Not surprisingly for a global financial centre, it has been a year in which FinTech has been at the forefront. Virtual and digital banking, applications for AI and blockchain, digital asset regulation, Data, encryption and cybersecurity have all been prevalent. Many other sectors are also developing apace in this market – from InsureTech, through Logistics and Mobility, even to the Food industry where plant-based meat substitutes from Impossible Foods, Beyond Meat and now Right Treat's "Omnipork", a concept developed by Hong Kong-born Green Monday, have rapidly gained traction here and elsewhere in Asia.
While unrest has continued (up to the November elections) and undoubtedly Hong Kong's excellent retail, tourism and F&B sectors have felt the effects of that, as we have noted previously, Hong Kong remains resilient, resourceful and an accommodating, supportive place for new businesses and innovation.
Here we look at an array of new developments, regulations and headlines around these topics. But first, a quick highlight for Hong Kong's IPO market…
Alibaba listing shows confidence remaining in Hong Kong market
In the world’s biggest stock offering this year, Alibaba Group completed its US$13.86bn. secondary listing in Hong Kong in November.
In an issue of 12.5 million new shares, the price rose by more than 6% above the offer price, and immediately created the city’s biggest stock with a market value of HK$4 trillion. The first day performance was one of the best the Hong Kong Exchanges (HKEX) has seen and placed it as its third largest IPO since 1986.
Alibaba’s listing came in an unusual season for Hong Kong’s economy, which bore with it more meaning than just the record-breaking huge figures. “The listing of Alibaba today is a milestone” said Charles Li Xiaojia, HKEX’s chief executive. The IPO attracted a vast number of applications from retail investors, as well as China’s onshore funds, with mainland institutional investors manifesting their strength. It was in fact Alibaba's decision, back in 2014, to effect its primary listing on the New York Stock Exchange that pushed the HKEX to move away from its previous insistence on one class of listed share and "one share, one vote". Its more flexible approach, allowing dual classes of shares with different voting right for each class, was introduced in the latter half of 2018, but remains reserved for "innovative technology companies".
This secondary listing has been widely seen as a test for the Hong Kong market and for China’s economic power. So far the results seem very positive. HKEX’s more flexible policy for share voting rights and the emergence of the buying power of China’s major investors look to be opening a new world of opportunities.
Rollout of Phase II Common Baseline for Open API Framework for the Hong Kong banking sector
On 15 November 2019, the Hong Kong Association of Banks published the finalised Common Baseline for the implementation of Phase II of the Hong Kong Monetary Authority's Open API Framework for the Hong Kong Banking Sector.
The Open API Framework aims to encourage banks to share their API infrastructure with third party service providers to develop innovative banking services and improve customer experience in line with international standards. Phase II relates to banks' sharing of information on applications for credit cards, loans and other products.
The Common Baseline comprehensively outlines seven topical areas, developed from legal and regulatory requirements, for banks to consider when assessing potential TSP partners. Banks are encouraged to be flexible and adopt a risk-based approach in their assessments, taking into account factors such as the nature of, and the risks involved in, API collaborations; the sensitivity of customer data provided through the API collaborations; and contemplated business relationships between banks and TSPs.
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State-backed digital currencies advancing to final stages
Among the numerous current plans in Asia for government or state-backed institutional digital currencies, Hong Kong and Thailand are on the verge of rolling out a digital token for use on a cross-border payment platform that will enable transfers of funds between the two economies significantly quicker and more efficient.
Using a two-tier system, evolved from the joint venture signed in May this year between the Hong Kong Monetary Authority and the Bank of Thailand, the first tier will see a token issuance to the Hong Kong banks involved in the pilot scheme, with the second tier involving the distribution of tokens to their corporate customers for use in bi-lateral trade.
In parallel, recent announcements in China have led to much interest in the prospect of the country issuing a central bank, state-backed digital currency soon.
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Market and Legal Updates
InsurTech Insights Asia 2019 Conference 27/28 Nov
Asia’s biggest InsurTech gathering took place over two days on 27 and 28 November 2019, attracting over 200 speakers and over 2,000 leaders in the insurance, InsurTech and financing/VC sector, connecting senior executives, entrepreneurs, investors and advisers.
There were two main stages with concurrent presentations, many in panel format. Many of Asia’s largest incumbent insurers were represented, along with investors, partnership arms of incumbent insurers and InsurTech businesses of varying sizes.
Some of key learnings and takeaways from the event were that:
- Incumbent insurers are on varying pathways or degree of maturity on their digitalisation journey, with some well in advance having started some 5 to 10 years ago, while others have only recently focused on this. Nearly all have said that the journey will throw up challenges, but the need to start simple and build is key.
- InsurTech is re-defining the insurance sector and this continues to growth exponentially in Asia. However, finding the right level and nature of investment/partnership, ability to scale, shared appetite for innovation and long term alignment of shared goals, culture and KPIs remain paramount.
Data and data-lead strategies are seen as central to the transformation of the insurance sector, allowing greater efficiencies, more tailored and personal products and services and a greater number of ‘touch points’ with the customers. It will also transform distribution and the nature and use of agents and intermediaries.
