consequence of differences in remuneration and working period, with women more likely to leave the workforce for family reasons, and this gap can only close with greater awareness and deliberate actions from employers and the government,” Adeline Tan, Mercer’s wealth business leader in Hong Kong, said.

6

HONG KONG BUSINESS | Q1 2022

Instagram was the most popular social media platform amongst 4,500 influencers surveyed

Best online influencer platforms in Hong Kong

I

nstagram, YouTube, and Facebook are the top three best social media platforms to invest in for influencer marketing based on a report by endto-end commerce platform, AnyMind Group.

Of the three platforms, Instagram was the most popular amongst 4,500 influencers surveyed, with 53.77% total users.

It is also the majority-used platform amongst the top three most popular influencer verticals in Hong Kong namely travel (57.19%), fashion & beauty (50.11%), and entertainment (47.27%).

In terms of median engagement rates, Instagram also snapped the most audiences.

The platform received 4.42% engagement from nano-influencers (1k to 10k followers) and 2.29% from micro-influencers (10k to 50k followers) under the entertainment vertical.

From nano-influencers and microinfluencers in fashion & beauty, the platform received 4.77% and 3.82% median engagement, respectively.

Meanwhile, travel influencers using Instagram got a median engagement of 4.03% (nano-influencers ) and 2.29%

YouTube has become a key platform for brands to run longer-form content and bring immersive experiences

Online engagement AnyMInd Group, however, underscored that “engagement rate is proportional to the total number of followers.”

“If a brand wants to do influencer marketing right, there are areas such as understanding an influencer’s follower demographics and actual volume of engagement to determine resonance,” it said.

Overall in Asia, Instagram accounted for over 50% of influencer marketing campaigns across 11 markets.

Following Instagram in the rank is YouTube, which was used by 26.1% of brands for influencer marketing campaigns.

Whilst it’s the second most invested platform all over Asia, YouTube only ranked as the third most-used channel of influencers, accounting for 20.72%.

In, in terms of median engagement rates, YouTube also came in second.

The video platform has a median engagement rate of 2.50% and 0.77% from nano and micro entertainment influencers respectively.

Fashion & beauty influencers receive 2.04% (nano) and 1.12% (micro) engagement,whilst rates for travel influencers are at 2.01% (nano) and 1.50% (micro).

AnyMind said YouTube has “become a key platform for brands to run longerform content such as explanations, product demos, etc., and can bring immersive experiences.”

Surpassing YouTube in terms of usage amongst three influencer verticals is Facebook, accounting for 24.58%.

Facebook, however, was the least invested platform for influencer marketing in Asia, with only 19.9% of brands spending on it.

It also had the lowest engagement rates compared with YouTube and Instagram.

Entertainment influencers using Facebook gets a median engagement of 1.06% (nano) and 0.65% (micro).

Fashion & beauty influencers receive 1.08% (nano) and 0.89%, whilst travel influencers get 1.09% (nano) and 0.59% (micro).

Facebook has “features such as livestreaming that make it a still-relevant platform for brands to look into.

FIRST Hong Kong’s food services industry is predicted to grow at a robust 5.5% for the next three years

Digital trends have dominated almost every business in Hong Kong

How does the digital ecosystem transform HK’s industries?

H

ong Kong businesses have been transforming to meet the changing preference of consumers who lead increasingly digital lifestyles.

Invest Hong Kong (InvestHK) and PricewaterhouseCoopers (PwC), in their joint report titled “Explore Opportunities in Hong Kong’s Digital Ecosystem,” showed that digital trends have dominated almost every business.

This digital emphasis, according to InvestHK’s Director-General of Investment Promotion Stephen Phillips, “permeates Hong Kong’s lifestyle cluster including vibrant areas like e-commerce, food services, and

creative industries.”

As Hong Kong’s digital economy continues to improve, businesses are creating new ways to engage with customers online.

Food industry In the food industry, for example, is the use of the Cloud Kitchen model.

“Cloud Kitchens are an innovative option for restaurants or caterers to expand to new areas or test new menu concepts without large investments in physical retail locations and equipment,” the report explained.

“With reduced operational costs, restaurants, in turn, are free to offer innovative new menus in strategic

neighbourhoods of Hong Kong whilst keeping risks at a minimum,” the report added.

With new avenues for business offered by food and beverage operators and growth in online grocery shopping, Hong Kong’s food services industry is predicted to grow at a robust 5.5% for the next three years.

Creative industries In the creative industries, PwC and InvestHK said there has been a creation of an online-first ecosystem as more consumers demand access to online contact.

The rapid digital adoption amongst consumers has also forced businesses in the industry to reframe their business models.

Advertisers, for example, are shifting to subscription-based models.

The report also stated that by 2024, high-speed mobile internet penetration in Hong Kong will reach 87%, up from 85% in 2021.

In the same year, the over-the-top video market will be able to bypass traditional TV revenues, the report stated.

E-commerce Given that over 40% of HK’s population shops online weekly and 70% monthly, HK’s eCommerce is expected to nearly nearly double by 2025, with a projected market volume of $90.63b.

HONG KONG HAS THIRD-HIGHEST ADOPTION RATE OF NEOBANKS: EY SURVEY

H

ong Kong has the third-highest neobank adoption rate globally, with 14% of consumers saying they have a primary financial relationship (PFR) with neobanks, EY’s NextWave Global Consumer Banking Survey revealed.

The city was just behind Mainland China (17%) and Germany (20%).

The survey said the finding reflects how “non-traditional tech startups are gaining ground” in Hong Kong.

From those surveyed, 47% also have products or services with a neobank, saying they perceive these technology brands to be more innovative and can offer better products and services.

Meanwhile, 61% of those whose PFR is a traditional bank, said they have three or more relationships with other firms which offer financial services.

The study also found that Hong Kong consumers are “looking for seamless integration across multiple providers,” with 50% expressing interest in super apps that combine multiple financial services.

David Scott, EY Banking and Capital Markets sector leader for Hong Kong, said the study’s findings show that “ incumbent banks need to transform their business models to meet the rising expectations of consumers and address the dynamic market landscape.”

“The results of our survey confirm that seamless integration of activities, ecosystem business models and stronger personalisation capabilities are essential for Hong Kong banks to maintain their customer relationships and chart a viable path to growth,” Scott added.

Non-traditional tech startups are gaining ground in Hong Kong

HONG KONG BUSINESS | Q1 2022

7

FIRST With the Green & Sustainable Finance Grant Scheme, the government encourages the issuance of green and sustainable bonds and loans in Hong Kong

Hong Kong aims to reduce carbon emissions by 50% before 2035 and carbon neutrality before 2050

HK expects $233.9b public sector investment for green energy

T

he Hong Kong government is expecting some $233.9b (approximately US$30b) in public sector investment over the next 15 to 20 years to support the country’s sustainability measures, Chief Executive Carrie Lam said.

“Hong Kong announced its climate action plan in October last year, setting out strategies and measures to achieve our goal of reducing carbon emissions by 50% before 2035 as compared to the 2005 level and carbon neutrality before 2050. This covers electricity

generation, energy-saving and green buildings, as well as green transport and waste reduction,” Lam said.

Lam delivered the opening address during the 15th Asian Financial Forum. The forum kicked off the celebrations for the 25th anniversary of the establishment of the Hong Kong Special Administrative Region.

‘Navigating the New Normal Towards a Sustainable Future’ With the year’s theme being Navigating the Next Normal towards

HOW MUCH DO HONG KONGERS NEED TO SAVE TO IMMIGRATE?

A

bout 71% of Hong Kongers planning to leave the city for good say they would need to save at least HK$2.5m to be able to do so, a survey from a digital life insurer, Blue, showed.

Based on the survey, it will take 41 years for locals to achieve their immigration budget given their current average monthly savings of HK$5,000.

For the 59% planning to leave the city in five years, an average monthly savings of HK$41,000 will be needed.

Based on the survey’s findings, 90% of Hong Kongers are having trouble saving money due to high expenses, whilst 10% of them never thought of saving.

In particular, their main reasons for being unable to save were mortgage payment or rental expenses (37%), meal costs and entertainment 8

HONG KONG BUSINESS | Q1 2022

expenses (30%), and shopping expenses (29%).

Of the married respondents with children, 57% said their children’s education fund was the most important factor affecting their savings behaviour.

The survey also revealed that “many Hongkongers did not understand the importance of savings,” with 12% of respondents expressing having no thoughts of starting a savings plan.

Out of the saving tools available, 50% prefer bank deposits; 17% would save by investing in stocks, funds, and bonds; 11% would want savings insurance; 9% prefer time deposits; 6% would store their money at home.

A total of 598 Hongkongers aged between 20 and 49 were surveyed through an online questionnaire for the study.

a Sustainable Future, Lam described what people are looking forward to in a world of uncertainties marked by extreme weather, pandemic outbreaks, geopolitical tensions, and diverging fiscal and monetary policies worldwide.

“My government, in collaboration with financial regulators and the industry, is stepping up efforts to promote green and sustainable finance in Hong Kong. Since May 2019, we have issued green bonds totalling the equivalent of more than US$7b (HK$54.57b) under the Government Green Bond Programme. They cover bonds denominated in US dollars, euros and renminbi. The issuances drew welcome demand from global investors, helping to establish benchmarks for potential issuers in Hong Kong and the region.

With the rolling out of the Green & Sustainable Finance Grant Scheme, we encourage the issuance of green and sustainable bonds and loans in Hong Kong. And we welcome financial and professional service providers and external reviewers to set up or expand here in Hong Kong,” Lam said.

The forum also hosts speakers such as United Nations Special Envoy on Climate Action and Finance Mark Carney and European Central Bank former president JeanClaude Trichet.

FIRST CONSUMERS BLAME BRANDS FOR SCAM MESSAGES: CALLSIGN

HK 2022 IPO funds to reach $400b: PwC

A

survey by Callsign released 23 September 2021 reveals 45% of consumers say their trust in businesses such as banks, retailers, mobile network operators, and delivery companies has decreased due to the persistent scam of spoofing brand names. Around 42% of consumers from Hong Kong, India, Indonesia, the Philippines, and Singapore ask mobile network operators to do more to stop scammers using their platforms, and 33% ask the same of banks.

People claim to have received scams through email (67%), SMS (57%), phone (46%), messaging apps (33%), and social media (23%) in the last year.

However, 37% of global consumers do not know where or who to report a scam message. Over half of consumers do not trust organisations to keep their data safe, with 43% of scam victims reacting with suspicion and wanting to know where fraudsters got their details.

Erosion of consumer trust “Callsign’s data demonstrates that consumer trust in our digital world has vanished, and brands are blamed.

Yet the sense is that little is done to purposely re-establish digital trust through complete and accurate digital identities,” says senior vice president Stuart Dobbie.

“The solution lies in re-thinking how we fight fraud and how we identify people online. Current approaches tackle both challenges by only identifying fraud,” states general manager Namrata Jolly. “The problem with this approach is that a fraudster using stolen credentials looks like a genuine user gaining access to accounts or executing transactions. If instead fraud strategies look to identify only genuine users, this automatically and simultaneously prevents fraud.”

Callsign’s technology involves the layering of behavioural biometrics over threat detection, device, and location data. Organisations eliminate one point of failure in the authentication process and achieve two-factor authentication with minimal friction.

Hong Kong’s bourse is agile and continues to evolve by embracing new models

T

otal initial public offering (IPO) funds to be raised in Hong Kong are expected to reach $350b to $400b in 2022 on the back of abundant funds and huge investment needs for corporate development, according to PwC. PwC forecast 120 IPOs in 2022 will raise the $350b to $400b which could place Hong Kong “amongst the top 3 fundraising markets in the worldwide” in the year.

The cross-boundary Wealth Management Connect Scheme and other initiatives allow Hong Kong “to offer greater value and more business opportunities for enterprises and investors,” it said.

Benson Wong, PwC Hong Kong Entrepreneur Group Leader, said reforms in the listing regulation over the past decade diversified Hong Kong’s IPO market.

“Hong Kong’s bourse is agile and continues to evolve by embracing new models. It has joined other global bourses in allowing special purpose acquisition companies (SPACs) to raise funds through IPOs,” Wong said.

“We expected around 10 to 15 SPACs to list in Hong Kong last year, raising $20b to $30b. 2022 will be an important year for the Hong Kong IPO market. We are confident that it will regain its place as one of the top three fundraising hubs in 2022,” he added.

PwC forecast 120 IPOs in 2022 will reach $400b, which could place Hong Kong in the top 3 fundraising markets worldwide

The New Economy and Chinese enterprises listed in the United States will be the main drivers of listing activity in 2022, PwC said.

Last year, total IPO funds raised reached $331.66b, a 17% decline from 2020 despite the high level of activity from New Economy listings and secondary listings by US-listed enterprises. US-listed Chinese enterprises that returned to Hong Kong for listing raised $100.3b, PwC said.

A total of 99 new IPOs were listed in 2021, 98 of which were listed on the Main Board. It noted that 54% were retail, consumer goods and services, and 19% were financial services.

Eddie Wong, PwC Hong Kong Capital Markets Services Partner, said that aside from pandemic, geopolitical and economic uncertainties, the IPO market of Hong Kong has also been affected by “scrutiny from China targeted on certain sectors.”

He also noted that Hong Kong ranks fourth globally in total funds raised amongst IPO markets.

“However, Hong Kong’s pipeline for IPOs remains strong. Greater investor demand and stricter regulatory requirements on climate change and sustainability will drive accelerated growth in listings for renewable energy, electric vehicles and other companies involved in sustainable innovation and ESG,” he said.

HONG KONG BUSINESS | Q1 2022

9

CASE STUDY: RENEWABLE ENERGY PROJECTS important initiative to promote wider use of renewable energy in Hong Kong, Angel Ng, CEO for Citi Hong Kong and Macau, said during the unveiling of the bank’s tailored hybrid energy system.

“We are proud to be contributing to this effort, which is in line with our group-wide strategy to reduce the environmental footprint of our facilities around the world,” Ng added.

Even before the hybrid system was fully installed and revealed to the public, Citi said that it’s Hong Kong operations had already reached its goal to source 100% renewable electricity to power its operations in 2020.

Citi and CLP senior executives in front of solar panel installation

Citi Hong Kong installs 360 solar panels at Kowloon office The project is part of a hybrid electrical and thermal energy system and is expected to produce 85,337 kilowatt-hours of renewable energy per year.

B

anks around the globe have become creative in making their own operations more energy efficient and renewable.

The Netherland’s ING Bank’s new headquarters Cedar, for example, used concrete and rubble from its old building as well as banned the use of single-use plastics in its restaurants and coffee shops, amongst other sustainability-related changes. But ING has the advantage of space: what about financial institutions whose base of operations are located in jampacked industrial centers with limited land areas, such as Singapore and Hong Kong?

Citi Hong Kong’s solution is to build its new renewable energy source at its roof. In March 2021, the bank unveiled its new hybrid electrical and thermal renewable energy system, built on the rooftop of Citi Tower at Kowloon East.

The new system’s focal point is its 360 solar panels, which Citi said is able to produce 85,337 kilowatthours of renewable electricity. This is reportedly equivalent to the annual energy consumption of 20 households, according to the bank.

This rooftop installation also 10

HONG KONG BUSINESS | Q1 2022

Net zero means rethinking our business and helping our clients rethink theirs

includes a wind turbine, which generates electricity on-site for local use. Even water heating is covered by the energy produced by this new installation, with the hybrid system making use of the sun’s energy to heat up water for use in the tower.

Citi Hong Kong expects that the hybrid system will overall contribute to a cost saving of approximately 4% of the building’s annual power consumption.

Through this installation, the bank was also eligible to take part in the Renewable Energy Feed-in Tariff FiT) scheme introduced by local electricity provider CLP. Under this, the bank will receive FiT payments for connecting the system to CLP’s electricity grid.

The Feed-in Tariff Scheme is an

Net zero by 2050 The hybrid energy system is a step forward in Citigroup’s commitment to achieve net zero greenhouse gas emissions by 2050, as announced

by Citi CEO Jane Fraser in March.

The commitment counts emissions that Citi directly produces and those contributed by the bank’s specific financing activities.

“Net zero means rethinking our business and helping our clients rethink theirs,” Ng said. “We believe that global financial institutions like Citi have the opportunity—and responsibility—to play a leading role in accelerating the transition to a net zero economy and deliver on the promise of the Paris Agreement.”

Ng added that the bank’s track record in sustainable finance places it in a good position to support clients with new ways of creating financial value that have environmental and also social benefits.

From 2014 to 2019, Citigroup financed and facilitated US$164b in low-carbon solutions and in 2020 pledged an additional US$250b in environmental transactions by 2025.

Solar panel installation at Citi Tower in Kowloon East

HONG KONG BUSINESS | Q1 2022

11

VOX POP

How do China’s plans to stop building coal power abroad affect coal-reliant countries?

CHINA

Fabian Ronningen Analyst, Rystad Energy: China has been one of the biggest funders of coal in Asia, together with ADB and development banks in Korea and Japan. We have seen already that several of the large financiers are pivoting their investments away from fossil generation, predominantly coal, to more green investments in Asia in the last few years. Now that China also has made it clear they will not finance any new coal power plants or coal mines, that could make it harder for several Asian countries. Countries that could be affected by this are especially Vietnam, Indonesia, Pakistan, the Philippines, and Bangladesh, which all have rapidly growing power demand and still plan to add more coal power to a larger or smaller extent. How dependent they are on Chinese financing depends on the country, but it is clear that all of them will feel it in some way.

