What s Next for Hong Kong? Through-Train Scheme HKIoD: How will Hong Kong benefit from the through-train stock scheme? Sheng: The very fact that mainland companies will be able to raise funds in Hong Kong and foreign companies may want to eventually raise funds in RMB that clearly will be good for the Hong Kong financial market. HKIoD: What are the major regulatory hurdles that need to be overcome? Sheng: The major regulatory hurdle is of course the different legal regimes in Hong Kong and China. There are cases where foreign jurisdictions may not have access to audit materials in the Mainland, so there are not just regulatory standards but also accounting and disclosure standards issues. Having the through-train will even out some of this, but there are structural impediments. In the drive to make Shanghai an international financial centre, the Mainland is slowly lowering its capital accounts considerations, which would enable Mainland and international companies to access Mainland markets and enable Chinese companies to access global capital. HKIoD: Analysts have said that the through-train scheme will increase cross-capital liquidity and shrink arbitrage opportunities between onshore and offshore RMB rates. Hong Kong banks have been making profits from the lower offshore RMB rates in recent years. Will the scheme erase their advantage? Sheng: There is a complacency where people seem to think that Hong Kong needs special privileges from the Mainland in order to compete that is against the spirit of the Lion Rock. Hong Kong has survived on competition and should never fear competition. 10 HKIoD: THE 21 ST CENTURY DIRECTOR
Hong Kong has many comparative advantages: free press, free market, low transaction costs, strong professional skills, rule of law, and great financial and logistics support; these are not easily caught up by any city, not even those outside China. How we build on this cannot be just the effort of the government, but the private sector also needs to take a lead. For example, The Hong Kong Institute of Directors should be much more proactive on building bridges with new membership from the Mainland and elsewhere in Asia. HKIoD: What implications does the through-train scheme have on the corporate-governance level of Chinese listed companies? Sheng: Corporate governance in Chinese companies has come a long way, but there is still considerable room for improvement. The real benefits of the throughtrain should not be only for large Mainland state-owned enterprises but the millions of SMEs that are now emerging in China. The total number of companies listed in the Mainland is fewer than 2,600. In India, that number is near 7,000. So the room for IPOs for Chinese SMEs in Hong Kong is huge. And if Hong Kong can even capture half of those new entries, the business opportunities are tremendous both for the stock market and the supporting professionals. When they come and if you are not ready, they will go elsewhere. Shanghai versus Hong Kong HKIoD: With further integration between the Shanghai and Hong Kong stock markets allowing foreign companies to access the Mainland market directly, wouldn t that eventually fade Hong Kong s role? adapt to the city s biggest customer the Mainland. There are many areas that need to be upgraded, and it s not just the responsibility of the government but the financial and corporate communities too. HKIoD: What about the free trade zone in Shanghai? Will that threaten Hong Kong s position as China s leading financial centre? Cheung: In terms of hardware and infrastructure, I don t have any doubt that Shanghai can do it in three to five years time; the important thing is about software development like human resources, the legal system and infrastructure support. More importantly, the free trade zone will have to gain recognition from international investors. I don t see any immediate threat that Shanghai will replace Hong Kong as an international business centre. In the long term, assuming that Shanghai will continue to prosper and set up the right infrastructure, it could become a threat to Hong Kong. The trick is whether Hong Kong can continue to advance itself and maintain the lead to create a bigger pie for both sides. Duhamel: One key to Hong Kong maintaining its competitive edge is to further collaborate with the Mainland in ways that help the city maintain its relevance to the global economy. The Shanghai-Hong Kong Stock Connect scheme launched this year is an important example. Essentially this means major global brokerage firms are eyeing account openings with the HKEx to trade A-shares on behalf of overseas clients. Mainland investors will also be able to trade Hong Kong stocks via the Shanghai exchange. Working with Shanghai on this will mean Hong Kong s role as a global financial centre will only be heightened. Interviewer: Ms Helen Luk, Editor of The 21st Century Director, The Hong Kong Institute of Directors Interviewees: Mr Andrew Sheng, Distinguished Fellow, Fung Global Institute; Former Chairman of the Securities and Futures Commission of Hong Kong and Honorary Fellow of The Hong Kong Institute of Directors Mr Vincent Duhamel, Head of Asia at Swiss private bank and asset manager Lombard Odier Professor Stephen Y L Cheung, President and Chair Professor of Public Policy, The Hong Kong Institute of Education; Author of the Report on The HKIoD Corporate Governance Score-card (2004, 2006, 2009 and 2012 editions) and leader of the research teams in the respective surveys conducted Sheng: Hong Kong s role will definitely change, but I wouldn t agree to use the word fade. Hong Kong s advantages are Hong Kong s to lose but not for others to gain. It is critical for Hong Kong authorities and the community to continually Hong Kong s greatest advantage as a global hub compared with Shanghai is the rule of law and independent judiciary. This makes the local business environment more predictable than it is in Mainland China. 11
