HKU Bulletin May 2016 (Vol. 17 No.2)

We have the advantage in terms of location, time zone, culture, political environment, but we’re not necessarily the only choice. The risk is that those institutions decide to follow the route that most other financial institutions have followed and put their international headquarters in London. Or they are lured to Singapore, which is also competing for this role. For Hong Kong, it’s an opportunity that is ours to lose. Professor Douglas Arner entrepreneurs are looking for. “It would make sense to have people come to Hong Kong to do business that supports start-ups around the world, not just in Hong Kong,” he said. The Compass study in which he was involved makes a case for that role. It ranked Hong Kong the fifth fastest-growing start-up ecosystem in the world out of 40 studied, with the caveat that there is still a lot of catching up to do (Hong Kong ranked only 25 th overall). It also offered ideas on how this could be achieved. Hong Kong is already well-plugged into national and global networks. It could take these in new directions by linking ideas, capital, talents, production facilities and markets to become a ‘Super Connector’ in the words of the study report. It could play to its strengths as a service economy, particularly in financial services, supply chain management and professional services, and consider its advantage as a test market for new ideas given the city’s East-West culture and the high penetration of broadband and mobile networks. The Government could support Hong Kong’s transformation into a start-up hub by making this the focus of global marketing campaigns, easing the path for talent to come here and set up business, and ensuring regulations keep pace with technological changes. Government and business could also help create demand for innovation (some firms already are, notably in finance). But more fundamentally, the Government needs to start rethinking its model for Hong Kong’s development and how to move from an efficiency-driven model of economic development to an innovation-driven model. Professor Wong cited the mobile service Uber as an example of the role Hong Kong could play in the global start-up ecosystem. “Uber is the biggest taxi company in the world but it owns no taxis – it’s a coordinator. This is the real model for Hong Kong,” he said. Finance at the forefront Professor Arner’s take on Hong Kong’s economic prospects starts with its present position as a leading international finance centre and the dangers in taking that for granted. “Something that has come out of our research is that too much finance in any jurisdiction is not necessarily good,” he said. Crunch times like the 2008 global financial crisis can hit the economy especially hard in those circumstances. But because 30 per cent of Hong Kong’s GDP is in the finance sector, and 20 per cent of employment, it can hardly afford to set off in new directions. Professor Arner’s TRS is therefore looking at ways to reduce Hong Kong’s vulnerability and develop its finance sector in new, promising directions. The TRS highlights the importance of beefing up Hong Kong’s role as a regional and international headquarters for Mainland and international financial institutions, and the leading offshore centre for RMB transactions. “Hong Kong in a sort of entrepôt role provides an intersection for these institutions,” Professor Arner said. “We have the advantage in terms of location, time zone, culture, political environment, but we’re not necessarily the only choice. The risk is that those institutions decide to follow the route that most other financial institutions have followed and put their international headquarters in London. Or they are lured to Singapore, which is also competing for this role. For Hong Kong, it’s an opportunity that is ours to lose.” Similarly, London is seeking to usurp Hong Kong’s leadership in handling offshore RMB transactions. This is an area that will only expand given the growing acceptance of the currency. Last autumn the International Monetary Fund added the RMB to its basket of major reserve currencies alongside the dollar, euro, sterling and yen. So how does Hong Kong strengthen itself? For one thing, it needs to plug gaps in its labour force, Professor Arner said. One study under the TRS has compared the employment composition in the finance sectors of Hong Kong, London and New York, and found Hong Kong lagging significantly behind in the number of people employed in professional services, such as legal services and accounting. A lot of the demand in this field has arisen from regulatory changes made after 2008 to rein in excesses, which has meant firms and regulators need more staff who can focus on compliance activities and reduce the risks in the finance sector. (HKU is helping to address this gap through the new Master of Laws in Compliance and Regulation to be offered in the autumn.) An even bigger opportunity for Hong Kong to gain an edge lies in innovation, in particular ‘fintech’ or finance technology. “Finance is already one of the world’s most digitised industries, and it’s one of the sectors that spends the most on information technology,” Professor Arner said. “In Hong Kong, we already have major financial institutions and service providers like technology firms advising those firms. Unlike industry, which Hong Kong doesn’t have much of any more, financial services and financial services technology is an area where we have major strength and existing opportunities to grow. This is not speculative.” DBS and Standard Chartered Bank have both funded fintech start-up incubators in Hong Kong. Professor Arner has also noticed that people laid off in the wake of the global financial crisis are now launching tech start-ups. “Many of them are doing this instead of starting hedge funds,” he said. “It’s a pretty dynamic environment for fintech start-ups.” Change your minds For Hong Kong to really take advantage of these opportunities, and set it on a new path of economic development, it does require one other fundamental thing: people need to get on board with these ideas. That should not be such a stretch given, as Professor Arner points out, Hong Kong successfully developed a world-class regulatory environment from the lessons learned in the stock-market crash of 1987, Asian financial crisis, minibonds scandal and 2008 global financial crisis. But there is a danger of hesitation. “The challenge at the moment for Hong Kong as I see it from a regulatory standpoint is changing the post-crisis mindset to begin looking at things like fintech, where there is very much a need to both consider the risks and the opportunities. And to realise that if we take too conservative an approach, we may miss one of our best opportunities to really develop going forward,” he said. Professor Wong takes a more fundamentalist view. “Hong Kong needs a mindset change across all segments of society if it is to become the epicentre of start-up activities in Asia – including the Government, business, investors, start-ups to parents and our younger generation,” he said. “Successful start-ups and investors do not just work for money. They seek to solve the world’s problems with passion and commitment. Hong Kong has to change its overly mercenary, materialistic and short-term culture if it is to truly develop its own breed of game-changing and world-changing start-ups.” He is optimistic that that can be achieved. “I believe we are coming to the end of pessimism over Hong Kong’s entrepreneurial spirit,” he added. Graphs comparing employment in the fields of legal and accounting, real estate and finance in Hong Kong, London and New York. (Source: Wojcik & Zhao [2014], calculations based on: Longitudinal Employer–Household Dynamics, Census Hong Kong, NomisWeb) Janos Barberis (left), Research Fellow of the Asian Institute of International Financial Law, and Professor Douglas Arner (right) at the seminar on Regulating FinTech Innovation: A Balancing Act in April, 2015. 08 | 09 The University of Hong Kong Bulletin | May 2016 Cover Story