Cutting abroad financing will maybe not impact Chinese emissions and emissions targets directly, but it sends a clear message that future coal power will be difficult to finance. As for the domestic emissions in China, we have also seen several signs that China is increasing its pace of renewable investments and development, to directly displace coal in the generation mix. If we only consider power sector emissions, the target of reaching peak emissions before 2030 is definitely feasible with the current pipeline and projections we expect for China. Whether or not China will reach carbon neutrality by 2060 is an open question. Focusing on reducing the dependence on coal is definitely a step in the right direction, but how fast emissions can drop after the peak depends on how effective China is in cutting coal out of its power generation mix.

It is unclear from the current statement how the financing ban will affect projects already under construction or the planning phase. Probably most of these projects will be completed, due to contractual obligations, but projects in the early planning phase have the risk of being cancelled or finding other financiers, which may be difficult.

China’s coal plant investments Using data from the Global Coal Public Financing Tracking website, it is stated that China financed a total of 53.1 gigawatts (GW) of foreign coal plants in the period 2013 to 2020 for a total financing cost of 50.1 BUSD. The data also shows that China represented 56% of foreign investments in coal plants in the period, so removing this financing source will create a “financing gap” for some of the countries we mentioned earlier.

Let’s assume similar Investments pr MW of coal capacity, we see that the cost is roughly 945 MUSD/GW in investment for a new coal plant (CAPEX). Let’s also assume that China would have continued to finance 56% of foreign investments in new coal power in Asia. Rystad Energy expects roughly 70GW of newbuilds in Asia the next decade (excluding 12

HONG KONG BUSINESS | Q1 2022

Narsingh Chaudhary, Black &Veatch’s Executive Vice President & Managing Director, Asia Power Business.

Harry Harji, Associate Vice President for Black & Veatch management consulting business in Asia: Decarbonisation commitments, such as China’s pledge to stop building new coal-fired power projects overseas, present an opportunity to increase support for countries developing green and low carbon energy and accelerate Asia’s energy transition.

With fewer financing options available for coal developments, we anticipate more proposed coal plants will be cancelled. Consequently, countries reliant on China for coal financing will need to review their energy plans to scale up alternative power solutions including renewables.

To accommodate more renewable energy generation, the region will need more integrated solutions across generation, transmission, and distribution; as well as the expansion of gas-fired generation and energy storage, to improve grid efficiencies and stability. In the longer term, integrating hydrogen to support baseload generation could be another approach to decarbonise the electric sector.

The China Electricity Council has reported that the electricity consumption of the country reached 6,165.1 terawatt-hours from January to September last year, a year-on-year increase of 12.9%. Countries with high demand growth rates such as China will need to balance economic developments and carbon neutral commitments.

China’s renewable energy portfolio Whilst China is still dependent on coal generation, it has also expanded its renewable energy portfolio. According to the International Renewable Energy Agency, China is the global leader in terms of wind energy deployments, installing 72GW of new capacity in 2020 alone rivalling the second largest country, the United States, which has a total capacity of about 95GW. Furthermore, with 253GW of installed solar power capacity as at end of 2020, China also has the world’s most capacity and this compares with about 151GW of solar power capacity across the European Union, according to International Energy Agency data.

However, too much intermittent renewable energy by itself can threaten reliable grid operations and performance. Given China’s continued growth in electricity needs, coal appears to remain a near-term option domestically to balance the grid; lessons from the recent grid challenges across China bear this out. Long-term, however, to meet its 2060 goals and address renewable energy variability, China will benefit from more integrated solutions across generation, transmission and distribution, like the rest of Asia, to effectively manage the energy transition and provide stable and reliable power. Gas-fired generation, energy storage and in time hydrogen and potentially nuclear are likely to see an increasing share of deployment.

HONG KONG BUSINESS | Q1 2022

13

CEO INTERVIEW

How Livi Bank aims to make banking more rewarding They are amongst the first banks in the city to roll out buy now, pay later services.

S

hake your phone after paying via QR code, and receive some cash rewards in return. This is just one of the many ways that Livi Bank, one of Hong Kong’s newest virtual lenders, is making banking more enjoyable and simpler for its clients.

Backed by BOC Hong Kong (Holdings), JD Technology and Jardines, Livi Bank—whose name comes from the concept of “living side by side with our customers”—operates with a philosophy of empowering customers to achieve their life goals and lead more rewarding lives with the help of financial technology, according to CEO David Sun. “Core to our offering are ease of use and reduced costs.

Livi’s customers don’t have to maintain any ‘relationship balances’, nor charge any fees to keep their account open,” Sun told Hong Kong Business in an interview.

This meant breaking ground in simple yet new ways, such as becoming the first bank to introduce the ‘buy now pay later’ concept in the city when they launched Livi PayLater last May. It offers an instant flexible installment payment facility through a virtual Mastercard debit card, and features automatic instalments and flexible repayment periods between three to 36 months, with transparent costs and a promise of no hidden charges—granting users the freedom to choose how and when to pay.

The BNPL service gives customers the benefit of simplicity, flexibility, and transparency—the three key elements that Hong Kong people today expect from their virtual bank, according to Sun. And it seems that Livi Bank is on the right track. As of August, just a little over a year after launching, the bank has surpassed 150,000 users, with liviPayLater alone attracting over 42,000 applications up to early November 2021.

Hong Kong Business caught up with CEO Sun of Livi Bank to learn more about what the virtual bank’s been up to since launching, their thoughts on Hong Kong’s digital banking potential, as well as their future plans.

What pain points does Livi Bank aim to address?

Livi represents a differentiated development strategy. We aim to fulfil unmet banking needs in the market, and the promotion of financial inclusion using innovative technology, whilst offering the additional benefits of an ecosystem platform.

We want to offer smart, simple, trusted, and flexible digital financial solutions tailored to customers’ everyday needs, anytime, anywhere in Hong Kong. The Livi app offers a range of mobile payment solutions—through UnionPay QR Payment, Livi Debit MasterCard, the innovative ‘buy now pay later’ product we call ‘Livi PayLater’, Faster Payment System (FPS) for making and receiving real-time transfers, as well as Electronic Direct Debit Authorisation (eDDA) so customers 14

HONG KONG BUSINESS | Q1 2022

David Sun, CEO of Livi Bank (Source: LiviBank.com)

Livi has introduced digital products that are wellreceived by customers such as LiviSave, virtual Livi Debit Mastercard, and Livi PayLater

can pull funds from their existing bank accounts.

We also have three-in-one ‘LiviScan’ facility that offers ATM QR Cash, FPS Scan, and UnionPay Scan features powered by QR scan technology. All these products and services aim to provide a simple, delightful, and convenient banking experience for customers.

With our ecosystem partners, Livi is more than a banking app. We have focused on offering a series of ecosystem benefits and promotions, which include joining Yuu from Dairy Farm, Hong Kong’s largest rewards club, as Yuu’s exclusive virtual banking partner. Upon linking their Yuu account with Livi, Yuu Points earned via Livi will be credited automatically.

Tell us more about your products and services. Could you share with us some of your most notable services?

We have introduced a number of digital products and ecosystem offers that have been well received by customers. These include LiviSave, UnionPay QR code payment, the virtual Livi Debit Mastercard, Livi PayLater, and our partnership with Yuu. We offer convenience, simplicity, and flexibility to customers with a unique digital first banking experience tailored to the customers’ everyday needs.

We take a measured approach in assessing Livi Paylater applications. We developed an advanced credit risk assessment model which enables us to conduct assessment 24x7 with

CEO INTERVIEW instant approval of the applications. It also enables customers who otherwise wouldn’t be able to have easy access to traditional lending products to make purchases by instalments to fulfil their life goals. This product has helped us embrace financial inclusion.

Our systems carefully assess the customers’ ability to manage the facility. Our ecosystem partnerships focused on the everyday needs of the HK customers, include Yuu brands such as Wellcome, 7-Eleven, Mannings, KFC, IKEA, to electronics such as Samsung, Home+, OTO, and YOHO, to fashion brands such as Farfetch and HBX. One of the things that Livi Bank said it stands for is that the bank “acts ethically and transparently and will always have the courage to do what is right.” How does this influence Livi Bank’s operations?

As one of Hong Kong’s challenger banks, we are aware that customers have high expectations for us. Our objective is to create a meaningful relationship with customers, [and] understand their needs and build trust. We believe that this can be achieved by having extensive understanding of our customers’ needs and always staying ahead of market trends, for only then will the Livi app become part of their daily lives.

And also empowering our colleagues by creating an open, vibrant and inspiring workplace that stimulates creativity, nurtures collaboration and instils pride.

And finally, serving the community by always being aware of the need to promote a sustainable, inclusive and socially responsible agenda that helps to change peoples’ lives for the better.

Since launching, how has Livi Bank been received in Hong Kong? Could you share with us any numbers or anecdotes?

We have a growing customer base and increasing usage of the Bank’s innovative product base—the total number of customers passed 150,000 in August 2021. Many of our new customers come from referrals, and this is very encouraging as it shows that customers see the value in our offers and recommend us to family and friends.

Our customers have given us positive feedback on our products and services. [A total of] 70% of our customers have activated the UnionPay QR Payment on the Livi app, and nearly 70% are Livi Debit Mastercard holders. These numbers show that customers are using our services for different purchasing needs.

Some 60% of the transactions are customers aged between 18 and 35, showing higher demand in the younger segments as they have a greater need to plan their payments over time.

What are your thoughts about being one of Hong Kong’s digital-only banks? What is your outlook for digital-only banks in Hong Kong?

An increasing number of Hong Kong people are tech savvy.

We believe it is not just restricted to young people, so we are looking at a broader customer base in terms of age and income that will see their everyday lives benefit from our products and business ecosystem. That is why we put a lot of focus on product innovation. We listen to our customers and aim to provide products and services tailored to their everyday needs.

Innovation requires a combination of care and courage.

Security and quality are a must when dealing with our customers’ hard-earned money

Innovation requires a combination of care and courage.

As security and quality are a must when dealing with our customers’ hard-earned money, there is an important balance between being enterprising and pioneering on the one hand, and seeking to ensure the delivery of meticulous products and top performance on the other.

Livi PayLater is a good example. We are the first bank in Hong Kong to introduce this ‘buy now pay later’ concept, with flexible repayment periods and automatic instalments enable customers to manage their finances in a cost-effective way.

How have digital banks, such as Livi Bank, impacted or changed the banking landscape in Hong Kong?

Virtual banks have been steadily gaining momentum since 2020. According to a survey Livi commissioned in mid-2021, more than 90% of Hong Kong adults were aware of virtual banks, whilst 43% of non-virtual bank customers would consider using virtual banks. 65% agreed that virtual banking is the future of banking.

We believe the development of virtual banks will foster digital innovation, promote financial inclusion and enhance customer experiences. They are convenient and personalised, and offer easy to use payment methods and products, whilst allowing the leveraging of ecosystem partners. Virtual banking is the way to go.

We believe that banks will continue to digitalise their operations. This will be from the front-end to the back-end, to provide more efficient and innovative financial services for the benefit of the Hong Kong people.

What other banking services will you roll out in the future?

What’s next for Livi Bank?

Our focus is on building a meaningful relationship with individual customers and encouraging them to use the Livi app in their daily lives. We will launch products that meet the everyday needs of Hong Kong people. This will include consumer lending, insurance products as well as wealth management.

Livi has a growing customer base and increasing usage of the bank’s innovative product base

HONG KONG BUSINESS | Q1 2022

15

COVER STORY

The World Bank Global Outlook noted that 90% of advanced economies may recover to pre-2019 levels in 2022

Where to invest your money in 2022 Asian SPACs are expected to enter the Hong Kong and Singapore markets this year.

T

he last year was not without challenges, as supply constraints and the chip shortage continue—and 2022 might not be so different for developing economies. The World Bank Global Outlook noted that 90% of advanced economies may recover to pre-2019 levels in 2022, but only a third of emerging and developing markets will hit the same target. Travel restrictions might not be lifted this year due to emerging COVID-19 variants, thus leaving the aviation and tourism sectors struggling. Trade costs are still expected to be high, hampering international trade growth.

With all of these developments, investing in 2022 might seem daunting. Hong Kong Business gathered some ideas on where to invest your money.

Idea 1: REITs With inflation picking up following 2020’s economic recession, real estate is often thought of as a good hedge. But, based on historical data, Oliver Samson from Savills World Research said that it also depends on which region you plan to invest in.

“From a regional perspective, Europe provides the best inflation hedge in comparison with North America or the Asia Pacific. This is underpinned by the widespread use of indexation, which is quite unique to European real estate, and differentiates the region from its global peers,” Samson said on Savill’s Inflation Implications for Real Estate report.

For the Asia Pacific, Samson noted that lease lengths 16

HONG KONG BUSINESS | Q1 2022

IPO activity in Asia was undeterred by the pandemic.

As of midNovember 2021, a record of US$9.8b was raised from 121 IPOs from SEA alone

tend to be shorter than their international counterparts, at approximately three to five years. This, in turn, causes demand conditions to differ across major cities and sectors. “Vacancy rates tend to be higher in office and retail compared with industrial (similar to the global trend), and are much lower in Tokyo compared with other markets such as Shanghai and Singapore. Shanghai retail leases, much like many other cities globally, often include a turnover linked component,” he said.

Idea 2: Asian Capital Markets Initial public offering (IPO) activity in Asia was undeterred by the pandemic, which several economies continue to battle to this very day. Data from Deloitte reported that as of mid-November, there was a record of US$9.8b raised from 121 IPOs from Southeast Asia alone, overtaking last year’s performance. Thailand had raised the highest funds from IPOs for the third consecutive year, followed by Indonesia, Malaysia, the Philippines, Singapore, and Vietnam.

Whilst it is possible that 2022 will continue to have a robust IPO market, investors have another thing to look forward to: special purpose acquisition companies (SPACs).

In September 2021, the Singapore Exchange released its regulations for black cheque listings. Hong Kong is expected to follow suit in 2022 with its own regulations. These two influential markets can light a fire that could lead the way to SPAC listings in other markets, giving companies a faster option to raise funds.

COVER STORY “There is now a significant uptick in companies in China and across Asia considering a similar route to accessing US capital markets as investors and management teams try to mitigate some of the challenges of traditional US IPOs; in particular market volatility around pricing and the significant investment of management time and cost,” Deloitte China said in its The Rise of SPAC in Asia report.

Idea 3: Cryptocurrency Cryptocurrency has become bigger than ever in 2021, with the price of a single Bitcoin skyrocketing to over US$57,000 as of the end of November 2021—and central banks from different economies are taking notice, with Sweden’s Riksbank, the Bank of England, the Bank of Canada, and the central banks of Thailand and Singapore researching the implementation of central bank digital currencies or CBDCs. On the opposite end of the crypto-space is decentralised finance or DeFi, keeping with cryptocurrency’s roots of having minimum regulation, save for being on a secure blockchain, enabling faster, registered transactions. 2022 would be an interesting year for cryptocurrencies, with governments and emerging fintech companies seemingly at odds with the future of this digital tender.

The top 10 cryptocurrencies based on approximate market cap in 2021 are Bitcoin (US$1.8b), Ethereum (US$557b), Binance Coin (US$104b), Tether (US$73b), Solana (US$64b), Cardano (US$52b), XRP (US$47b), U.S. Dollar Coin (US$38b), Polkadot (US$37b), and Dogecoin (US$28b).

Idea 4: NFTs Non-fungible tokens (NFTs) have taken centre stage in the crypto-asset space since it was announced in mid-2021. As a unique digital asset, NFTs provide one-of-a-kind and noninterchangeable proof that one has purchased another digital asset. With NFTs mostly linking to visual artworks, the NFT market has served as an online art trade. The most expensive NFT, Everydays: The First 5000 Days by artist Beeple, was auctioned off for US$69.3m.

However, contrary to popular belief, NFTs do not prove ownership of the asset it links to. “An NFT is not the underlying

NFTs have taken centre stage in the crypto-asset space since mid-2021

E-commerce sales in APAC are expected to hit the US$2t mark by 2025

asset itself, but an electronic record proving ownership of the asset that is separate from other legal ownership risks (such as the copyright, in the case of a digital artwork).

In other words, owning an NFT does not necessarily equate to owning the asset underlying the NFT, unless the NFT specifically includes a transfer of rights such as the copyright,” defined PwC in its Annual Global Crypto Tax Report 2021.

“If such a transfer were allowed under local law at all, it could be tricky in a blockchain environment, given that in certain jurisdictions the transfer of copyright must be in writing and signed by the copyright owner,” PwC added.

Idea 5: E-commerce E-commerce is a booming industry, especially in Southeast Asia. Analytics firm AppsFlyer, in its 2021 State of eCommerce App Marketing report, saw a 240% increase in spending from Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam. In-app revenue rose by 13% to 35% from March to July of 2021, bucking the 2.05% decline in global spending.

“Southeast Asia is poised to experience a digital shopping wave; what businesses do now can determine their market share over the next few years,” said Sam Chiu, Senior Director of Marketing, APAC, AppsFlyer.

The Asia Pacific and Australasia regions are poised to become e-commerce powerhouses in the future, with sales opportunities of over US$6.

The Asia Pacific and Australasia will become an e-commerce powerhouse in 2021 and beyond, due to e-commerce sales opportunities of over US$68.5b, according to a new report from global market research company Euromonitor International. Sales in the Asia Pacific are expected to hit the US$2t mark by 2025.

Idea 6: Green finance There has been an increased interest in green finance.

Data from the Climate Bonds Initiative show that an approximate US$452.2b green bonds were issued globally in 2021, far exceeding the US$279b issued the year previous. Standard Chartered, in its Sustainable Investing Review 2021, noted that 13% of emerging affluent, affluent, and high net worth investors have sustainable investments making up more than a quarter of their portfolio. An approximate 61% of these investors have placed funds in a sustainable investment solution.

