Caroline Lacocque, Director of Client Services, TMF Hong Kong, looks at how Hong Kong can capitalise on its competitive advantages in the emerging business landscape.

The global economy is displaying ‘a new normal’ – the volatile financial markets we have been experiencing will be around for some time. In this rather challenging environment globally, Hong Kong needs to identify and capitalise on the key advantages which can help it stay competitive in the years ahead.

Connecting Mainland China with the world

Hong Kong’s geographic position makes it an ideal link between China and the rest of the world. It is a regional leader in a knowledge-based economy, well connected with entrepreneurs to support an outward-looking internationally minded population.

Hong Kong can attract foreign technologies and investments by acting as a ‘superconnector’ between Mainland China and the world, leveraging the advantages of ‘one country, two systems’, according to Chief Executive Leung Chun-ying in his January 2016 Policy Address.

The One Belt, One Road (Belt and Road) initiative refers to the ‘Silk Road Economic Belt’ and the ’21st Century Maritime Silk Road’; and the aim is to promote economic cooperation with countries along the proposed Belt and Road routes. According to the Chief Executive, this initiative will help power the future for Hong Kong, China and more than 60 economies along its linked corridors. Key characteristics include an economic policy of free enterprise and free trade, the rule of law, a well-educated workforce, sophisticated commercial infrastructure as well as a seaport and an airport.

At the China Daily Asia Leadership Roundtable in 2009, the Chief Executive explained that Hong Kong can help set the Belt and Road in motion. Its high degree of openness and recognition as one of the world’s freest economies has helped maintain a reputable standing and valuable international connections.

Hong Kong has the expertise, capacity and connections to serve as the fundraising and financial management hub for the Belt and Road. It is more than China’s international financial centre; it is also one of the world’s financial capitals and the seventh largest stock market in terms of market capitalisation. Globally, it ranks second in equity funds raised through initial public offerings.

The government is also looking to issue its third sukuk (Islamic bonds) and become an Islamic bond centre to meet the financing needs of Islamic markets.

The increase in Chinese enterprises

In recent years, the number of Chinese enterprises in Hong Kong has increased significantly, which reaffirms the city’s unique role as ‘the major springboard’ for Chinese companies to expand overseas.

Data released by the government last October, illustrates Hong Kong’s position as an international financial hub in the world, with growth among financing and banking companies in the last five years. The number of businesses operating in Hong Kong with parent companies overseas and in the Mainland climbed to a new record of 7,904 in 2015, an increase of 4.2% compared to the previous year. Combined, these 7,904 companies have already employed about 422,000 people, which is a 4.3% increase compared to 2014.

Also in a five-year period, the number of businesses with parent companies located in China, and companies engaged in the financing and banking sector saw even more growth, both increasing by 36% from 805 and 1,059 respectively in 2011.

Fintech opportunities

Government support for financial technology (Fintech) start-ups has been growing as the sector complements the city’s strength in financial services and its existing talent pool. In April 2015, the Hong Kong government created the Steering Group on Financial Technologies and plans for the first Innovation and Technology Bureau were also mapped.

Cybersecurity, block chain, e-payments, robotics, Internet of Things (IoT) and regulatory technology will be among top niche industries being targeted as Hong Kong looks for greater recognition as a Fintech hub.

According to Financial Secretary John Tsang in his 2016-17 Budget speech, Hong Kong’s extensive trade network, the open market operating under the rule of law and total transparency, together with the resilience and resourcefulness of the people, will provide the required conditions for this new economic order.

The city has been one of the fastest growing start-up hubs in the world; there are more than 1,600 start-ups, up 50% since 2014. The government is setting up a HK$2 billion Innovation and Technology Venture Fund to invest in local technology start-ups together with private venture-capital funds. The government has also set up Invest Hong Kong, an official online platform to help start-ups, investors, as well as research and development institutions establish a presence in Hong Kong.

Companies should explore the existing Hong Kong fintech ecosystem and the support they can receive from the local government, incubators and accelerators, economic development agencies, strategic investors, angel investors, venture capitalists and use of co-working spaces.

The Hong Kong Monetary Authority, the Securities and Futures Commission, as well as the Office of the Commissioner of Insurance, will also be establishing dedicated platforms respectively to enhance communication between regulators and the fintech community.

Impact on business operations

The global marketplace is multi-channel; financial institutions and merchants are offering a ‘consumer self-service’ point of sale evolution in order to stay competitive. The increasing trend towards mobile and the ever-growing security and compliance requirements create a complex real time business landscape that puts a huge strain on existing back office systems and processes.

The amalgamation of real time and legacy applications lead to high cost work around processes that bring down potential business returns. According to research from McKinsey, banks are looking for a pay-off from investments made in digital processes, which should focus on back office automation projects and steer clear of multi-channel integration.

Real time will be the way forward.

The challenges

Despite the continuous support from the government, the city’s high cost of living, a limited pool of talented IT professionals and lack of venture investors are challenges that companies face. Although it is not a big problem for companies to raise a first round of funding from angel investors, they may find there is a funding gap later on.

In order to overcome these challenges and take on the combined advantages of ‘one country, two systems’, Hong Kong needs to increase global know-how among entrepreneurs, improve the availability of top technical talent, and grow the tech angel investor community and government support.

Caroline Lacocque
Director of Client Services,
TMF Hong Kong