HKIoD: In which areas should Hong Kong be more proactive? stand to gain a lot from nurturing these future corporate captains. Sheng: Only some of the biggest Chinese companies and the more entrepreneurial corporate captains in China have come out, but there are many SMEs, with great international potential, that need capital and modern management techniques. Within Hong Kong, there seems to be different pockets talking only among themselves, whereas there should be a more structured dialogue between directors and C-suite leaders from the Mainland. There are many areas where Hong Kong professionals and corporates can be assisting Mainland companies to upgrade. I feel that Hong Kong has lagged in recent years even against the Mainland. The Mainland has established at the city level property rights exchanges, which enable unlisted companies to trade unlisted equities and properties. The China Securities Regulatory Commission is trying to consolidate these under what is known as the Third New Market ( ). I see no Hong Kong response to this new development, where SMEs with listing potential going through a nursery of accessing a trading platform for their unlisted shares and enabling private equity funds and wealthy family offices to invest in such SMEs. I believe much more can be done in this area in Hong Kong, although Hong Kong securities companies may not have the necessary Mainland skills and networks to build this to critical mass. There are over 5,000 PE funds today in China with over 2 trillion RMB of assets under management. The scale of equity needs of Chinese SMEs is huge. Of course, the risks are huge, but these are options that Hong Kong needs to take in order to benefit from the huge upside. If you don t manage those opportunities, somebody else will. In the next 20 years, there will probably be more than a 100 Steve Jobs emerging in China they could be locals or foreigners who will take advantage of the mobile Internet-dependent China. Hong Kong securities professionals Offshore RMB Centre HKIoD: Singapore has just beaten London to become the biggest offshore RMB centre outside Hong Kong. Competition is intensifying: How long do you think Hong Kong can keep its number one position? Duhamel: Singapore and London have made solid headway but still only account for 6.8 percent and 5.9 percent respectively; Hong Kong accounts for more than two thirds of overall RMB payments globally. I believe Hong Kong will continue to hold onto the number one position for the foreseeable future, but only as the share of the pie enjoyed by other centres continues to grow. This is not something Hong Kong should fear but embrace. The march to full RMB convertibility has begun and internationalization of the Chinese currency is in full swing. As demand for use of the RMB grows, this will only have a positive impact on the global appetite to continue tapping Hong Kong as a financial centre, even if its share of offshore RMB business shrinks. Cheung: I don t think Hong Kong should have the fantasy that Hong Kong will remain the number one RMB offshore centre in the world. Competition is meant to come. When people choose to settle in RMB offshore markets, they will look at transaction costs and the efficiency of the payment systems. To attract international investors to transact their RMB deals in Hong Kong, the city needs to keep the costs low and the systems efficient. HKIoD: The initial response to RMB IPOs in Hong Kong has been encouraging. Is Hong Kong ready to further expand this business? Cheung: Yes, we are. Hong Kong has accumulated a large sum of RMB during the past three to four years. As RMB deposits generate very little returns, we need other investment vehicles such as RMB-denominated equities. Corporates with business in China can raise RMB directly for their Chinese operations. That s a win-win situation. The problem of RMB-denominated equities is we don t see a lot of liquidity and trading. The stock exchange has to find a way to attract more quality issuers to issue RMB-denominated equities in Hong Kong. This problem could be solved once the through-train scheme is implemented. Hong Kong s Future Role HKIoD: Given intensifying political tensions including the Occupy Central movement, have you perceived any deterioration in Hong Kong s business environment? Duhamel: I haven t personally experienced any deterioration in Hong Kong s business environment as a result of the Occupy Central movement. From the standpoint of the operations of the Swiss private bank and asset manager that I head in Asia, Hong Kong remains a global hub where business is easy and transparent 12 HKIoD: THE 21 ST CENTURY DIRECTOR