Investors effectively are spending less and getting higher returns on green bonds, than they are on other bonds. And that’s also showing up in the level of oversubscription on bond issuance. So everyone wants bonds right now, they want certainty. They’re the most popular category of bond versions right now. So that bodes really well for your supply and demand and growth going forward,” said KMPG Partner and Head of Financial Services Anton Ruddenklau said in an interview with Hong Kong Business last quarter.

KPMG Partner for Financial Services Leon Ong, in the same interview, cited Hong Kong and Singapore as growing markets for green finance, adding that China will continue to be the juggernaut in the Asian region.

HONG KONG BUSINESS | Q1 2022

17

COUNTRY REPORT: ISRAEL

Israeli companies are relatively young and are looking to explore opportunities in the global market

Israel and Hong Kong forge fertile business bonds

The Head of Economic and Commercial Mission for the Consulate General of Israel says several of its companies are keen on entering the Hong Kong market.

H

ong Kong is soon to be a safer place for health workers due to closed system transfer devices that minimise their exposure to hazardous drugs when administering medication.

This technology was developed

by Simplivia, one of the many Israeli companies that have seen the advantage of doing business with Hong Kong. Other Israeli medtech companies looking to expand their businesses in Hong Kong include Libra@Home, which uses virtual reality technology in neurorehabilitation; and Newsight, whose SpectraLIT device can detect COVID-19 in saliva samples. The latter is even building a sub-office in Fragrant Harbour in the near future.

In an interview with Hong Kong Business, Yoav Haimi, Commercial Consul and Head of Economic and Trade Mission at the Consulate General of Israel in Hong Kong, said that several Israeli companies, particularly startups, are interested in capital raising and strategic investment in Hong Kong as well as partnering up with local firms.

18

HONG KONG BUSINESS | Q1 2022

Yoav Haimi

Israeli startups are interested in capital raising and strategic investment in Hong Kong

“Israel is really well-known in terms of innovation and technology.

There are many different startups with top-notch technologies that can be implemented within companies in Hong Kong. Israeli companies are relatively young and are looking to explore opportunities in the global market,” Haimi said.

What sets Israeli companies apart from their global counterparts? The answer is simplicity itself.

“We take a very simple idea which no one thought about, and think outside the box, and we can really change the ecosystem,” the consul said.

Medtech is amongst the fields that Israeli companies can greatly contribute to the Hong Kong economy. Another field is smart cities—in the areas of waste management, construction, and building assessment.

In fact, Percepto is an Israeli firm that’s doing just that, using drone technology to help inspect aging buildings in Hong Kong whilst lowering the risk to human life, providing accurate data, and lowering assessment time.

Investing in Israel and HK markets With online shopping gaining more traction in Asia, Haimi sees potential in Israeli firms like Glassbox, which provides analytics on consumer behaviour in e-commerce platforms. He noted that Hong Kong nationals are also showing more interest in Israeli food, with Halva Kingdom now exporting delectable Mediterranean sweets to the East Asian market.

These are just a few of the Israeli companies that have entered the Hong Kong market through the assistance of the Economic and Commercial Mission. Haimi said that there is a nigh unlimited number of tech providers from the Israeli market that are ready to partner with Hong Kong companies.

But there has also been increased interest in investing in Israel from Hong Kong and Mainland China.

“We see that investors are looking to be a part of the great success of the Israel ecosystem, looking for specific solutions. Typically, these are companies from Mainland China, for a strategic corporation.

Another opportunity I see for Hong Kong companies is establishing research and development centres [in Israel], something that many multinational companies are doing in Israel,” Haimi said, adding that these companies recognise Israel’s expertise in innovation.

The Economic and Commercial Mission headed by Haimi helps connect Hong Kong and Israel businesses. All Hong Kong companies have to do is to contact the office, give them their specific needs, their budget, and their timeline—and they will help find their best match.

“I can do the work for them, bring them the best companies in terms of the catalog, videos, connect them to the co-founders and the relevant teams within these companies.

That’s what we do on a daily basis,” Haimi explained.

Economic and Commercial Mission at The Consulate General of Israel in Hong Kong is located at the 701 Admiralty Centre Tower II, 18 Hardcourt Road. Its website is https://itrade.gov.il/hongkong

PROPERTY TECHNOLOGY - SMART CITY

Chinachem looks to a sustainable future through innovative use of proptech It has opened up its properties as ‘Innovation Places’ where start-ups can pilot and refine their solutions.

Chinachem Group and HKSTP key persons at the launch of ‘CCG Accel — Powered by HKSTP’ in March 2021

H

aving celebrated its 60th Anniversary of serving the community last year, Chinachem Group is now looking firmly forward to the decades ahead – in particular how it can help put Hong Kong at the forefront of smart city development and make it a more liveable and more sustainable city for future generations.

Being independent of public or family ownership, the Group enjoys the freedom to place social and environmental values on an equal footing to profit – a concept it terms “Triple Bottom Line”, balancing the interests of people, prosperity, and the planet. Its motivation is to create shared value in the communities it serves.

In this respect, the Group sees innovation as not only beneficial to its own success, but also as a valuable opportunity to help Hong Kong strengthen its competitive edge in regional and international markets.

Having already adopted a wide range of innovative technologies in its property developments, the Group is taking the opportunity to work with local start-ups and help them grow their own businesses under a “Collaborate – Adopt – Invest” approach. This means establishing partnerships with innovators to develop new technologies, testing the resulting products in real-life situations and, if they prove successful, investing in the startups to help them scale and develop the technologies further.

One notable collaboration is the “CCG Accel – Powered by HKSTP” programme

launched in March in partnership with Hong Kong Science & Technology Parks Corporation. This pioneering programme is aimed at propelling tech start-ups with high potential by guiding them through the crucial transition from the pilot stage to mass adoption. Each of its three themed accelerator cohorts will provide training, mentorship, and support for up to 10 startups, with the Group helping the start-ups

THE GROUP IS TAKING THE OPPORTUNITY TO WORK WITH LOCAL START-UPS AND HELP THEM GROW THEIR OWN BUSINESSES UNDER A “COLLABORATE – ADOPT – INVEST” APPROACH shape and trial their solutions at Chinachem Group properties ahead of general adoption. The first cohort has been given an exciting opportunity to demonstrate and pilot their innovations at the iconic Central Market, a heritage building newly revitalised and reopened to the public under the Group management.

The Group has also recently launched the Inno Place@CCG programme, based on a “Living Lab” concept that breaks away from traditional innovation labs where testing is restricted to physical lab space.

This programme, also supported by HKSTP,

will see the Group open up its properties as “Innovation Places” where selected innovations can be trialled in a real-world environment – a win-win arrangement that allows the start-ups to pilot and refine their solutions, and the users to benefit immediately from them.

As regards its own proptech initiatives, the Group has, for several years now, made wide use of Business Information Modelling (BIM) for its new property developments, and is the first local developer to use the BIM, Novade and Oracle Aconex platforms in a single project.

At its Mount Anderson construction site, it is pioneering the use of a portable battery storage system called Enertainer to replace traditional diesel generators, thereby reducing both carbon emissions and noise pollution. Enertainer has been developed by Ampd Energy, another local start-up incubated at HKSTP. At the upcoming Tonkin Street redevelopment in partnership with the Urban Renewal Authority, the Group is adopting Modular Integrated Construction – the first deployment of this process for a private-sector residential building in Hong Kong. This will greatly speed construction time, an important issue given the city’s acute housing shortage.

Looking ahead to smart city development, the Group is working with the Smart City Consortium to develop Internet of Things (IoT) technologies for property applications in Hong Kong and design a set of guidelines for both existing and new IoT solutions. While IoT-powered solutions in smart buildings will help improve costefficiency and operational effectiveness, they could also increase cybersecurity risks if no suitable standards, guidelines and best practices are in place – hence the importance of this collaboration for Hong Kong’s future smart city development.

Simply put, Chinachem Group’s ultimate aim is to embed innovation into every element of its business processes and operations and become an industry leader in the application of proptech. In this way, it can help the city take full advantage of the opportunities opened up by proptech to foster the development of smart buildings and smart living in Hong Kong.

HONG KONG BUSINESS | Q1 2022

19

INDUSTRY BRIEFING: RETAIL

Should Hong Kong’s brick-and-mortar retailers ride the e-commerce wave?

Retailers will need to cater more to the 62.1% of Hong Kongers who prefer to shop in-store, expert says.

O

nline sales accounted for 6.3% of total retail sales in 2020, according to PwC, which saw a “very modest” increase to 7.4% as of September 2021.

Analysing this, a PwC executive said that Hong Kong retailers may have fallen short.

“If you look at the actual amount of online sales, we’re talking about only 7% of retail sales overall. Hong Kong retailers are still not doing that much of moving their business models into online-to-offline (O2O),” Michael Cheng, Asia Pacific, Mainland China and Hong Kong Consumer Markets Leader for PwC, told Hong Kong Business.

Although online sales in the city have the potential to reach over 10% in the next two to three years, this is still behind China’s retail industry that now has a target of over 25%. Cheng added that businesses will still rely more on brick-and-mortar stores to generate revenues more instantly even as retailers change their business models to improve their online operations.

“As the city returns to more of a business-as-usual, Hong Kong retailers will still continue to see their physical stores as the main generator of business, at the expense of online expansion,” he said.

Data from Centaline Commercial, as cited by PwC, showed that volume transactions in the industrial and commercial store market have risen by 56% and 83% year on year, respectively.

“To some extent, you cannot blame them because this

62.1% of consumers in Hong Kong either strongly agree or agree that they would shop in-store to create experiences

20

HONG KONG BUSINESS | Q1 2022

Hong Kong retailers are still not doing that much of moving their business models into online-to-offline

is how they used to make money in the past and they believe this is the most efficient and effective way in a very short time period,” Cheng said, adding that in the long run, this will call for retailers to make a “very drastic and very determined way to change the habit of making both online and offline practical and feasible to the customers.”

Pop-up retail scene The declining cases of infections have encouraged retailers to set up shop in physical spaces after a challenging 2020 and 2021 when the vacancy rate of street shops recorded a rate of over 10%.

“They are playing around with more pop-up stores.

And they’re also looking at how they can work with the shopping malls and the retail property players in creating those new experiences, so that, I think, is definitely something we will continue to see in 2022,” Bailey said.

Herbert Yum Research Manager at Euromonitor International added that as Hong Kong continues to return to normal, retailers will likely allocate more budget on both experience and pop-up stores.

In its Voice of Consumer Survey: Lifestyle 2021 report, Euromonitor found that 62.1% of consumers in Hong Kong either strongly agree or agree that they would shop in-store to create experiences. Some 46.4% have also agreed that it is important to spend money on experiences.

“It is expected such consumer sentiment will continue in 2022, hence retailers would need to rethink how they could enhance both online and offline shopping experience to better capture the consumer spendings,” Yum noted.

PwC’s Cheng, meanwhile, said that pop-up stores in Hong Kong have emerged as retailers have responded not just to the pandemic, but also to the impact of social unrest in the city back in 2019.

“We definitely see the risk in having very large stores concentrated in major shopping centres. That’s why you will see a lot of brands moving out of the main shopping hubs,” Cheng said, adding that retailers will likely move towards smaller stores, like pop-ups, where rents are lower and leases are relatively short.

Consider omnichannel KPMG, likewise, projects the Hong Kong retail industry will see an uptick in 2022 as travel expectations remain despite the emergence of new COVID-19 variants.

But for KPMG Head of Consumer & Retail for Asia Pacific Anson Bailey, said traditional retailers that are looking at setting up their online platforms will particularly become 2022’s “big winner.”

His retail clients in Asia, for instance, have seen the share of online sales double or even triple from what used to be only around 5% to-10%. And in this light, he expects

INDUSTRY BRIEFING: RETAIL to capture Gen Z, 27% have already adopted a strategy, whilst another 27% remain uncertain.

Amongst these strategies include optimising the mobile experience, providing personalised and interactive experiences, leveraging micro-influencers and user-generated content, using video communication, promoting corporate social values and sustainability, and prioritising authenticity.

Retailers need to keep their eyes on Millennials and Gen-Zs because of their willingness to spend

that retailers will manage to sustain their e-commerce momentum.

“We’re going to continue to see the new norm; and as I said, it’s also going to come down to convenience as consumers now realise that online can be very quick and convenient,” he said.

“Of course, people still want deep, immersive in-store experience. And I, absolutely, think that is going to be very, very important. But they’re going to want to have this omnichannel solution where potentially it is offline, but significantly, it is going to be online as well.”

Rise of the Gen Zs On the consumer side, the two age groups that retailers need to keep their eyes on are the Millennials and the Generation-Zs, not just because they are more tech-savvy, but also because of their higher-income coupled with their willingness to spend. Euromonitor noted brands need to develop agile and user-friendly online marketing and retailing channels to better tap into these consumer groups.

Based on KMPG China’s estimates there are around 300 million millennial consumers in China and roughly the same number of Gen Z, who could be going online as well.

“They’re really into social media, they love live streaming. And equally, they are also looking at you through a new lens as they strongly believe in everything around purpose areas, such as ESG (Environmental, Social, and Governance),” Bailey said.

Retailers, he advised, need to be ready to deal with this consumer group, particularly Gen Z, who have a far greater focus on the health and wellness of consumers and the planet in terms of selecting their products.

“These new Gen Z consumers are very digitally minded, tech-savvy, and very media savvy. And they’re also far more socially aware. So, they’re now asking a lot of questions about brands, and challenging the brands as well,” he said.

“I don’t think they have any issue with calling out those brands.”

In its Retail’s Realignment report, conducted with GS1 HK and HSBC, KPMG found that 46% of businesses are looking at developing a new strategy in the next two years

The 2022 retail sales outlook will depend largely on the reopening of the border between mainland China and Hong Kong

Retail in the year ahead The 2022 retail sales outlook will depend largely on the reopening of the border between mainland China and Hong Kong. PwC’s Cheng noted that if the border reopens in the third quarter of the year onward, retail could increase by at least 10% to 15%, compared to 2021. But, if the border remains closed, Cheng noted, that retail will likely see a “very limited increase” between 2021 and 2022.

Hong Kong’s retail sector was supported by the improved sentiment of local consumers as well as the easing of restrictions imposed on restaurants and food and beverage retailers. The government’s $5,000 consumption voucher scheme also stimulated consumer spending. Using the baseline population of about 7 million, Cheng estimates the vouchers cost the government some $35b, which is almost equivalent to 10% of annual retail sales.

However, Cheng said the entire amount may not have gone to Hong Kong’s retail market, as the HK$5,000 voucher was likely used to purchase daily consumer goods. “It will only partly contribute to additional spending, as most consumers are treating this as a separate payment option, rather than an incentive to increase spending on high-value items like a luxury,” he said, noting that by his rough estimates only half of the HK$35b fell to Hong Kong’s retail market.

In a report, Euromonitor International forecast that retail sales in Hong Kong could reach $518b in 2022.

According to its Retailing 2022 report, the doubledigit growth will be driven by the expected recovery of tourists in the second half of the year as well as the strong advertising and marketing campaigns of retailers to stimulate domestic consumption.

Moreover, retail sales growth will also benefit from the rapidly growing e-commerce and online marketing campaign that will likely continue in 2022.

Euromonitor International’s Yum expects the retail sector will continue to rethink its retail focus in terms of online or offline, as borders are expected to reopen and bring in more tourists.

“Once the tourism flow returns, the investment would need to, once again, flow back to store-based retailing,” Yum said.

“This does not necessarily mean that the pre-COVID style of store-based retailing would return, instead, how retailers and brand owners could add additional functions or experiences through physical and digital enhancement in physical space, combined with the e-shops and online retail strategy, would be the key challenge to them in 2022.”

HONG KONG BUSINESS | Q1 2022

21

INDUSTRY BRIEFING: PROPERTY

Hong Kong property market ‘on the cusp of full recovery’ in 2022: JLL

Thanks to the strengthened demand in the retail and industrial property sectors since 2021

The office market of Hong Kong has entered the last phase of the current down cycle

P

roperty analysts all have the same general outlook— the Hong Kong property market will see recovery in 2022, following the sustained economic growth in 2021; and despite the threats of the Omicron variant.

CBRE Executive Director Marcos Chan said that the higher chance of partial resumption of cross-border travel with Mainland China would boost the retail and business activities in the city, whilst business spending will remain “largely prudent despite increasing levels of corporate activity.

“The positive business outlook will see leasing demand strengthen in the retail and industrial property sectors and result in moderate rental and capital value growth, but the office sector is bounded by the upcoming supply boom, with rents poised to only stabilise in 2022 after a sharp decline from 2019 to 2021,” Chan said.

JLL, meanwhile, said that the residential and industrial centres have overcome capital value corrections in 2020. It added that the whole property market of Hong Kong is “on the cusp of full recovery in 2022,” but at a moderate level.

Office rents enter recovery The office market of Hong Kong has entered the last phase of the “current down cycle and is on the cusp of recovery in the near future,” Alex Barnes, head of Agency Leasing at JLL Hong Kong said, adding that overall it is expected to rise 0% to 5% next year.

Gross leasing volume is seen to improve next year, 22

HONG KONG BUSINESS | Q1 2022

The office sector is bounded by the upcoming supply boom, with rents poised to stabilise in 2022

supported by the resumption of travel with mainland China, he said, but “the vacancy rate will edge higher as there will be a considerable amount of new office supply slated for completion in 2022.”

In the first 11 months of 2021, net absorption in the overall Grade A office market of Hong Kong was at -643,400 square feet (sq. ft.) but there was more expansion in the recent month and some tenants retract surrendering of their office which shows improving sentiment, JLL said.

