Welcome to part two of the NexChange Interview Series with Fintech Association of Hong Kong General Manager Musheer Ahmed. Musheer — a former global markets trader and strategy consultant with a keen interest in disruptive technologies — recently helped publish a major report on fintech in the Greater Bay Area and, in this part, he shares more of his thoughts on the region, including it’s potential benefits, it’s impact on talent, and it’s current development. To read Part One, click here.
Part Two – “I think serious changes in GBA will take at least three years to come into place.”
Olga Yaroshevsky: What about the international companies, in terms of, let’s say, investment, or technological and financial cooperation? Which benefits they get to experience, if they want to be involved with GBA?
Musheer Ahmed: So the GBA has a few special economic zones, like the Qianhai investment authority and investment zone, which provides slightly better tax, for instance, for international companies. There is some relaxation in employee tax, as well as company taxes, for those who set up in special economic zones. The key idea here is that earlier you were looking to access mainland China to Hong Kong, which had different jurisdiction and regulations. Potentially, if the GBA policies are executed, and there’s more cross-border collaboration, you could have – and that is our recommendation to try to set up – passporting of companies that are set up in Hong Kong and allow those companies to market their products, and function and operate in the GBA. So there’s a potential, something that international firms can get, and it provides them a good launchpad to go to rest of the mainland China. 70 million population is relatively small.
Still you can see that the growth of Guangdong Province is quite strong, between 10-12 percent over the last 5 to 10 years. Shenzhen is now over 10 million people, Guangzhou is a big city as well.
OY: Doesn’t that mean that most of the talent, companies, funds will be concentrated in just these 4 cities, out of the whole area?
MA: Talent is going to be cross-border, but one of the focus areas is to try to enable talent from Hong Kong to go work in Guangdong province, and vice versa. Let’s take two areas, fin and tech. There’s a huge amount of experienced financial services talent in Hong Kong, who understands both investment and corporate finance, as well as taxation, etc. Which is a great benefit to Mainland Chinese companies. And on the other hand there is a lot of technological talent that is available in Shenzhen, in particular, and across the Guangdong province, whom the Hong Kong companies could use. That could be a good benefit for both. That’s a good example of how a collaboration can happen from a talent perspective. When it comes to investment, there are a lot of VCs that go into mainland China, from the US and other places. Startups also get a lot of investment, Shenzhen being a big startup hub. What we are potentially exploring and hoping to see is more clarity on how VCs can function in Hong Kong, going into mainland China. And secondly is mainland Chinese funds can invest in Hong Kong and other places. Capital flow is restricted in mainland China, and PBOC have to come up with nine lines of allowing people to invest outside of mainland China, for the amount that managers of PBOC need.
OY: I also know that Shenzhen is adopting a very loyal policy for talents, and especially for those coming outside of Shenzhen, is that right?
MA: I think in general mainland China is adopting more open policies for international companies and talent. For example, earlier this year and late last year, PBOC and SEC eased the norms for foreign ownership of banks. Earlier you could not have a majority of foreign ownership of a bank, it was always a local partner. Now they allow foreign institutions to set how a majority states in a bank. A few banks are looking to take this up. It’s not super popular, since people are evaluating options, this will happen slowly. This will also benefit companies who are looking to go to mainland China and launch their products there. Secondly, when is comes to wealth management – Hong Kong has a huge number of millionaires. Guangzhou also has a great number of industrial millionaires. Shenzhen is a city of about 40 years old, but it has a lot of new millionaires. That’s another place for people looking for access to mainland China’s wealth owners.
OY: In terms of development – what is your personal opinion, is it too slow, or is it just fine – for mainland China to be involved, in terms of regulation and financial ties? For international companies to be involved, for cross-border relationships to be established – is it enough or is it just too slow?
MA: I don’t think it’s too slow, I would say it is conducted in a very careful manner. Because when mainland China allows international collaboration and international access for companies and capital outflows, they are maturing as international destination and international regulation, right? They don’t want to set up an incident with that change too much, as it doesn’t work, and they want to be more careful and concentrated and take their time to do it. I won’t say that it’s too slow. Once they decide to do it, then the pace can be very fast. It’s just a matter of figuring out the best mechanisms. Hong Kong is very mature, very recognised, top destination when it comes to international regulations for financial institutions, it’s a major legal arbitration hub as well. But economies and different. Most developing economies are evolving, and they need a slightly different structure than developed economies. These economies need certain allowances and different fragment, and developed economies that mature need more businesses and participants. Hong Kong is growing 3-4 percent a year, mainland China is growing 70 percent a year. There is a big difference in how it’s done. If you look at the regulations as well, for example, crowdfunding is not allowed in Hong Kong, it is only allowed for professional investors, whereas in mainland China you have peer-to-peer lending and crowd funding, and regulations came in couple years ago. They typically allow innovation and business ideas to grow, before they put in stronger regulation. Whereas in a place like Hong Kong the regulations are fairly set, and when you’re looking into innovative solutions, you have to wait for regulators to allow that to take place. Hong Kong regulators are also trying to quicken the pace of their response of distributed technologies, like blockchain and a few others. I expect in the next 3 to 5 years that the pace of change and allowing of regulatory frameworks and collaboration is going to quicken in mainland China and rest of it. And that’s why the GBA is a good place for them, cause they are able to then interact with international companies through this mechanism, and speed up the process. In a sense, you can think of a regulatory sandbox, which government is using for updating their regulations and coming to terms, and being in synch with international regulations.
OY: Are you involved in this process as an association, do you get to sit with officials and government bodies?
MA: We actively work with HKMA, SFC, the insurance authority and BFA – on policy. Which typically is about Hong Kong policy, but we also started our interaction with associations and government bodies in mainland China. For example, in two weeks time I’m having a delegation visiting from Beijing, which consists of government officials, as well as companies. To discuss the innovation in Hong Kong, what’s been changed, what’s been going well, and to talk about how things are working in mainland China. There is a lot of exchange of information. We are also invited from time to time by regulators to have cross-border discussions, about fintech in particular. We are a young organisation, we are only 2 years old, but we have quite a bit of interaction and credibility on the market, and hence we get more engaged. And our focus with the GBA committee is to be more actively engaged in this process.
It’s just I think people have to be careful about expecting too much too soon, that’s not going to happen, as it requires a lot of structure change. The blueprint is just out in February, I think serious changes will take at least three years to come into place. It will start with smaller things, talent moving cross-border may be easier, there might a mutual recognition of best investment and insurance products in the first three years. But the stronger, deeper connection will probably take a little longer. The blueprint talks a lot about greater integration, and the governments are working on connecting infrastructure, like the Zhuhai – Hong Kong – Macau bridge, which is the world’s largest suspension bridge. That’s one way of connecting, but Hong Kong is working the Shenzhen government on spending 3 billion US dollars on an infrastructure project to connect Hong Kong and Shenzhen for innovation. There’s a lot of investment happening, launched even before the blueprint for GBA, so we can see that the governments are keen to continue collaboration with respect of how the blueprint develops.