to conduct. I expect that the authorities will do their best to retain Hong Kong s status quo. As a company, we are always ready for any scenario and whatever happens, it will be business as usual for us. I suspect this is the case for all global companies operating in Central. Cheung: With political tensions intensifying between different sections of Hong Kong, that will definitely have an impact on the city s business environment. In the old days, political risk was never an alarming factor for Hong Kong. But if you ask analysts to rate Hong Kong nowadays, political risk would be an important factor on the radar screen for a lot of investment banks. The question is whether it will get worse or whether we can compromise in terms of political reform in Hong Kong. Let s hope that the different political parties will have the political wisdom to come up with something that can keep our economic development and create a more harmonious society for Hong Kong. HKIoD: Is the Hong Kong government doing enough to attract talent from China and globally? Duhamel: As a businessman focused on growing our activities in Asia, I am thankful for the efforts made by the Hong Kong government to facilitate business-related matters in the city. Hong Kong s talent pool remains deep in general terms, and it is very easy to fulfil the needs of an organization in terms of hiring different nationalities and Mainland Chinese employees. I have never seen talent not wanting to come to Hong Kong to work because of the working environment. The only issue I see that has influenced some people to leave, or stay away, is pollution, a historical challenge especially for families with young children; there are clearly cities like Singapore, which have done better. As a parent of three children and employer vying for internationally minded talent, I believe continued efforts are needed to ensure Hong Kong s education sector is adapted to the competitive, global context. This means fostering creative thinking, an ability to adapt, proficiency in English (beyond Chinese, of course), and an outward looking not simply China-focused mentality. Cheung: The business environment of Hong Kong is getting quite challenging. Property prices, including the rental expenses, have been going up constantly, sometimes quite rapidly. For the expatriates, even including talents from Mainland China, coming to work in Hong Kong is getting less attractive in terms of the overall package, including monetary returns, education prospects for their kids, and the living environment. Increasing international school places is a way to go. We have to see how we can stabilize the real estate prices, which have a direct impact on the cost of doing business in Hong Kong. HKIoD: Does Hong Kong still have the ability to innovate and move forward like it did in the past? How do you see the city s development in five to 10 years? Duhamel: Barring the unforeseen, I expect Hong Kong to remain a buzzing metropolis bridging the global business community with Mainland China, North Asia, and even many other parts of this region. Hong Kong has always been blessed with incredible energy and drive and, by all accounts, continues to act as a magnet for many mainlanders and foreigners to find new economic opportunities. With regards to innovation, this is key to the survival of any person, organization or city. Hong Kong has always had innovation, and a drive to succeed, in its DNA and I am confident that in a decade, this enduring DNA will manifest itself in a Hong Kong that continues to be seen like America s equivalent to New York. Cheung: The key for future development should be innovation, but it has never been at the top of the agenda of our education system. We need to see how we can nurture creativity and innovation in our schooling systems. My view on Hong Kong s economic development can be summarized in two words: talent and capital. These two are interconnected: When you have a lot of talented people, investments will come. We need to train and strengthen our workforce as well as attract foreign talents to advance our economy. We also need to find a way to retain our aged talents who are over 60 years old but, at the same time, don t jeopardize the career advancement of younger people. Sheng: There is no doubt about Hong Kong s ability to innovate or its access to innovative ideas both within China and globally. With such freedom of access to information and technology, it is a matter of networking the right people and talent together. Silicon Valley was the networking of technology people in the three top universities, plus the entrepreneurs and investors both in California, Wall Street and elsewhere. It grew when the Indian, Taiwanese, Korean and today Chinese people who work in Silicon Valley began to outsource manufacturing to East and South Asia. Hong Kong needs to play a role in that networking. There is a common complaint that there is a lack of leadership in Hong Kong, but leadership is not just at the political level, it is also at the community level. If the community does not step up because the politicians blame the civil servants and everybody blames the businessmen, nothing will happen. Leadership comes when the community recognizes a threat, the leaders articulate it, and the community recognizes that there are difficult trade-offs and sacrifices that are necessary from everybody. A community cannot survive if it wants its cake and eat it too. If it wants absolute democracy, then there are certain prices to be paid. A democracy means that the silent majority must stand for their rights and not allow extremists to take untenable positions. It is important for the middle majority to break out of what people consider to be an impasse. Don t just blame the so-called leaders because in a democracy, everybody is a leader. 13
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