The overall vacancy rate was at 9.6% by end-November from the peak of 9.8% in September.

Amongst the submarkets, JLL expected rent in Central is the strongest, rising by 5% to 10%, following a 1.2% rebound after a 3.2% dip in the first half of the year. Rent in the Tsimshatsui submarket is also seen to increase up to 5% in 2022, whilst Wanchai/Causeway Bay, Hong Kong East, and Kowloon East were seen to decline by around 5%.

Wendy Lau, executive director and head of Hong Kong Office Services at Knight Frank, said in a report that they also expect Grade-A office rents to increase 5% to 10%, especially in Central, Admiralty, and Wan Chai districts.

Lau also said that there will be a new supply of over 2.8 million sq. ft. of office space in the next two years, most of which will be in Central and Quarry Bay. Knight Frank also said that whilst the pandemic and work-from-home arrangements will affect the office rents, its global (Y)our Space Report showed that around 70% of Hong Kong enterprises plan to increase their office footprint in the next three years.

Cushman and Wakefield Executive Director and Head of Office Services Hong Kong Keith Hemshall said that overall availability of Grade A office space is expected to increase to 16% to 17% by year-end and average rents to drop by 1% to 3%, with the completion of over 2 million sq. ft. of office space Two Taikoo Place in Hong Kong East, 98 How Ming Street in Kowloon East, and Airside atop Kai Tak MTR Station.

“That said, we expect that anticipated border reopening will drive an improvement in the economy and the demand for office space will increase with an estimated net take-up of 300,000 – 500,000 (net floor area) for 2022. We expect banking & finance, insurance and business centre/coworking to continue to be active,” he said.

Leasing demands Alan Yau, partner and head of Real Estate Hong Kong at KPMG China, said leasing demands will continue to improve for Hong Kong next year. Despite the continuing adoption of a hybrid model of work set up in some companies, Yau said that small and medium-sized organisations are still relying on physical setup.

For the office sector, leasing momentum is expected to improve if cross-border travel with Mainland China

INDUSTRY BRIEFING: PROPERTY partially resumes, despite the uncertainties posed by the spread of Omicron, said Ada Fung, executive director, head of Advisory & Transaction Services–Office Services at CBRE. Grade A office rents are expected to remain “largely stable” through the year.

Overall rents in Hong Kong will remain flat, following a decline of 7.3% in 2021. Greater Central and Kowloon East were the only submarkets expected to see an up to 5% increase in rental change, whilst Wanchai, Causeway Bay, Hong Kong East, and Tsim Sha Tsui were seen to decline up to 5%.

‘Fairly resilient’ industrial sector Samuel Lai, senior director for Advisory & Transaction Services–Industrial & Logistics at CBRE, said there were more expansion requirements in the industrial sector in 2021 compared to the previous year, driven by third-party logistics (3PL) operators that accounted for over 50% of the leasing activity.

“With a possible demand recovery from retail-related trades, leasing demand from 3PLs is expected to pick up. We also see a sustained and growing leasing demand from the tech and healthcare sectors,” Lai said, adding that industrial property is set to be the best performing commercial sector with limited space available for rental growth this year.

The warehouse sector rents rose 3.9% in 2021 and were expected to increase by 5% to 10% this year. Flatted factories and industrial or office sector rents rose by 1.3% and 0.2%, respectively, last year. New supply for the warehouse sector is seen to reach about 1.4 million sq. ft. in 2022, compared to 90,000 sq. ft. in the previous year.

Yau also noted that industrial property and logistic warehouses “continue to be fairly resilient” because of e-commerce.

“I think high-end warehouse space in Hong Kong is fairly limited,” he said. “The quality, convenient locations for logistic warehouses [are] highly sought after. That also implies the rent for these logistic warehouse spaces will be

With a possible demand recovery from retail-related trades, leasing demand from third-party logistics is expected to pick up

Investors are reallocating their capital to incomeresilient assets or properties that have the potential to be repurposed

going up.”

He also noted that in recent months, old logistic warehouses are being converted into data centres and cold chain storage space, noting that data centres would be a “very hot property” in the next few years.

JLL noted that total investment volumes in Hong Kong rose 52% YoY to $96.8b in 2021, with investors reallocating their capital to “income-resilient assets or properties that have the potential to be repurposed.

This boosted investment volume into industrial properties by 217% YoY to $33.6b, accounting for 35% of total investment volumes and the highest across all property sectors.

Improving rents for retail Vacancy rates of High Street shops and Prime shopping centres are expected to improve next year, forecast to rise 5% to 10% and 0% to 5%, respectively, according to JLL. This is following a decline in preliminary rent value for High Street shops in 2021 at 6.9%, and 2.1% for Prime Shopping Centres.

“We believe the overall rental correction has reached the cyclical bottom, though some adjustments will likely continue in some areas of major shopping districts to accommodate the structural change of the market,” Jeannette Chan, Senior Director of Retail at JLL in Hong Kong, said.

JLL noted that the improved leasing sentiment in Hong Kong has led retailers to commit to longer lease terms and more brick-and-mortar shops at affordable rents.

Whilst luxury brands had been the “most aggressive tenants over the decade, there has been a structural change in the retail dynamics in the market switching to midto-mass market retailing from luxury, it said. JLL added that luxury fashion and accessories brands are reducing their flagship stores and some are looking at opportunities through pop-up stores.

Cushman & Wakefield’s Executive Director, Head of Retail Services Hong Kong Kevin Lam said the consumer market is expected to improve further in 2022 following the gradual recovery of the domestic economy and employment rate, with vacancy seen declining. He added that overall high-street rents will “likely recover” more in the first half of the year between 2% to 5%, with the Central district recovering by 5% to 8%.

The reopening of borders will also support major brands’ expansion plans, he said. “​​However, a net population outflow is expected at the initial stage of the border reopening, bringing short-term pressure on retail sales, and particularly impacting food and beverage (F&B) businesses during weekends. Accordingly, the return of tourists and their related consumption activities will drive recovery in the longer term. The wellness and athleisure trends we saw driven by the pandemic are expected to continue in 2022.”

CBRE also expected retail rents to increase by about 5% if there will be no major outbreaks that will lead to tightening of social distancing which could pull back leasing demand, according to Lawrence Wan, senior director for Advisory & Transaction Services–Retail. He added that F&B, particularly Japanese cuisine, is still the most active sector in HONG KONG BUSINESS | Q1 2022

23

INDUSTRY BRIEFING: PROPERTY the leasing market last year.

“Mass market brands and necessity item retailers have been relatively more positive. Improved market sentiment has seen some landlords holding a firmer stance in terms of rental asking. Therefore, vacancy might stay high as the expectation gap between landlords and tenants widens,” he said.

New supply in prime shopping malls was expected to reach 1 million sq. ft. in 2022 from 184,200 sq. ft. in 2021, it said.

KPMG’s Yau said that the retail market is “fluid at the moment,” with malls in prime locations filled compared to 12 to 18 months ago. However, for the luxury retail sector space, there is still significant pressure to try to downsize operations unless international travel restrictions are lifted. “​​The projections of the restriction from international travelling and the uncertainty arising from when the border will be open creates a lot of unfavourable factors for these retailers to continue to expand their footprint especially in a very expensive retail environment in Hong Kong,” he said.

For Knight Frank’s Helen Mak, senior director and head of retail services, rents for the retail market are seen to stabilise in 2022, adding that it expects experiential retail to become the “next biggest trend” as retailers can not rely on products alone to steer sales.

Rise in residential rents, price With the economic recovery, preliminary data showed that capital values of mass residential rose by 4.4% in 2021, whilst luxury residential increased by 7.2%. The luxury residential rents also increased by 3.2% during the period due to upgrading because of the work-from-home arrangement.

JLL said residential sale transactions rose about 28% at a monthly average of 6,374 deals from January to October, from the monthly average of 4,990 deals in the previous year. “If the trend continues, the average monthly transaction volume will reach the highest since 2013.” JLL Hong Kong Chairman Joseph Tsang said that for 2022 mortgage rates are expected to remain low despite the possible rise of interest rate.

“New private housing supply will remain low in the medium term, with private residential units that have commenced construction dropping noticeably since 2020 after the government changed the public to private housing supply ratio to 70:30 in 2018. It will support the capital values of mass residential to stay firm and grow 0% to 5% next year, whilst luxury residential prices and rents will also climb 0% to 5%,” he said.

For Knight Frank, the residential market in Hong Kong is expected to grow 3% in prices in 2022, following the recorded largest increase in 2021 since 2019. Martin Wong, director and head of Research and Consultancy in Greater China also said that the anticipated opening of the border to mainland China will also allow room to boost the luxury housing prices, increasing by 3% to 5% next year.

“Hong Kong will continue to maintain a low-interest rate environment in the next 12 months, encouraging more buyers to enter the market, with some second-hand purchasers moving into the primary market,” Wong said.

24

HONG KONG BUSINESS | Q1 2022

The retail market is “fluid at the moment,” with malls in prime locations filled compared to 12-18 months ago

Rents for the retail market will stabilise in 2022, and experiential retail will become the “next biggest trend”

Knight Frank expected mass residential prices to increase 0% to 3% and rents to climb 2% to 3%, whilst luxury residential prices will increase 3% to 5% and rent by 2% to 3%. Wong also said that total transactions volume in 2022 may fall back to 60,000 to 65,000, with the primary market making up 30% of it.

JLL’s Tsang also said that with the Northern Metropolis development plan, there is a need to develop an additional gross residential floor area of 400 million sq. ft. to meet the government’s vision of housing 1.54 million people.

Cushman & Wakefield Director in Hong Kong Keith Chan said they expect the residential market to continue to prosper in 2022, following an active market in 2021, reaching nine-year high transaction volumes. They expect around 18,500 private units available.

“The high base number of 2021, combined with a shrinking stock of small-value units, will likely diminish the 2022 transaction volume by around 10% YoY. However, an improved economic environment will likely drive a further rise in home prices. We anticipate home prices to climb by around 5% to 10% next year. Luxury homes in urban areas will likely benefit more,” he said.

KPMG’s Yau also said that Hong Kong remains to be one of the most expensive residential markets globally. There is still demand in New Territories where presale is very active.

Investments Antonio Wu, Knight Frank’s head of Capital Markets, Greater China, said that the overall investment climate “picked up” in 2021 with a total of 136 deals made, compared to 97 in 2020, adding that en bloc industrial and retail properties accounted for the biggest percentage of the $70b transactions. Hotel property also saw strong sales activity in the second half of the year, he said.

“Moving forward to 2022, we believe there will be growing investment interest in funds/private equity funds, residential, data centres and hotels. We foresee Chinese mainland developers selling properties due to

INDUSTRY BRIEFING: PROPERTY their financing positions, which will increase supply in the market,” he said.

Meanwhile, Oscar Chan, JLL Hong Kong’s head of Capital Market stated that they expect hotel assets to remain as the focus of investors in 2022 and aged assets for compulsory sales. Sales of hotels, particularly mid-low end hotels with easy access to MTR station were active in 2021, with investment considerations for en bloc hotels skyrocketing by 198% YoY in 2021 as investors mull converting them into rental housing, according to JLL. Chan said the sales momentum of industrial properties will be moderate “as the capital values have been lifted considerably by strong capital inflows this year.” Its capital values for 2022 are expected to increase from 0% to 5%.

Grade A offices capital values, meanwhile, are also seen to rise 0% to 5%, whilst High Street shops will rise 5-10% in 2022 due to rental recovery.

Cushman & Wakefield’s Head of Capital Markets Hong Kong Tom Ko said that total major transactions volume in 2022 to surpass 2021 levels and reach 200 deals worth $100b, with industrial buildings, residential development sites and multi-family conversions to be the “three key pillars” of the investment market in 2022.

He also said that the demand for industrial buildings, which reached a historic high last year will continue in 2021.

He noted that investors worldwide were attracted to multifamily conversions, such as serviced apartments and hotel properties, which were expected to benefit from the revival of tourism, adding that the proposed lower threshold for compulsory sales will “trigger to more development site transactions in 2022.

Challenges There were a number of international funds that have completed new rounds of fundraising of their investment cycle in the next few years, following a muted activity of over a year. Property firms, however, will be competing in securing limited stock of assets in the city, Cushman & Wakefield’s Chan said.

“The challenges, therefore, come from the ability to make competitive offers, and timely decisions,” he said. “It is

The spread of Omicron would have a significant impact for office and retail leasing as tightened social distancing measures may lead to lower retail sales prospects

Hotel assets will remain the focus of investors in 2022 and aged assets for compulsory sales

advised that property firms should form a clear investment objective and target beforehand, and structure deals in their most comfortable way, with the right balance of equity and debt.”

Yau, meanwhile, said that liquidity is of “paramount importance” for property firms. He said that they should make sure to have enough liquidity to service various demands like capital expenditure, interest, and loan repayment burden. Creating flexibility in leases is also a key in managing assets for landlords, he said.

“I think developers will try to use different strategies to offload these inventories. For instance, they allow buyers to lease for the first maybe two to three years before the actual property is handed over. So these create a lot of flexible arrangements to buy or to commit to acquiring properties from developers. And that sort of flexibility will continue in the next year,” Yau said.

Maintained positive outlook The coronavirus situation may also come into play and remain to be amongst the key risks for 2022 for the sector, he said.

Despite the threats of the spread of the highly transmissible Omicron variant, property analysts maintained their projection of improving rents across the property sectors.

Martin Wong, director and head of research and consultancy for Greater China at Knight Frank said the spread of Omicron would lead to a reduction in residential transaction volume in the short term due to reduced viewing/inspection activities and slowed down launch of new sales project, but the impact on price will be limited as seen in previous increase in cases.

However, there would be a more significant impact for office and retail leasing as some companies may delay their new leasing or expansion and tightened social distancing measures may lead to lower retail sales prospects. But the impact on office and retail rents would be limited, Wong said, as a reduction in rent “would not help those businesses to take up space if they have concern on their business prospects.”

“Based on the above reasons and given Omicron is not widely impacting the Hong Kong community as in the other cities, we maintain our previous forecasts,” he said.

Nelson Wong, head of research at JLL in Greater China, also said that they maintain their projections, but noted that the property market in general “will likely bump along the bottom longer instead of edging up,” depending on the longevity of the fifth wave.

He said that the retail sector may be hit harder because of the “disproportionate disruptions” it may face, whilst the residential sector will be less active due to stricter distancing measures affecting developers’ sales campaigns.

The office sector, meanwhile, would be the least effective, Wong said, noting that the positive momentum especially in the Central “will likely continue unless this fifth wave is considerably prolonged.

Cushman & Wakefield’s Chan also believes that “the directions remain largely unchanged” but the Omicron breakout would prolong the recovery process.

HONG KONG BUSINESS | Q1 2022

25

INDUSTRY BRIEFING: LUXURY GOODS

The Chinese companies in the Top 100 that saw a double-digit decline in luxury goods sales for 2020 included Chow Tai Fook Jewelry Group Limited

HKSAR joins the Global Powers of Luxury Goods Top 100 Chow Tai Fook Jewelry Group from China/Hong Kong SAR was amongst the top 10 luxury goods companies on Deloitte’s list.

T

he share of China and Hong Kong in the top 100 luxury goods sales increased by 1.8 percentage points to 8.9% in the financial year 2020, according to Deloitte’s Global Powers of Luxury Goods 2021 report.

With the entry of China National Gold Group Gold Jewellery Co. and the Guangdong CHJ Industry Co., a total of nine China (including Hong Kong Special Administrative Region [SAR])-based vertically integrated jewellers joined Deloitte’s list for 2021.

However, the nine companies reported a 12.3% year-on-year composite decline in 2020 luxury goods sales revenue, with only Lao Feng Xiang achieving growth, Deloitte data showed.

“Seven of the nine Chinese companies experienced doubledigit percentage falls, due not only to the COVID-19 pandemic, but also to a surge in the international gold price that dampened the retail demand for gold products, and 26

HONG KONG BUSINESS | Q1 2022

The clothing and footwear sector accounted for the largest percentage of sales in the Top 100

weak performance in Hong Kong SAR as a result of social unrest and a contraction in the local economy affecting tourism and local sales,” it said, but noted that the seven largest companies remained profitable.

The Chinese companies in the Top 100 which saw a double-digit decline in luxury goods sales for 2020 were Chow Tai Fook Jewelry Group Limited (China/HK SAR), China National Gold Group Jewelry Co. Ltd. (China), Chow Sang Sang Holdings International Limited (China HK/SAR), Luk Fook Holdings (International) Limited (China/HK SAR), Chow Tai Seng Jewelry Co., Ltd. (China), Tse Sui Luen Jewelry (International) Limited (China/HK SAR), and Zhejiang Ming Jewelry Co., Ltd. (China).

Guangdong CHJ Industry Co., Ltd (China), meanwhile, saw a singledigit decline of 7.7% in luxury goods sales.

The composite net profit margin for the China-based companies was at 4.2%, 1.7 percentage points lower

than last year.

According to Deloitte, the top 100 companies have an aggregate luxury goods sales of $1.96t (US$252b) in 2020, lower than the about $2.2t (US$281b) in the previous year following the, reflecting the impact of the pandemic which lead to the closure of stores, shifts in consumer demand, and supply chain disruption, amongst other factors.

France accounted for the largest share in the Top 100’s percentage of luxury good sales at 28.1%, followed by the US at 18.8%, Switzerland at 12.6%, Italy at 11.3%, the UK at 9%, Japan at 4.2%, Germany at 1.2%, Spain at 1%, and other countries at 4.9%.