- The insurance sector and the use and nature of InsurTech in Asia are varied and need careful attention to local conditions and local markets. What may work well in one jurisdiction in Asia may not work as well in another, particularly in an online or digital world, and especially without tailoring and bespoke adjustment. The rise of super apps and platforms and partnering in Asia is an increasingly important and growth area for insurers and InsurTechs alike.
PRC issues new Encryption Law
The People's Republic of China Encryption Law was passed on October 26, 2019 and comes into force on January 1, 2020.
The law provides the regulatory framework for the use of encryption technologies and products in China, offering systematic guidance for information protection in various industrial sectors.
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Cybersecurity regulations in China and Hong Kong SAR
On 1 June 2017, China implemented The Cybersecurity Law of the People's Republic of China, providing heightened regulatory oversight over the Internet network domain for mainland China. Issued as a milestone foundational guidance law, The Cybersecurity Law embodies the Chinese government's mission to reinforce China's cybersecurity standards amid rapid changes in the international geo-political cybersecurity environment.
Over the last two years, a variety of public consultations have led to the enactment and publication of further and more detailed implementing legislation and clarification, with more expected to follow. In the light of the more recent implementations coming into force, in this guide we examine The Cybersecurity Law and contrast the legislation with that in place in the Hong Kong Special Administrative Region.
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M&A | Will Germany’s tightening of controls over tech-business takeovers impact Chinese buyers?
Germany's economy ministry revealed in late November that it had drafted an amendment to the Foreign Trade Regulation that would allow the German government to review and, determined appropriate, to block acquisitions of "critical technology" companies in Germany by non-EU acquirers. Observers almost immediately linked Chinese corporate buyers to this manoeuvre, as this seems a plan to tighten rules on non-EU takeovers of hi-tech firms, against a backdrop of growing alarm about Chinese firms buying up core German technologies.
Back in 2016, the high-profile takeover of Kuka by Chinese manufacturer Midea piqued concerns about control of some of Germany’s vital technologies being shifted to Beijing. The German government has now responded by taking closer control of acquisitions by non-EU firms and strengthening its veto powers, which allows the government to review purchases of stakes as low as 10% in certain tech companies, down from 25% previously.
During a visit to Berlin in July 2018, Chinese Prime Minister Li Keqiang stressed that Chinese firms merely wanted to learn from German experiences and technologies and do not threaten Germany’s national security. However, concerns seem to continue - "It's not about banning acquisitions, but about being able to look at them more closely in cases where it concerns critical technologies," Germany's economy ministry said in a statement in November.
Nevertheless, Germany’s recent move will inevitably have some impact on Chinese acquisitions in the technology sector. It remains to be seen how potential Chinese buyers may adjust their strategy in response.
SFC issues circular to licensed corporations on the use of external electronic data storage
In response to the frequently asked questions about the use of external electronic data storage providers (EDSPs), on 31 October 2019 Hong Kong’s Securities and Futures Commission (SFC) issued a circular to licensed corporations (LCs), offering guidance for LCs on the commonly raised questions.
The Circular addresses detailed requirements for LCs that exclusively rely on EDSPs for the storage of Regulatory Records. Notably, when electronic data storage is outsourced, potential compliance issues arise under the Securities and Futures Ordinance (SFO). It is now clear that LCs should seek approval when engaging EDSPs. The circular also confirms broader principles and its expectations for mitigation of cyber and operational risks.
While the SFC has not set a deadline for compliance with these expectations, LCs are reminded to review their use of external electronic data storage to avoid violation. If an LC is already keeping regulatory records exclusively with an EDSP, it should notify the SFC without undue delay and apply for approval under the SFO.
With this new guideline in position, Hong Kong has taken a step forward approaching a more advanced system for cybersecurity and data protection.
China circulates draft Foreign Investment Law for public consultation
In November 2019, China released draft implementations regulations for the new Foreign Investment Law. The draft regulations, if enacted, will come into force on 1 January 2020. It came as a much anticipated document as many were hoping for guidelines and regulations to address the long-expressed concerns of foreign investors in China. These concerns include forced technology transfers, profit repatriation, and trade secrets.
Although criticized by the US-China Business Council to be overly light on details and containing “language that is unlikely to be enough to allow equal participation for foreign companies”, the draft still meets the general expectations by tackling critical problems. Notable clauses touch upon thorny issues, including punitive damages for the infringement of IP rights, protection of trade secrets, a ban on the forced transfer of technology, free remittance by foreign employees, and profit-sharing and the surplus property distribution. The draft also aims to improve communication channels between government departments and foreign businesses to create a more transparent business landscape.
Under the mounting pressure to make China stay as an attractive market to foreign investors, the regulations mark the country’s real efforts to clear up doubts and concerns.
Looking Forward to 2020
Hong Kong has experienced a tough second half to the year. Many of the city’s retail, leisure and tourism related businesses have borne the brunt of this. However, despite these challenges and attendant media coverage, we see Hong Kong’s well-established fundamentals as still intact, especially its position as a global financial hub.
Hong Kong continues to foster the fast growth of small businesses and start-ups, equally welcoming and supportive of domestic and international ones. Its regulatory framework is advancing and adapting to accommodate the developments in many sectors, particularly the FinTech world. It continues to offer to international businesses its close connections with and facilitation of access to mainland China. In short, there remains good reason for confidence that Hong Kong will prove its strong resilience and resourcefulness in the coming year.