The nine markets were included in the geographical analysis given the “high concentration” of luxury goods companies headquartered in Europe, the US, and the largest markets in Asia, Deloitte said. Whilst sales for many companies come from outside their country of origin, it said that all of the companies’ sales will be attributed to the company’s domicile country.

Luxury goods in the report referred to goods for personal use such as designer clothing and footwear, bags and accessories including eyewear, jewellery and watches, and prestige cosmetics and fragrances. The top 100 were included according to their consolidated sales of luxury goods in 2020.

The clothing and footwear sector accounted for the largest percentage of sales in the Top 100 at 33.6%, followed by jewellery and watches at 28.4%, cosmetics and fragrances at 17.4%, multiple luxury goods at 15.7%, and bags and accessories at 4.8%.

In the top 10 Chow Tai Fook Jewelry Group Limited from China/Hong Kong SAR fell to Top 10, dropping two places from the 2019 list as its luxury goods net sales declined by 14.7%, reaching about $56b (US$7.2b).

“The group had a stable performance in the first half of FY2020, supported by steady growth in mainland China, but sales fell

INDUSTRY BRIEFING: LUXURY GOODS Luxury goods companies are putting more emphasis on adopting digitalisation and sustainability goals, which are driving fashion-tech investments

Top 100 share by country, FY2020

Source: Deloitte

in the second half, due to a surge in the international gold price that dampened the retail demand for gold products, a weak performance in Hong Kong SAR, and the impact of the COVID-19 pandemic in [the fourth quarter] (Chow Tai Fook’s financial year-end was end-March 2020),” Deloitte said.

Deloitte added that the company shut about one in five of its Hong Kong stores, the majority of which are in the prime tourist areas because of the ongoing demonstrations and protests, and the declining number of visitors from Mainland China.

Chow Tai Fook Jewelry Group revenue also declined in all product categories, with platinum/karat gold products delivering the best performance due to the launches of more contemporary collections and fixed-price gold jewellery.

Meanwhile, its gold products slipped 16.3% mainly due to gold price volatility and gem-set jewellery declined 17.5% “in the challenging macroeconomic environment.”

Deloitte also noted that the group continued expanding its owned and franchised retail network, opening over 700 new points of sale in Mainland China, bringing its total number of stores by end-2020 to 3,850 and another 1,139 shop-inshop/store corners. It also saw its e-commerce retail sales grow by 3.4%.

The group completed its

acquisition of Enzo Jewelry in January 2020. Enzo Jewelry has 59 points of sale in Mainland China and is also present across e-commerce platforms there including Tmall, JD.com, and VIP.com.

France-based LVMH Moët Hennessy-Louis Vuitton SE topped the Top 100 list of luxury goods companies with $264.6b (US$33.98b) luxury goods sales in 2020, followed by another France-based company Kering SA with $116.3 (US$14.9b), and USbased company The Estée Lauder Companies Inc. with $111.3b (US$14.3b).

Swiss company Compagnie Financière Richemont SA ranked fourth with $102.66b (US$13.18b) sales, France-based L’Oréal Luxe came fifth with $90.35b (US$11.6b) sales, and the UK-based Chanel Limited ranked sixth with $78.7b (US$10.1b) sales.

Italy’s Essilor Luxottica placed sixth with about $68.5b (US$8.8b) sales, whilst US’ PVH Corp. climbed a place to rank eighth with around $65.3b (US$8.4b), and France’s Hermès International SCA rose two places to ninth place with about $56.7 (US$7.3b) sales, according to Deloitte.

‘Breakthrough’ luxury Deloitte said luxury goods companies are also undergoing changes in their operations and are

putting more emphasis on adopting digitalisation and sustainability goals in the industry, which “are driving fashion-tech investments.”

“Increasingly, luxury goods companies are changing their approach and mindset, incorporating sustainability and digitalisation into their long-term strategies, to align with consumers’ demands and new regulatory requirements,” it said.

“They are focusing more on sustainability in the design and production of luxury goods, and at the same time are accelerating the adoption of digital solutions to engage with consumers and deliver luxury shopping experiences using technology,” it added.

Setting environmental targets Deloitte said luxury goods companies are setting environmental targets for the future, prioritising the offsetting of carbon emissions, noting that ways to go about this are by being more sustainable in design, production, distribution, and communication. They are also looking at using technology to develop environmentally-new products.

“Luxury companies are exploring the use of biomaterials, not only for apparel or shoes, but also for cosmetics and beauty products. The use of biotech could give a boost to sustainable production methods, reducing the negative impacts of sourcing raw materials (intensive farming, extraction, and fishing),” it said.

The companies collaborate mostly with startups that are specialising in biotech, it said.

Deloitte noted that biomaterials, natural material, or synthetic material created through interaction with biological systems, are already being used in other industries for different uses. It noted that technology is used to create new material with minimal environmental impact but has great material output and design.

It also added that the growing market for pre-owned “vintage” watches is one way for the companies to engage with new customer HONG KONG BUSINESS | Q1 2022

27

INDUSTRY BRIEFING: LUXURY GOODS Luxury brands are sold online to consumers through different business models

Gen Alphas are expected to become a generation of consumers with large spending power and the key to future success for luxury goods brands

Source: Pudae eatumque sunt

segments and foster circularity or reuse. It will also provide consumers with a sustainable and accessible way of buying luxury watches.

Luxury goods companies are also delving into the market for non-fungible tokens (NFTs) which represent a digital item or asset through blockchain technology, Deloitte said, noting that it presents several opportunities for luxury companies.

NFT serves as a tool to verify the authenticity of an item as blockchain helps trace the origin of an item

including its history and previous owners, allowing a product to be easily transferred, traced, and resold.

It can also be used to sell digital collectibles such as limited edition or “one-of-a-kind” pieces of art, it said.

The tokens were also being used to create digital skins for avatars in video games, a popular activity for Gen Zs. Deloitte said that an important aspect of “virtual luxury” is its viability and accessibility.”

“Entering the gaming world is a way for luxury houses to speak to the younger generations, who will

providers such as WeChat miniprograms which could help deliver eloitte said that 2021 was a “high quality, flexible, reliable, disruptive year that has “driven brand-centric e-commerce business luxury e-commerce past the models,” were also amongst the key tipping point” for it to become a vital factors. part of the omnichannel distribution Deloitte said the reluctance of strategy of global players. luxury brands to sell online and rely The key factors that have driven on physical boutiques and multie-commerce strategies in the sector brand third-party retailers was due include the growing consumer to their desire to “desire to retain demand for luxury e-commerce due control over the defining elements to the pandemic and the increasing of the luxury identity of their brands, importance of younger consumers such and their lack of capability to deliver as Millennials and Gen Z for luxury the defining elements online. goods sales.

Farfetch and YOOX NET-AIt also cited China’s rapidly growing PORTER Group were the leading share of global luxury sales and other e-commerce players in Western new geographic opportunities and markets, whilst Alibaba’s Tmall the partnerships with major luxury Luxury Pavilion is the leading player e-commerce players and social media in China and other Asian markets.

LUXURY E-COMMERCE

D

28

HONG KONG BUSINESS | Q1 2022

be their most important customers in the coming decades and creating appeal by modernising their brands,” it said. “Collaborations between luxury goods firms and gaming companies offer the opportunity to create parallel streams of revenues thanks to capsule collections that can be found first in a game and are then sold in real life.”

Luxury industry players are now gearing up for their next steps by studying Gen Alpha or those born since 2010, as Gen Z has already entered the market and brands are already accustomed to dealing with them and the Millennials.

Deloitte said the generation is composed mostly of children of Millennials and are raised according to their parents’ values, noting that they are living in a “digitalised economy and a globalised world.”

“Gen Alphas are expected to become a generation of consumers with large spending power and the key to future success for luxury goods brands may lie in gaining their loyalty from an early age,” Deloitte said.

“As the consumers of the future who were born in a digital age, Gen Alpha will be exposed to luxury brands from a very young age through social media, through their peers, and through the habits of their millennial parents,” it added.

Top 10 luxury goods companies by sales, FY2020

Source: Deloitte

E] T6O7PNDF [TZ M:@3@ [:AK6AJ:P

ib% ^*1*"% ' `%"%d x'".n% `%$n1b&+#v M:< 86 6 :O: 69:P 78 87O:A@73 6K K6A T6O7PNDF [TZN y; 73 M:@ Z:@y 3@ 78 6y3 B? J78y3:@

,/+*1 &"%!%1'.

IHEB BBD? FEHG <;A:=9A:8:37<@5<64 >>>59A:8:37<@5<62

"$!#

HONG KONG BUSINESS | Q1 2022

29

COUNTRY REPORT: HONG KONG

Where is Hong Kong now in its carbon neutrality target?

After a slow start, the City is now implementing several greenhouse gas abatement measures as it aims to be carbon neutral by 2050.

H

ong Kong has been introducing measures to stabilise its carbon emissions, carefully tying its economic activities into its environmental goals of achieving carbon neutrality before 2050.

Moreover, the Hong Kong government has implemented several new strategies on waste management, energy supply, and green building, amongst others, as part of this ambitious undertaking.

Since 2000, the region has seen an upward increase in greenhouse gas emissions, despite its concerted efforts to cut down and stabilise them since the late 1990s.

A report from the Hong Kong Legislative Council showed that carbon emissions in the region peaked in 2014, having increased to nearly 45 million tonnes annually.

Amongst the sources of greenhouse gas emissions in the region, power generation has always accounted for the highest percentage. Power accounted for only about 0.8% of Hong Kong’s total energy usage between 2011 and 2017.

Coal also remains the most

Power generation has always accounted for the highest percentage of greenhouse gas emissions in Hong Kong

dominant fuel in meeting power demands, still accounting for about 25% of the fuel mix despite its declining share.

Whilst Hong Kong’s carbon intensity rate is still on a high, several efforts have been made by the government to stabilise it and in time - lower it. In 2010, it made a pledge to cut carbon intensity by half to 60% over the next decade, compared to its 2005 level. Hong Kong pledged further to bring down carbon intensity by at least 65%, whilst making a new commitment of reducing per capita emissions by at least 37% before 2030.

However, the region is still far from those policy targets. It only managed to have a 35% decrease in carbon intensity, and an 8% decrease in per capita emissions on actual performance between 2005 and 2017. As such, the Hong Kong government has started making more urgent policy changes, including switching the fuel mix in its electricity generation.

One of Hong Kong’s main measures to cut down carbon emissions is to increase the share of

The Hong Kong government is adjusting its power generation fuel mix in favour of renewable sources

30

HONG KONG BUSINESS | Q1 2022

renewable energy in the mix. This includes the deployment of more offshore wind farms, solar power, waste-to-energy plants, and also increased electricity imports from mainland China.

Increased reliance on renewables and gas Data from the Legislative Council revealed that renewable energy only accounted for about 0.8% of total energy usage between 2011 and 2017.

With this low share in mind, the government, together with local power firms CLP Power and Hong Kong Electric, introduced the feedin tariff scheme in 2017. This has been used as a way to encourage the private sector to invest in renewables. Under the scheme, both business and individual customers are incentivised to install solar photovoltaic or wind power systems at their premises for selling their renewable energy output from HK$3 to HK$5 per kWh. Furthermore, research from the Asia Pacific Economic Cooperation reveals that the generation mix in Hong Kong is also going to change significantly in the coming years, with the government planning to raise the share of natural gas in the electricity generation to 50%. Coalfired generation is expected to be phased out by 2035, and gas-fired generation will expand from 35% of the fuel mix in 2016 to 78% in 2050.

Both CLP and HK Electric are actively contributing to this target.

CLP’s Black Point Power Station currently comprises a newly-built 550 MW unit, five 337.5 MW units, and three 312.5 MW units, with an additional 550 MW unit currently under construction. The new 550 MW unit allowed CLP to achieve its target of about 50% gas-fired electricity generation, in line with the government target, last year.

Meanwhile, HK Electric’s Lamma Power Station has recently commissioned its L10, a 380 MW gas-fired generating unit, which has increased its gas-fired electricity generation for its customers by about 50%, which is also in line with the government target. Two more

COUNTRY REPORT: HONG KONG Wong said during the webinar that the region has been exploring various solutions to combat climate change, which includes “seeking more zero-carbon energy, adopting energy-saving technologies, promoting the wider use of electric vehicles, and enhancing waste reduction and recycling, such as optimising the development of advanced wasteto-energy/resources facilities to further turn waste into valuable resources.”

Projected energy supply by fuel, 2000-2050

Source: APEC Energy Demand and Supply Outlook, 7th edition.

380 MW gas-fired generating units, L11 and L12, are currently under construction.

However, the two power firms will have to complete the construction of the three new gas-fired generating units by 2024. This directive is part of a memorandum on new caps on annual emission allowances, as approved by the Legislative Council.

This will bring the proportion of local gas generation to around 57% of the total fuel mix for power generation by 2024.

The two power companies will also continue to acquire low-emission coal for electricity generation and maintain the performance of emission control devices so as to reduce emissions from coal-fired generating units.

The renewables push continues The Hong Kong government is partly limited in its quest for greater renewable energy generation, by its lack of land and other development constraints. But it has managed to maintain progress over the last few years.

In his latest Budget speech, Finance Secretary Paul Chan said that the government would set aside an extra HK$1 billion for more than 80 projects to install additional small-scale renewable energy systems on government buildings and installations, and a HK$150 million fund to conduct energy audits and install energy-saving appliances for non-governmental

organisations.

All these measures can help Hong Kong advance towards its carbon neutrality target, and will also create jobs,” Chan said.

Hong Kong’s leaders have also shown support for the development of offshore wind farms, with Hong Kong Electric planning to install offshore wind turbines near Lamma Island with a total generating capacity of 100 MW. These are expected to produce 175 gigawatthours of electricity per year once online.

“Analysis of the wind resource indicates that the site is feasible for development of an offshore wind farm,” the company has told investors. “The wind monitoring campaign is still ongoing aiming at collecting additional data for optimizing the offshore wind farm design.”

CLP is also considering the feasibility of constructing an offshore wind farm in the southeastern waters of Hong Kong.

“The project has been under consideration for some time, but recent advances in the technology of wind turbine generators and an increasingly mature supply chain in the region make it appear more feasible,” it said.

In March last year, Environment Secretary Wong Kam-sing also spoke at a webinar to discuss opportunities arising from Hong Kong’s carbon neutrality pledge to the European business community.

Fok Kin Ning

Richard Lancaster

Moving towards the target With the Hong Kong government actively aiming to reach carbon neutrality by 2050, the two power companies are proactively welcoming this undertaking.

CLP aims to support the region in its target through promoting the development of renewable energy, helping customers improve their energy efficiency, and closely monitoring the latest technological developments in new zero-carbon energy.

“We are seeing a clear shift from incremental improvements to an acceleration of the desire for change. This will create further opportunities given our strong existing position in the market,” CLP CEO Richard Lancaster said in the company’s 2020 report.

On the other hand, HK Electric aims to engage with the government on the best way forward, including exploring the wider use of zero-carbon energy and carbon reduction technologies.

“Sustainability is firmly integrated into our ethos and we have now reorganised our structure with a new Sustainability Committee to steer our efforts on this front,” HK Electric chairman Fok Kin Ning said in the company’s 2020 report.

As Hong Kong moves forward, it must continue to promote renewable energy and seek innovative solutions to its constraint in land, both of which would be beneficial to reach their target.

At the same time, the government must also work further with its stakeholders to overcome its issues on attaining carbon neutrality.

HONG KONG BUSINESS | Q1 2022

31

INTERVIEW

Direct power purchase agreements should be scaled up: Asia Clean Energy Partners But doing so poses financial risks to the operator due to the longevity of contracts.

T

he lack of feed-in tariffs or regular competitive auctions serves as a barrier to the clean energy transition in the region, and this can be at least partially addressed through a direct power purchase agreement (PPA).

Hong Kong Business spoke with Asia Clean Energy Partners’ Managing Partner Peter du Pont on how DPPAs are done and why these should be scaled up in Southeast Asia in response to the lack of open access to grid generators.

Du Pont has over 30 years of experience in sustainable energy and efficiency both in the US and Asia. He is Southeast Asia Regional Coordinator for the Private Financing Advisory Network and has previously served as Senior Climate Change Advisor for the US Agency for International Development in Asia.

In a May report, Asia Clean Energy Partners found that the Asia-Pacific region is amongst the most challenging markets in the world for businesses seeking to shift to renewable energy. Is this still the case in the region and what are the remaining challenges for businesses switching to renewables?

Yes, there are continued barriers to the scale-up of renewable energy in Southeast Asia. It’s not easy to get renewable energy installed in a way that you can use it on-site and also sell it to the grid. You can install solar rooftops in most countries in Southeast Asia, but you cannot always sell the excess of the solar capacity onto the grid, and this creates a problem.

In Thailand, where there’s not a feed-in tariff in place for large commercial and industrial customers, there’s a huge market—the “behind-the-meter” market, where solar companies come in, and they install systems, with say 300 kilowatts (KW) or 500KW of solar panels on the rooftop, and they cannot export to the grid because regulations don’t allow that. They have to undersize the system, so the amount of electricity that they are producing, even at the peak time, will not be more than what they are using in the factory. If it’s more than the use of the factory, they have no place to put it, so you have sub-optimal systems. The fundamental problem is the lack of a feed-in tariff or net-metering mechanism, which can allow facilities to sell electricity to the grid at a good price; and also the lack of open access to the grid for thirdparty solar project developers.

In Vietnam, the government is testing out something called a direct PPA, which could really unlock a lot of activity in the region. A direct PPA would allow a renewable energy developer to put in a small solar farm, sell it to the grid and wheel the power over the grid, and then somebody else could raise their hand and say, I want to buy that power. So that ability to enter into a contract with a producer of renewable energy, and to buy that power through the grid, having it wheeled through the grid, does not exist in most Southeast Asian markets. So you have a very closed market. And that’s a fundamental problem—the lack of open access to the grid 32

HONG KONG BUSINESS | Q1 2022

Peter du Pont, Managing Partner, Asia Clean Energy Partners

for generators, and therefore consumers pay higher prices for electricity.

Developed countries have no business putting pressure on developing countries to go net-zero faster when they haven’t lived up to their commitments for financing

If they can’t feed into the grid, at what point would it be economic to store excess power in batteries?

Let’s say the average price that a factory in Thailand would pay for electricity is about four baht. That’s about 13 cents a KW-hour. There are many project developers who can go in and put a solar rooftop onto a factory. And there are thousands of megawatts (MW) of solar rooftop PV being installed across Thailand. They put solar PV on the rooftop of a factory, shopping centre, or building. The solar electricity that the owner of the factory or the store will buy from the solar company is about two baht, which is about eight US cents a KW-hour. Meanwhile, the factory owner is paying about 4 baht per KW-hour—which is about 13 US cents per KW-hour—to the electric utility. So a solar project developer is coming in to put on a solar rooftop and the electricity that this provides is about one-third cheaper than the electricity they are getting from the grid. That’s a great deal. Does it make sense to put a battery in? Generally, no. I am not aware of companies coming in and saying we’re going to make a bigger system and make it twice as big and put a battery in because the economics are not there for that.

One of the biggest problems in this whole dilemma is

INTERVIEW how the Thai utilities, PEA and MEA, can continue to pay for the upgrading and maintenance of the grid, whilst they are losing load from customers who are putting in solar rooftops. The best thing that could happen is, instead of putting a battery at the site, you can allow the export of power from the solar rooftop to the grid and use the grid as a battery. So if you have that excess power from your solar rooftop, then that just goes into the grid, a feed-in tariff, or net metering process. But the reason that the Thai utilities are not accepting power exports into the grid is that they have an oversupply in most regions of the country, and they do not have a way of being compensated by customers for the value of using the grid as a battery.

What other policies should be implemented by governments in Southeast Asia to attract more investments to clean energy?

For utility-scale solar power, there’s a trend away from feed-in tariffs toward competitive procurements across the region, and this is a good thing because it brings down costs.

For rooftop solar, stores and factories need to get a fair rate.

In some of the customer segments, Thailand is doing net billing for rooftop PV. For some customer segments, such as the small commercial, and residential, the utilities only pay customers about 2.1 baht (about 6-7 US cents) per unit when they buy electricity from rooftop solar systems. But the utilities charge customers about 4 baht (or 13 cents) per unit for electricity that the utility sells to them. So if you have your solar on your rooftop, and you’re selling it to them, you only get about half the rate for selling your electricity to the utility, compared to what the utility charges you for their electricity. That’s not a good deal. There needs to be a fairer deal for the solar rooftop customer.

The rate that utilities pay to solar rooftop owners needs to be increased to make economic sense. But at the same time, it is clear that the utilities should be able to charge a reasonable fee for the service of allowing solar rooftop owners to inject electricity into the grid, and essentially use it as a battery.

What we’re trying to do is just get renewable energy into the system by allowing for direct PPAs, which I described earlier. Wheeling of electricity is a common practice, and it is being implemented in other parts of the world, and it is an approach that can be tried and scaled up across the Southeast Asia region.

With regard to utility-scale solar, where companies are setting up solar farms, one of the biggest limiting factors to reducing the cost of production is the cost of capital. In Thailand, the typical cost of capital for renewable energy is in the range of 3% to 5%; in Vietnam and Indonesia, and the Philippines, it’s a bit higher, at 5% to 7%. If it costs you 6% or 7% to borrow the money, then it will make a big difference in a five-year or 10-year contract, compared to someone who gets the money at 3% or 4%.

What are the risks in implementing direct PPAs? The fundamental risk of allowing direct PPAs and wheeling is the financial health of the utility that operates the grid. The problem that the utilities are facing is that many of the utilities operating the power systems have

Developed countries have no business putting pressure on developing countries to go net-zero faster when they haven’t lived up to their commitments for financing

entered into long-term contracts to get stable power, and they are typically locked into the prices in these contracts for 10 years or more.

If the electricity regulator allows direct PPAs and wheeling, then you will have new generators coming in and selling power at rates significantly lower than the utility’s current tariff. When this happens, the off-takers, the utilities who have committed to these long-term contracts, have financial risks because they’ve already committed and they may not be able to enter into direct PPAs at lower rates. In my view, direct PPAs are a good tool, but they should be gradually phased in.

Why has the market been strong in Thailand and why hasn’t it taken off in other markets such as Indonesia?

Actually, the market for solar has taken off in Vietnam, where they have installed more than 10,000MW of both utility-scale and rooftop solar over the past two years.

Vietnam has a lot more solar rooftops than Thailand because there’s been a government policy with a feedin tariff for solar rooftops. Thailand’s market is almost exclusively behind the meter and it has taken off because the cost of solar is one-third less than the utility tariff.

There are at least 100 or more really large companies that each have scores of megawatts of solar rooftop in their portfolios, in markets such as Indonesia, Malaysia, Thailand, and Vietnam. I expect that this activity will only increase.

Thailand’s solar rooftop market is very active because the economics are so good, but it’s very inefficient. The amount of solar rooftop is much smaller than it could be if you didn’t have undersized systems due to the lack of net metering. So you basically end up with having undersized systems on many factories when you could have many, properly sized systems if you had net metering. But this would put a big strain on the utilities. The markets, to the extent they’re active in other countries in the region, are mostly like this, behind the meter, and this greatly limits the amount of rooftop solar getting built.

Discussion should be about net-zero with development, ‘Beyond Net Zero’

HONG KONG BUSINESS | Q1 2022

33

ANALYSIS: COMMERCIAL INSURANCE actively monitored by intelligent systems that alert underwriters or risk managers to changes in peak exposure, compliance, and even pre-claim detection.

Predictive analytics also delivers real value to customers by providing tangible insights into risk which can be proactively managed.

This is a win-win situation for commercial insurers and their customers.

The global macro environment has become increasingly interconnected, volatile, uncertain

Asia leads the charge to digitalised insurance industry

Its less mature commercial insurance market is actually an asset, Concirrus’ Client Development Director for Asia reveals.

T

he commercial insurance industry has been operating at 20% to 30% loss for some time now. This is becoming the norm, especially in Asia, where losses are incurred because of the climate-related natural disasters that most often hit the region.

S&P Global Ratings, for instance, mentioned the wildfires in Australia, destructive and costly typhoons in Japan and the Philippines, and last year’s devastating flooding in Henan, China that cost the industry more than $2b in losses.

Despite this, Concirrus’ Client Development Director for Asia, Oliver Miloschewsky, still expressed his belief that the region will revolutionise the commercial insurance industry. Here is his exclusive interview with Hong Kong Business where he discussed how Asia’s digitalisation trend will further push the growth of the industry.

34

HONG KONG BUSINESS | Q1 2022

Digitalisation directly addresses key challenges in commercial insurance, namely operational efficiency and sustainable profitability

How will digitalisation solve the problems the commercial insurance industry is facing now?

In order to derive real value out of data, organisations need a digital environment that deploys all the data and analytics in a consumable and user-friendly way. Digitalisation significantly reduces operational costs and, at the same time, lays the foundation to enable powerful analytics to unlock meaningful insights to drive faster decision making with more accuracy.

Predictive analytics is the most exciting and arguably the most significant step. Underwriting teams can then develop new coverage types, price them using the latest available data, and rate them in a digital system that delivers real-time visibility of changes associated with the risks.

Once bound, individual risks and indeed the entire portfolios can be

What are the strategic advantages of having a data-driven model in the commercial insurance industry?

All insurers have historical data within their existing portfolio; however, they are not necessarily resourced to take full advantage of this data, which can be limiting when looking to grow or expand into new areas of risk. Historical data of individual companies will also have an inevitable bias to risks written in the past and often significant blind spots regarding segments or geographies not previously serviced. This is where the third-party data and analytics providers can play a crucial role, not only in making a company’s own data accessible in a cleansed and meaningful format but also to provide access to broader market models that provide a much more accurate and holistic view of risks.

This directly informs underwriting strategy and risk appetite which can be adjusted almost in real-time.

For the underwriter, it is important to receive submissions that are prioritised based on their appetite and targeted market segment. The immediate and long-term benefit is a much more productive use of time, as insurers are able to focus on the most relevant risks and make much better-informed underwriting decisions, resulting in a more balanced and profitable portfolio.

What digitalisation trends do you see affect Asia’s commercial industry?

What is different in some Asian countries’ digitalisation trends is the strategic mindset and

ANALYSIS: COMMERCIAL INSURANCE support. Singapore, for example, continues to actively encourage and strategically support insurtech, enabling ecosystems to flourish.

The combination with strategic support for specific industry segments, for example maritime technology, makes this even more powerful as customers and commercial insurers are getting ever closer.

What countries in Asia do you think are on the right track in adopting digitalisation in their commercial industry?

Asia is the most exciting, but also the most diverse market, with significant differences in size and maturity of commercial insurance industries. Two of the most advanced countries would have to be Singapore and China, actively driving digitalisation. Singapore is well-established as a major regional hub for commercial insurance.

China has the advantage of a huge domestic market and companies like Ping An are at the forefront of digitalisation.

In your perspective how is Asia faring compared to the rest of the world in terms of a digitalised commercial insurance industry?

What makes Asia very exciting is the combination of leading insurance places like Singapore combined with amazing growth potential in countries like India and Indonesia with a population of 1.366 billion and 270 million, respectively.

Less mature commercial insurance markets can have quite a significant advantage in terms of digitalisation. They don’t have to deal with the complexity of interconnected legacy systems. Asia will therefore continue to be at the forefront of digitalisation.

We are certainly passionate about Asia, its growth, and the opportunities it presents. Over the next five years, we envision Concirrus becoming the trusted partner of insurers throughout the region, managing third-party data that will fuel the transformation of commercial insurance

clearly shows just how powerful digitalisation can be.

The combination of loss ratio improvements, better accumulation control with resulting reinsurance optimisation and gains in operational efficiency will dramatically improve the profitability of commercial insurers.

Oliver Miloschewsky, Client Development Director, Concirrus Asia Pacific

Some commercial insurance classes like marine have historically struggled to generate consistent positive returns. Do you think digitalisation would cut down on these losses? If yes, how much can be saved by dumping traditional methods?

Profitability varies amongst commercial insurance products, but marine has certainly been one with a very poor track record globally. We have backtested our risk selection and pricing models with customers and the results have clearly shown that a datadriven underwriting approach and portfolio management has the potential for a huge improvement in loss ratios of as much as 20%.

Of course, insurance companies have to manage their commercial relationships and will not always be able to execute 100% on technically correct underwriting decisions but the potential improvement

Asia is the most diverse market with significant differences in size and maturity of commercial insurance industries

How has Concirrus contributed to the push towards digitalisation of the commercial insurance industry in Asia?

After launching commercial operations in Asia, our goal has been to partner with local and regional insurers and brokers to help them solve their three most pressing challenges – improving profitability, reducing operational expenses, and ensuring portfolio growth.

By giving Asia’s insurers and brokers access to previously unavailable data and analytics, they now have the ability to underwrite their existing portfolios more successfully, and confidently expand into new risk areas knowing that their decisions are based upon true behavioural data.

Concirrus offers a broad range of solutions for commercial insurers, ranging from highquality industry-specific datasets, advanced AI and analytics, process automation, risk modelling, and a cutting edge technology stack. Our technology and insurance expertise help commercial insurers unlock efficiencies across the organisation and drive a more sustainable future.

Marine insurance has a very poor track record globally in terms of profitability

HONG KONG BUSINESS | Q1 2022

35

INTERVIEW

Blue revolutionises HK’s stagnant insurance industry One way to break free of the misconceptions about insurance is through gamification.

H

ong Kong may be one of Asia’s prized financial centres, yet digital penetration of services in some financial sectors remains low. The insurance sector is one of them. Despite being seen as a mature market, digital penetration in the sector is less than 2%.

And that is just the tip of the iceberg. Hong Kong’s insurance industry also suffers from complex products, complex language, a really complex experience, and in many cases, even poor customer satisfaction.

“Very often in terms of products, you see so many new product innovations, but the consumer doesn’t really have access to all the choices,” Charles Hung, CEO of Blue, Hong Kong’s first digital life insurer, told Hong Kong Business in an exclusive interview.

“In general, the digital adoption in Hong Kong is low, not just for the insurance industry, but even for other online services such as online shopping, digital wallet usage. It is relatively low compared to the other locations, and perhaps compared to other industries, as well,” Hung added.

Hung recognised these pain points; you could even say he is an expert at it. Before becoming chief executive of the digital insurer, Hung spent 30 years working a variety of senior roles in different financial industries, occupying CIO, CSO, and chief executive roles in the banking, insurance, and asset management industries. He has also worked in a plethora of markets, not just in Hong Kong, but also in the US, Japan, and China. His background has given him extensive knowledge about the problems the insurance sector faces—and prepared him for the ambitious task of leading an enterprise set on revolutionising the insurance industry.

Because Blue is going big or going none: they plan to leave their mark by upturning misconceptions about insurance, providing simple, flexible, tech-savvy products and services to their customers.

Hong Kong Business caught up with Hung to learn more about Hong Kong’s first digital insurer, as well as their plans to revolutionise Hong Kong’s insurance industry.

As Hong Kong’s first digital insurer, how has Blue made use of technology i to create a seamless customer journey?

Technology is really is the driving force of our entire business model. We leverage a lot of technology, the ABCD. First in “A,” artificial intelligence (AI). We use a lot of AIs in the journey that we provide to our customers. For example, If you apply facial recognition technology to help in the identification journey, this would really enhance the customer experience.

We are also the first insurer in Hong Kong to adopt Tencent’s cloud technology. This is a very important part of our core infrastructure in terms of dealing with increasing 36

HONG KONG BUSINESS | Q1 2022

Charles Hung, CEO of Blue

capacities, performance, and speed. We have a very good cloud infrastructure to help us to support our customers.

Specifically, this is helping us in Blue to deal with scalability issues and other challenges, because we do have a very good infrastructure in place.

Then for the C and D, that’s cloud and data analytics. We use a lot of data to analyze the market needs and the customer needs. In terms of just market customer data, we use a lot to improve both our underwriting process and the user experience, as well.

Blue’s vision is to innovate insurance together.

We’re here to disrupt the market

Blue is a joint venture between Hillhouse and Tencent.

What inspired these two entities to team up and launch a digital-only insurer in Hong Kong?

I’ll say that there are really two parts to that: first, it’s about the market pain points and also about the low penetration rate. The insurance industry has been lagging behind in the financial industry in terms of digital penetration. Overall, the market has less than a 2% penetration from a digital perspective—way, way behind other sectors in the financial industry.

Our shareholders have the capability to house fantastic and very strong investment capabilities. Tencent is of course very strong in terms of technologies and also in the area of the internet. The combination of these two factors gives us the

INTERVIEW strong ability to address the needs of the market.

Our shareholders do see the market opportunity and coupled with their capabilities, I think there’s a huge opportunity that we can capture. That, I would say, is the driving force: inspiring them, our shareholders, to invest in this particular area of insurance and to disrupt the market.

Demographic-wise, which age group or generation makes up the biggest share of your customer base? What does this age group expect from digital insurers?

So far, our core customer base ranges from 25 to 45. I would say that they probably make up over 55% of our customers.

We also have other age groups, as well, but the 25 to 45 has been our core segment. The 25 to 35 age segment will be buying products that are less heavy on premium, whilst the 35 to 45 age group are more mature and financially capable.

So, they will be buying more high-end products and more high premium products. That has been in line with our expectations. Knowing this is how we have been involved to really meet our customers’ needs.

If you go back to what I said, we consider price ability and value for our customers. That’s the overarching theme, principle, and vision in what we do. As we evolve, we react to the market, as well. I think often my people, whenever we come up with a product, we always ask that question, “Is this product addressing the market? Is this product addressing a customer’s needs right?” If not, we should not be launching.

Blue recently launched the mobile app ‘Blue WeMedi’ alongside a new top-up plan, WeMedi Top Up. How does the launch of the app refine your customers’ insurance and health journey?

The WeMedi app is particularly designed to help our customers manage their outpatient services from their mobile phones anytime. I would say that this new app really highlights our commitment to creating a fantastic customer experience and maybe even customer-centric insurance solutions by providing greater convenience and providing really flexible features.

The WeMedi outpatient app is transparent in terms of details available to the consumer. You don’t need to flip your policy booklets anymore, it’s in your mobile app. For example, when you go see a doctor, you want to find out what’s covered and what’s not by your insurance. Here, you just read it on the app. There’s also a search function, where you can search the nearby network doctors. Sometimes you might find yourself having an emergency, and you can plan when and where to visit. This mobile app also gives you an e-medical card, so you don’t have to carry the card with you all the time. I personally always forget to bring my medical card, so this is convenient.

It also reduces the size of your wallet.

We also want to utilise this app to communicate with our customers. Through this app, we will be providing the latest updates and also special offers we have.

What are some trends you have observed in Hong Kong’s insurance space? How has this affected the digital insurance space?

With the COVID situation, people have become increasingly health-conscious. Therefore, in terms of demand for health

At Blue, we use a lot of gamification; we like to engage our customers through games

products and insurance products, we’re certainly seeing an increase in that. Second, during COVID, people have been doing social distancing, and so more people have been doing online purchases.

Hence, digital transactions have been more welcomed by the customers. A lot of people are now investing more in those areas. All these things have been translating to heavy adoption of technology in the industry, the ABCD dimension; certainly, there’s an acceleration and heavier adoption of that too.

The consumers have been a lot more demanding, as well.

A lot more demanding from a product perspective, from a service perspective, and also from an experience perspective. I think traditionally, the products being offered are all the same: “Here’s the menu, please choose from it.” Now consumers want more tailored services. They want you to know them a little more before you make a recommendation.

All these really translate to the consumer wanting to take the driver’s seat. I think the industry, historically, has been insurance company-driven. The insurance company drives the products, drives the experience, we drive most of the stuff.

Increasingly we’re seeing the consumer wanting to take the driver’s seat. They request more, they ask for better service.

So, those are interesting trends that will make all of us think about how we’re going to capture the opportunity.

What is your outlook for Hong Kong’s insurance sector?

The innovation of insurance services and products need to be will be accelerated. You’re seeing that insurers are now competing in terms of the speed of launching new services, trying to impress the consumers. That’s number one: increasing innovation, increasing personalised services as technology becomes more advanced, basic acceleration of digital adoption, some of those things become possible.

The second one really involves the adoption of artificial intelligence. These days, we need to learn and understand a lot more about our consumers. So the usage of data is going to be a big topic for the industry. The usage of AI technology is going to be a big topic as well. Having said that, as technology becomes more advanced and digitisation is accelerating, that brings the challenge of cyber security, as well. I think cybersecurity is going to be an area of higher focus in the insurance industry going forward.

Consultations^ made with private medical practitioners in Hong Kong during the 30 days before enumeration by net consultation fee

Source: BLUE

HONG KONG BUSINESS | Q1 2022

37

TECHNOLOGY: BANK BOARDROOMS

Why banks need more tech experts in their boardrooms Massive adoption of banking technology without critical tech advice from experts could spell doom for lenders.

A

rtificial intelligence, machine learning, data analytics, online apps – the finance world is all about the tech and the digital now, with banks noted to be massively adopting digital technologies over the past five years, according to a recent survey by professional services company Accenture of 2,000 directors from the world’s largest banks.

But even with the rapid adoption of tech, banks’ board rooms still feature a severe lack of experts in this field. Only 10% of boards of directors have tech expertise in 2021. Less than one in ten of board members from China (4%) and Japan (7%) have a tech background; Australia, just a little above that, at 12%.

Having board members with tech expertise is important as the board can often be critical in advising on how to minimise the risks and maximise the benefits of technology investments, according to Fergus Gordon, Managing Director and Banking Industry Lead, Accenture.

In 2015, only 6% of boards of directors had tech expertise – that number increased to 10% globally in 2021

“In general, we recommend that banks strive to fill 25% of their board of directors with technology experience – so there is still work to be done,” Gordon told Hong Kong Business in an intervew.

A study by Accenture found that only 6% of board directors for banks have any technological expertise. What does this tell us about the nature of tech leadership and direction of financial institutions?

When we conducted this research for the first time in 2015, only 6% of boards of directors had technology expertise – that number increased to 10% globally in 2021.

The pandemic showed just one reason why technology experience at the board level is so important.

The pandemic forced many banks to quickly shift to digital touchpoints and accommodate employees working from home, which required immediate additional technology investments, like accelerating cloud adoption.

The perspective of the board, which has a high-level view of the

A study by Accenture found that only 6% of board directors for banks have any technological expertise

38

HONG KONG BUSINESS | Q1 2022

organisation, can help advise which investments are compatible across various business units – and boards with technology experience can provide invaluable guidance.

Banks are also facing complex decisions regarding how best to transform their core systems – whether to build or buy and at what scale – and those choices will have long-term implications.

Whilst banks spend huge sums on technology, a lack of tech experience at the boardroom level could ultimately undermine these investments.

Why do you think banks have been quite slow to appoint tech experts in their board? What challenges are banks facing in building up their board’s tech proficiency?

Banks haven’t made much progress in appointing tech experts to their board since the last time Accenture carried out this survey in 2015.

Back then, only 6% of bank board directors had technology expertise – this was an era when cloud was gaining traction and emerging technologies like blockchain and AI were attracting interest from the financial services sector. The inertia is likely the consequence of a sector steeped in tradition. This is not necessarily a bad quality when that tradition encourages trust from customers who place their money with you, but it can be an obstacle when the pace of change accelerates and demands innovation.

The importance of technology expertise within banks goes well beyond just the board level; banks need to elevate the skills and knowledge of key technologies that are essential to growth, like cloud, AI and cybersecurity, throughout the entire organisation. But a board with a high level of technology expertise can help drive and navigate complex operating model transformation, monitor progress and help steer the ship if it appears to veer off course.

What can financial firms do to build their bank board’s tech proficiency?

TECHNOLOGY: BANK BOARDROOMS Percentage of all bank board members who have technology expertise in 2015 vs 2020

Fergus Gordon

Source: Accenture

Banks should make technology credentials a consideration in new appointments. Other ways to bolster expertise can also be explored, such as coaching members on the latest technology, dipping into the knowledge pool of third-party suppliers, and setting aside dedicated time to discuss technology during committee meetings. Some big banks have even established an advisory council to keep executive management up to speed with the latest innovations.

It’s all about finding ways to keep the corporate finger on the technology pulse; to be aware of key developments around cloud, AI, and the Internet of Things.

These are technologies that will pose questions around security, compliance, and governance – issues that intersect with business fundamentals.

Could you give us examples of how the lack of tech expertise in boards or tech leadership in general have impacted banks, particularly in Asia, especially in the past year?

One of the many elements of our lives that may have changed forever over the past year, is the way we spend money and interact with banks. In addition to a surge in contactless payments, we have seen a rapid shift towards digital touchpoints – half of retail bank customers now interact with their bank through mobile apps or websites at least once a week.

This shift didn’t only impact consumers; with banks having to pivot to remote work, employees

at every level have been forced to sharpen their technology skills.

The banks that pivoted successfully did so largely with the help of cloud technology, which enabled remote work and collaboration, quick upgrades of customer-facing applications, and helped banks deal with a flood of fraudulent transactions. However, for many banks, cloud adoption is in its infancy; many of the industry’s important innovations – like mobile banking, data analytics for risk assessment, and personalised experiences would be impractical without cloud.

As banks try to keep up with the accelerated pace of change, broader adoption of cloud will be critical to modernise outdated legacy banking systems and adopt new business models.

What are some good practices you have observed that banks in the APAC region have done to

bridge the gap and build up tech expertise in their boards?

Some banks have introduced structured learning sessions to help boost tech expertise amongst board members. As part of these sessions, these banks bring in experts – both internal and external – to educate members on a broad range of technology topics and trends.

Where possible, these sessions also leverage actual case studies as examples to showcase the real-life impact that technology expertise can have in boosting business in the finance industry.

Taking this one step further, banks can also explore “digital safaris”. These are interactive showcases that show, rather than tell, what the future could look like with technology. Here at Accenture, we offer our clients the chance to experience our Accenture Digital Safari, where we showcase advanced technologies and how these are helping our clients create a competitive edge in their business.

The live demos of AI, Blockchain, Advanced Analytics, Industry 4.0 and Extended Reality present executives the unique opportunity to fully immerse themselves in a technology-driven future, offering them a glimpse into the potential it can bring to their banks.

Seeing and experiencing these opportunities through their own eyes may be the difference needed to motivate more board members to embrace technology.

Broader adoption of cloud will be critical to modernise outdated legacy banking systems (Photo by Dylan Gillis)

HONG KONG BUSINESS | Q1 2022

39

ANALYST VIEW: CHINA AND GREATER BAY AREA

China has set up new schemes that will entice foreign financial firms to enter the market

China’s new foreign-friendly financial market laden with opportunities

If authorities remove the execution-only restriction in Wealth Management Connect, money flows in the channel could grow 10x bigger, says Ernst & Young’s Christine Lin.

C

hina opening up its trilliondollar financial market to foreign firms is cause for much celebration, but that’s not to say that everything is smooth sailing: more foreign firms may be taking a waitand-see approach following China’s ongoing regulator crackdown.

In 2020, China moved to open its financial market overseas, easing restrictions in foreign ownership and finally allowing wholly foreign-owned financial institutions to the country.

Foreign firms have much cause for celebration: the revised regulations open up a US$48t-market, as noted by an American think tank Peterson Institute for International Economics.

Already, non-Chinese firms are making waves, with the most notable of them being the asset manager, BlackRock China, whose equity fund raised $1b in its maiden mutual fund just days after it launched in August last year.

40

HONG KONG BUSINESS | Q1 2022

China has also set up a number of new schemes that will definitely entice foreign financial firms to enter the market, chief of them being the Wealth Management Connect (WMC), which offers opportunities for financial institutions situated in Hong Kong to offer investment products to millions of investors across the Greater Bay Area (GBA).

That’s not to say that everything is smooth sailing: the recent regulatory crackdown in China–which has affected even the country’s biggest financial players, a chief example being Ant Group’s suspended 2020 IPO— may have driven some foreign firms to take a wait-and-see approach before diving into the Red Dragon’s financial market no matter how enticing it is, noted Christine Lin, Financial Services Assurance Leader and Wealth & Asset Management Sector Leader for EY Hong Kong.

In regards to WMC, restrictions

Recent regulatory crackdown in China may have driven foreign firms to take a wait-and-see approach

in the scope of activities that can be done under the channel are deterring growth–restrictions which, if removed, could drive money flows within the channel to be much bigger than the US$22.5b (RMB150b) quota set by authorities, Lin told Hong Kong Business. “[One] of the restrictions is that the banks in Hong Kong, for example for the Southbound, can do “executiononly.” This means that the bank cannot make recommendations to the fund managers on different funds or investments,” Lin explained.

And how big could it grow? “When you look at the population of Hong Kong and the GBA, we’re talking about 7.8 million and 71 million, respectively. If you just talk about that, 10 times, definitely,” Lin said. “So if you have to ask me to put a number on it: 10 times.”

Hong Kong Business spoke with Lin to find out more about what’s been

ANALYST VIEW: CHINA AND GREATER BAY AREA In five days, US$1b was no problem for BlackRock.

With that, you can see the purchasing power of the middle class in Mainland China Christine Lin, Financial Services Assurance Leader and Wealth & Asset Management Sector Leader, EY Hong Kong (Source: EY.com)

happening in China since foreign investment funds entered, what the wealth management connect could mean for foreign banks, and what’s in store for China’s push to integrate itself in global financial markets.

Could you give us an overview of what’s been happening in China since foreign investment funds first entered?

From what we observed in the market, a lot of the global banks, private banks, or the global asset managers, actually have been at different paces of their own journey in their goal to set up business in China. Some of the multinational companies are applying for the licenses, and some have actually already set up joint ventures like in the old days when the multinational entity was not able to take a controlling stake, but now they allow fund managers to hold 100% of the wholly foreign-owned enterprise.

So these are some of the setups that international firms are doing in Mainland China at the moment.

I think BlackRock has been very high profile and very successful for their first fund launch in Mainland China. In five days, US$1b, [it] was no problem for them. With that, you can see the purchasing power of the middle class in Mainland China presents such a huge business opportunity for the global bands and global asset managers.

But some of the global banks or global asset managers, take a wait-andsee attitude. At the beginning of 2021, or even back in 2020, a lot of them were very bullish on the development of their China footprint. How they move forward will depend on how

comfortable they are with their China plans. So it’s quite a diversified market, I would say.

There’s currently a regulatory crackdown happening in China that is also affecting the financial industry. Have you observed whether the activities of foreign investment funds and even foreign finance firms are being affected by this?

At the moment, because of what’s happening in Mainland China with new regulations for a while in the internet gaming, education [sectors], they recently talked about the casino [industry]—I think all these are making them want to stay away for a while. But how long are they going to stay away? I think this all depends on how the regulatory (environment) develops, as well. I do think from a longer-term perspective, China is still one of the core focus for fund managers.

Let’s move on to banking. What does the launch of the Wealth Management Connect mean for the banking industry in the Guangdong, Hong Kong, GBA region?

Fee income definitely. I think you may have already seen some of the media talking about the US$500m annual fee income that banks can benefit from WealthConnect. From the bank’s perspective, in order to tap into these opportunities, they will need to have the right product and also the right resources. That’s why in the early days, you see that multiple banks have already announced their recruitment plans; say, by the end of 2025, how many people they want to recruit from

the private bank perspective. From the front to the back office, they are recruiting.

The reason I mentioned the product perspective is that when you look at the state of the WealthConnect at the moment, unfortunately, we’re [in the midst] of the COVID situation right now, so Southbound, Hong Kong does allow remote account openings, but Northbound, Hong Kong people still need to physically travel to Mainland China. Because of this, in the beginning, there will be more inflows from the southbound side because of the remote account opening.

From the product perspective, one of the restrictions is that the banks in Hong Kong, for example for the Southbound, they can do execution only. This means that the bank cannot make recommendations to the fund managers on different funds or investments. For the product features, the design, that’s quite important, so they just are able to attract Southbound investors, and so it’s easier for them to buy and understand the product through e-distribution.

Fintech design will be one of the key features of the investment for the private banks.

What opportunities does it give to foreign banks and financial institutions?

In order to be successful and to attract Southbound investors, it’s very important to have the right product on the shelf and make it easier for Mainland investors. So if we talk about e-distribution in the Mainland market, when you look at the largest funds at the moment, the one with the largest market share... is Tianhong Asset Management, which is definitely [leveraging] via the Ant Financial e-distribution platform to distribute their products.

When you look at all these local asset managers, China AMC, Harvest, etc, they all have their own-developed e-platform as well. So that’s why e-platforms are quite important for asset managers and for banks to tap into the retail space. And at the moment, WealthConnect is still retailfocused, because they do not allow institutional investors to approach us HONG KONG BUSINESS | Q1 2022

41

ANALYST VIEW: CHINA AND GREATER BAY AREA for the WealthConnect platform yet.

So that’s why e-distribution is very important at the moment.

regulations, we’ve also seen all these regulations come out very quickly, so there might be an impact.

What issues, if any, does wealth management connect present to the banking and finance industry of the markets?

One thing the industry asks about a lot is regarding it being execution only.

They cannot recommend which fund or which product the investor can buy. For example, if I’m a Southbound investor in the Mainland, looking at the products offered by my bank, and I am looking to invest in Hong Kong when I’m from the mainland, I will of course look into the bank’s website, where there are 50 to 100 funds listed. You can already tell how difficult it is for a normal investor just to pick out a fund from the long fund list there.

At the moment, you can sort of do reverse solicitation, which means if the investor asks for the features of a particular fund, then the RM in Hong Kong can explain. But they still cannot make recommendations. So this is an issue the industry will need to think about how to tackle in order to make wealth connect work for their bank.

The rules for WealthConnect at the moment use the word executiononly and the HKMA was very clear in their FAQs that you cannot make recommendations on the investments.

If the regulator allows the banks to be able to sell and make investment recommendations, WealthConnect will work much more easily for the Hong Kong and the China banks.

This is why the industry is asking that they be able to sell and make recommendations on investments.

It’s also been observed that the Chinese regulators seem keener to keep capital within the country and have made it harder for foreign listings. What is your view on this?

Whether they keep funding within the mainland or make it difficult to invest into Mainland China...I am looking at this as the mainland government making the call. This is a kind of policy that, given the geopolitical environment at the moment, would probably be a temporary policy. I don’t think they’re trying to make it so difficult, or trying to cap the money within the mainland.

So you don’t think it’s going to affect the foreign firms? Will this discourage them from offering investments in China?

I think in the short term, yes. But from a longer-term perspective, China is still being seen as one of the growth engines by many of these global companies. So I do think that in their long term business development plans, China still has a place in their development. In the short term it could be affected, [due to the] geopolitical issues, different 42

HONG KONG BUSINESS | Q1 2022

Do you know if the Hong Kong industry is lobbying to have wealth management connect openly to institutional investors?

At the moment, the banks are lobbying for a larger quota, lobbying for their product list to be larger because they want to include more products in the wealth management connect. Whether WealthConnect can be opened to institutional investors, for the longer term, yes, I think the banks will lobby for that as well. But at the moment, we haven’t heard that the banks are lobbying the regulator for institutional investors yet.

Earlier you said that there are many foreign firms that are taking a wait and see approach. So what changes in regulation have made foreign firms rethink their strategies?

I think for some of the firms, when they look at their whole China strategy, why they put it on a wait and see is because they can see their peers setting up, and can see how well their peers are doing, whether they are making profit or not, etc.

There are a few things not purely from the regulatory perspective that push them to take a wait and see approach. Number one, actually, when you look at all the global banks and asset managers, talent is really an issue for them. I mean, onshore Mainland China talent. The lack of a talent pool in Mainland China makes hiring very

The lack of a talent pool in Mainland China makes hiring very difficult for global players

difficult for global players, to get the onshore people they need to help fuel their infrastructure. Chinese high net worth or ultra-high net worth investors follow their relationship managers a lot; and for many firms, it is very expensive and very difficult to find and retain a good relationship manager.

I think the second one is also when you’re comparing those global players, their global minimum numbers sometimes are actually higher than the local China regulatory requirements and also the China market practice.

From the global banks’ perspective, they will need to adjust this concept, if they want to go ahead with their China operations or China setups.

Number three is from the value proposition perspective. The Chinese high net worth and ultrahigh net worth investors may not see immediate value in using a foreign player unless they want to get exposure to overseas products or services. The Chinese banks will also need to offer well-designed products, which will be able to provide profitability and protection fit for the Chinese investors’ habits and preferences, as well, and be able to meet the needs of the current FinTech development in Mainland China.

The last point I want to make is that the enhanced data security law in Mainland China, which came in force on 1 September 2021, actually contains provisions covering the usage, production and also protection of data in Mainland China. This is also another issue that the global banks and the global asset managers will need to talk about in terms of what data can be or cannot be transmitted outside of the mainland. How this will impact their China operations is something the global banks and global asset managers will need to figure out.

China is still being seen as one of the growth engines by global companies

HONG KONG BUSINESS | Q1 2022

43

OPINION

ONG AND KUMAR

The Next Pedestal of the Payments War for Banks and FIs: Buy Now Pay Later

T

CHING-FONG (CF) ONG Managing Director and Senior Partner, SEA Leader for DigitalBCG, Boston Consulting Group SUMIT KUMAR Managing Director and Partner Boston Consulting Group

here have been significant moves in this space in recent years, with major BNPL provider Klarna recently valued at over US$45b, Australia’s Afterpay purchased for US$29b by Square, and major FinTech firm PayPal also entering the space. BNPL is expected to represent 12% of all e-commerce sales across Asia Pacific (APAC), North America, Europe, and Australia by 2023, up from 2% today. 80% of all BNPL transactions will be completed online in mature markets, with a doubling of growth for in-store BNPL purchases. With low penetration today due to lack of customer awareness and limited availability of financial providers, APAC is expected to be the next growth story with a remarkable 145% CAGR projected to 2023. Banks are being left behind by fast-moving FinTechs, and it’s critical they prepare for the second war on payments—BNPL. Buying in to BNPL in Southeast Asia The region’s retail sales market is expected to expand from US$374b to US$457b by 2023, with online sales increasing 44% annually to represent 20% of total sales by 2023.

With attractive market demographics and early signs of accelerating adoption it’s expected that Southeast Asia’s addressable market will be as high as US$27b by 2023, with a projected BNPL net revenue of ~US$1.5b. Market penetration of 6% is projected to be double that of the wider APAC region. In countries like Indonesia, surveys show a whopping 78% of respondents expressed familiarity with BNPL and its advantages.

Funding in Southeast Asia is already outpacing APAC, driven by investments in Singapore and Indonesia. Southeast Asian BNPL FinTech companies attracted 30% of total APAC BNPL funding between 2016-2020, 10% of the global total. That investor confidence is seen in companies such as Akulaku, FinAccel, and Redivo.

Mature BNPL markets such as Australia offer valuable insight into Southeast Asia’s potential. Rapid market growth has seen an estimated 20% of Australians using BNPL, and approximately 60% of merchants offering the service.

The regional landscape is relatively fresh in Southeast Asia, but FinTechs such as Atome and Hoolah are expanding to target both offline and online merchants, enjoying rapid growth in transaction values.

Open ecosystem players such as Akulaku and a Traveloka-Bank BRI partnership are exploiting BNPL services as part of evolving ecosystem offers. E-commerce players like Shopee are introducing BNPL as part of standard features. Meanwhile, credit card companies and banks are exploring partnerships with winners from other markets such as Pine Labs.

Key areas of BNPL to watch Establishing the right model will require a strategy that reflects the local 44

HONG KONG BUSINESS | Q1 2022

BNPL players will have to develop sustainable methods for revenue generation

landscape and rapidly evolving market conditions.

Offline sales still represent the majority of sales volume, thus scaling together with offline merchants is key. Challenges such as integration hurdles, secure customer information, educating customers in-store, and maintaining positive user experience during lengthy application processes must also be overcome.

Regulation is also likely to tighten, as early plays by technology companies increasingly come under the review of financial authorities.

Consumer groups in Europe and Australia are already pushing for greater oversight of unregulated BNPL lenders around AML, KYC checks and fraud protection.

In addition, BNPL players will have to develop sustainable methods for revenue generation—whilst merchant-linked fees are a good way to start, we believe such fees will reduce over time. Players need to build consumer financing leveraging BNPL transaction data, coupled with value-added services such as advertising or bill payments, for a longterm model.

The success of BNPL in India offers some interesting lessons on this evolution, with four broad operating models emerging in the market.

Pureplay FinTech players such as Zest are targeting underbanked segments, serving customers without credit cards with rapidturnaround approvals. Customers opt in at online or offline checkout pages, with credit risk analysis undertaken by lending partners.

Consumers opt in to BNPL through the in-ecosystem checkout page. Point-of-sale (POS) aggregators such as Pine Labs leverage instore POS systems to drive BNPL growth. Pine Labs operates on over 450,000 POS systems across 150,000 merchants, backed by 35 banking partners. Customers can conveniently sign up to BNPL at the point-ofsale, with credit risk undertaken by partner banks.

Display to 31 March 2019 HK$40

Issue No.52

ART

Hong Kong’s Best Selling Business Magazine

ISSUE ISSUE FACETIME: WHy INVESTORS ARE EyEING COMPANIES EyEING yOu HOW TO GET 8,000 HECTARES OF lAND FOR FREE IS yOuR FuTuRE HOME A FlOATING HOME? 52

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

Art by: KAWS, WAITING, 2017, Bronze, paint, 178.4 x 85.1 x 72.1 cm

Issue No. 86

Display to 31 March 2019 S$5.90

Daily news at www.sbr.com.sg

10

It was a terrible year for equities, but experts are not completely writing them off in 2019.

2019

WHO ARE SINGAPORE’S NEXT UNICORNS? CRAZy, POOR EXPATS? WHy FOODTECH IS THE NEXT BIG THING WILL THE NEW TRAINING SCHEME HIT LAWyER HEADCOUNT?

EY RV TLAW SUARGESS& T

R A N K I NG A THE

ASIAN

S

BUS I

SS

RD WA

NE

Singapore’s Best Selling Business Magazine

t INVEStmEN IdEAS for

EXPORT AWARDS

2018

2018

L M ES S 25 FIRLARGE FIRM 50 ANC

86 73

UR INS

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

Issue No. 94

DISPLAY TO 31 MARCH 2019

sWift’s need for

speed Asian Banking & Finance

wHy JAPANESE REGIONAl BANKS SuFFER HEAVy lOSSES CAN CHINESE BANKS wIN AGAINST AlIPAy? wHy SuNDAy BANK IS A THING IN KOREA wHICH AuSTRAlIAN BANK BEARS BRuNT OF HOuSING DOwNTuRN

Mark Surgenor Head of Wealth, HSbC p.16

Issue No. 91

ISSUE | DISPLAY TOTO31 ISSUE91 100| DISPLAY 30March JUNE2019 2021 || www.asian-power.com www.asian-power.com||AACharlton CharltonMedia MediaGroup Grouppublication publication

US$360P.A. US$360P.A.

CLEANING UP bUILDSWORLD’S ACROSSLARGEST ASIA ACWA POWER CSP

ACWA POWER IS GOING ALL-IN ON A TRANSITION TO CLEAN ENERGY FACILITIES FROM VIETNAM TO SAUDI ARABIA Asian Power

hERE’S WhAT hAPPENED IN ACWA POWER CEO PADDy PADMANAThAN’S $5B BID TO BuIlD ThE lARGEST CONCENTRATED SOlAR PROJECT IN ThE WORlD

NUCLEAR TAKES UP THE SLACK FROM FOSSIL FUELPOWERED ENERGY REGULATORY HURDLES SLOWING DOWN WIND POWER PROJECATS

CAN SOUTH KOREA MEET ITS AMBITIOUS GOALS CANRENEWABLE INDIA HIT ITS BY 2034?

2022 ENERGY GOALS? “COAL INERTIA” LINGERS ACROSS ASIA HOW CANPACIFIC ASIA

KEEP WIND POWER bLOWING? WHAT’S bEHIND CHINA’S ENERGY TRANSITION? WILL ASIA DOMINATE ENERGY STORAGE?

ASIA’S LEADING

BUSINESS TO BUSINESS

MEDIA

PUBLISHER

ISSUE NO. 13

The magazine for healthcare administrators and policy makers

|

www.healthcareasiamagazine.com

Display to 28 February 2019

HOSPITALS UNDER ATTACK SINGAPORE’S MASSIVE DATA BREACH SHOWS THAT HOSPITALS NEED TO STEP UP THEIR GAME IN ORDER TO WARD OFF POTENTIAL ATTACKERS AZHAR HARUN CEO, UMSCp14

Healthcare Asia

CHINA’S INTERNET HOSPITAL BOOM OVERCROWDING IN SINGAPORE’S PUBLIC HOSPITALS WILL RISING COST STUNT THAILAND’S UHC GOALS? INDIA’S AMBITIOUS MODICARE PROGRAMME

HCASEPTFEB19.indd 1

9/21/2018 2:35:41 PM

In Print, Online, Mobile, Events, Awards, and Research HONG KONG BUSINESS | Q1 2022

45

OPINION

LAWRENCE CHIA

Could vaccine passports move the economic needle?

Vaccine passport’ may become a routine feature of any mass activity

H

ong Kong’s operating businesses have weathered the worst of the pandemic so far and even have cause for optimism: official figures show economic sentiment improving in several key areas. This is hopefully set to continue, with recent measures such as the Consumption Voucher Scheme goosing consumer spending.

When we reflect on the bigger picture, though, it becomes clear that COVID-19 and its potential for economic disruption will continue to loom for at least as long as a significant proportion of the world’s population remains unvaccinated. And with new COVID variants such as Mu threatening to ‘outwit’ currently available vaccines, it may be years before the threat fully recedes.

In other words, optimism should be tempered with caution. The IMF’s latest World Economic Outlook, released in July, illustrates the point, revising the forecast for advanced economies upwards, whilst showing curbed growth prospects for other economies in light of recent COVID-19 waves. The outlook for emerging markets has also dimmed due to inadequate access to vaccines and uncertain fiscal support.

The good news is that once we accept that ‘business as usual’ can’t and likely won’t resume in the foreseeable future, we can begin to devise new strategies, practices and technologies to make the best of an unstable situation. For the MICE industry, this means finding ways to make events as inherently ‘virus proof ’ as possible, enabling exhibitions, trade shows, conferences, spectator sports, etc, to carry on as scheduled under most conditions.

A massive example of the ‘state of the art’ in COVID safety is the coming Expo Dubai, which expects 25 million visitors over a six-month duration starting on 1 October. Temperature checks, mandatory indoor and outdoor mask-wearing and social distancing are the basics. Whilst proof of vaccination is not mandatory for attendance, it is ‘encouraged’ – and free vaccinations will be available on-site for official representatives of participating countries. Notably, the Expo site will also include three COVID-19 46

HONG KONG BUSINESS | Q1 2022

LAWRENCE CHIA Group Chairman and CEO, Pico Far East Holdings Limited

testing and medical facilities, complete with ambulances.

Though considerably smaller in scale, the HKTDC Hong Kong Book Fair was in at least one key way even more stringent in its anti-COVID measures: all exhibitors and staff were required to provide proof of full vaccination or a recent negative COVID-19 test result, whilst visitors were required to use the ‘LeaveHomeSafe’ app to register for the event. Tickets for the Fair were either purchased in advance online or via app, or at the door via Octopus, with no paper tickets issued.

A similar approach is expected to be taken at CES, the famous international consumer electronics and technology show; when it returns to a physical format in Las Vegas in January 2022, all attendees will be required to present proof for vaccination.

That some form of ‘vaccine passport’ may become a routine feature of any mass activity is underlined by Germany’s adoption of the so-called ‘3G rule’ of geimpft, genesen, getestet (vaccinated, recovered, tested). This essentially lifts limits on attendance as long as all visitors provide proof of at least one of the ‘Gs’ and the organisers have drawn up a ‘hygiene concept’. For events anticipating more than 5,000 participants, the ‘concept’ must be submitted to health authorities for approval.

It should be noted that forms of ‘3G’ are also being applied in other sectors such as F&B, gyms and retail, in many countries and cities around the globe. In some cases, ‘vaccine passports’ are also being used as an incentive for the remaining unvaccinated to get their jabs and fully rejoin society.

With new coronavirus variants constantly evolving, the approach may not prove to be the absolute last word in the response to the pandemic, but it should at least limit the potential for new outbreaks. For MICE and other sectors, it’s the best chance yet for business to resume a substantial degree of normalcy.

Vaccine passports’ are being used as incentive for the unvaccinated to get their jabs and fully rejoin society

HONG KONG BUSINESS | Q1 2022

47

OPINION

KING AU

Hong Kong can do more in fight against rising cybercrime in financial sector

T

he economic cost of the COVID-19 pandemic is estimated to be in the region of US$5-US$6 trillion in terms of lost global GDP. Its cost in broader terms is, of course, immeasurably higher. The cost of annual cybercrime worldwide is forecast to reach about US$6 trillion last year.

That valuation makes cybercrime more profitable than the global trade of all major illegal drugs combined. Its mounting cost and impact runs deeper than ever having accelerated discernibly since the start of the pandemic because of both the largely unplanned increase in homeworking, ecommerce and electronic trading, and the fact that criminals have been forced online too.

Financial sector an attractive target The financial services sector is heavily targeted by hackers and other cyber criminals, who are attracted to the sensitive data on individuals, businesses and governments held by banks and other financial institutions. As a sector, it typically features in the top five sectors for severity and frequency of cyber-attacks.

During the first three months of the pandemic, attacks against the financial sector increased 238% globally, whilst 80% of financial institutions reported an increase in cyberattacks in 2020, according to VMware. Indeed, in a survey of global business customers, Allianz found nearly half citing cybercrime as the top risk for the financial services sector, ahead of the pandemic, business interruption and legislative or regulatory change.

As a leading global financial centre, Hong Kong is an attractive target for cyberattacks. It’s an unfortunate fact that the level of economic losses experienced in the city as a result of cybercrime is on an upward trend.

During the past decade, Hong Kong has seen a huge increase in cybercrime, with reported incidents rising from 2,206 in 2011 to 12,916 in 2020. During 2020, the number of cases rose 55% from 2019.

The value of those crimes rose from HK$148 million in 2011 to a staggering HK$2.96 billion last year.

Smart City Blueprint needs cybersecurity plan Hong Kong can certainly do more to protect itself from cybercrime.

It’s holistic Smart City Blueprint brings together payments, transport, energy, education, water, work, living spaces and other elements that comprise a modern a city in a vision underpinned by digital technology.

It is important and clearly positive that the blueprint incorporates cyberspace safety to the vision: “Enhance the Government’s cyber security capability to address new security risks, facilitate collaboration amongst stakeholders to promote awareness and incident response capability in the community.”

But more could be done; more planning is needed. Clearer work plans with policy priorities over a longer time horizon are important because they can facilitate different stakeholders, including businesses in Hong Kong, to coordinate and make their part of contribution 48

HONG KONG BUSINESS | Q1 2022

KING AU Executive Director, Financial Services Development Council (FSDC)

correspondingly.

Hong Kong would benefit from the establishment of an independent commission, similar to the Australian Signals Directorate or the Cyber Security Agency of Singapore. Alternatively, it could set up a cross-bureau working group to coordinate both regulatory and enforcement actions.

In Hong Kong, there is no specific legislation that deals with cyber offences. The legal framework for cyber offences is set out in other existing legislation, such as Personal Data (Privacy) Ordinance, Unsolicited Electronic Messages Ordinance, Interception of Communications and Surveillance Ordinance and Official Secrets Ordinance.

Regulation and oversight fragmented The regulation and oversight of these different pieces of legislation is fragmented. The Cyber Security and Technology Crime Bureau (CSTCB) of the Hong Kong Police Force is responsible for handling cyber security issues and for carrying out cybercrime and technology crime investigations, computer forensic examinations and prevention of technology crime.

At the same time, the Office of the Privacy Commissioner of Personal Data (PCPD) oversees data related issues, and adherence to its Guidance on Data Breach Handling and the Giving of Breach Notifications. There’s also the Commissioner on Interception of Communications and Surveillance.

In the financial services sector, there are the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (SFC) and the Management, Supervision and Internal Control Guidelines for Persons Licensed by or Registered with the SFC. Regulation and oversight of these businesses and individuals is part of the SFC’s role.

Besides the SFC, the Hong Kong Monetary Authority (HKMA) and Insurance Authority (IA) also have their respective guidelines to assist their licensed institutions in handling cybersecurity issues.

Some degree of coordination is seen, but more efforts towards coordinating policy responses need to be made.

Omnibus cybersecurity protection Many of the world’s leading jurisdictions in cybersecurity have an omnibus cybersecurity protection law as a core element of their cybersecurity framework. Hong Kong should consider introducing its own omnibus Cyberspace Protection Ordinance. Alongside, other related statutes should be reviewed on a regular basis to ensure that they remain fit for purpose and aligned with international standards.

With the HKMA’s introduction of the enhanced competency framework, the market has generally seen an improvement in the cyber resilience of the banking sector. However, given the high level of inter-connectivity amongst various areas within the financial services industry, the banking sector’s progress could be undermined if the other sectors do not demonstrate a comparable degree of resilience.

C

M

Y

CM

MY

CY

CMY

K

鄧記過九龍

Deng G has arrived at K11 MUSEA ( 九 龍 ) 鄧 記 川 菜 Deng G Sichuan, Ko wloon 九龍尖沙咀梳士巴利道18號K11 MUSEA 412-413號舖 Shop 412-413, K11 MUSEA, 18 Salisbur y Road, Tsim Sha Tsui

+852 2545 3288

(香港) 鄧記 Deng G, Hong Kong

香 港 灣 仔 皇 后 大 道 東 1 4 7 - 1 4 9 號 威 利 商 業 大 廈 二 樓 +8 5 2 2 6 0 9 2 3 2 8 2 / F, Wes wi ck C om m e rcial Building , 1 4 7 -149 Qu e e n’s Road E ast, Wan C hai

HONG KONG BUSINESS | Q1 2022

3