Capital Markets: A new role model for growth (NZ Herald)

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Originally published in the New Zealand Herald

Tour highlights the importance of a clear vision and well-communicated long-term infrastructure plans

Each year, New Zealand’s peak infrastructure body Infrastructure New Zealand leads a delegation of senior public and private sector leaders overseas to explore new ideas and approaches to delivering infrastructure.

This year, the delegation travelled to Singapore, Hong Kong, Beijing and Shanghai to investigate road pricing, integrated transport and urban development, new cities development, and national, regional and city planning. Infrastructure Minister Shane Jones travelled as part of the delegation for the first week.

Industrial and Commercial Bank of China (ICBC) New Zealand helped to co-ordinate the Beijing part of the itinerary, which included sessions on China’s national, regional and city governance; China’s economy and infrastructure funding and financing; Beijing’s masterplan and transport system; and how China looks at prioritising its investment planning.
Xiong’an: green, intelligent and liveable

As part of the Beijing leg, delegates took a day trip to nearby city Xiong’an. The Xiong’an New Area, announced in 2017 and about 100km southwest of Beijing, is destined to become the location for many of Beijing’s non-capital functions and — in turn — home to its relocated population.

At the time, President Xi said the most important role of the Xiong’an New Area was “to help phase out functions from Beijing that are not related to the capital, explore a new model of optimised development in densely-populated areas, and restructure the urban layout in the Beijing-Tianjin-Hebei region.”

Almost immediately, comparisons were drawn between Xiong’an’s future and the southern city of Shenzhen and Shanghai’s Pudong area. Shenzhen — now a leading global technology hub and one of China’s richest areas — greatly benefited from the rapid foreign investment following the economic reform and “opening-up” in 1979. Shanghai’s Pudong is home to many of China’s most iconic skyscrapers, and remains one of the country’s most successful development projects.

Early this year, the 2018-2035 master plan for Xiong’an New Area was approved by China’s central authorities. According to the plan, Xiong’an will be transformed into a green, liveable and modern urban area designed for the modern economic system, with “relatively strong competitiveness and human-environment harmony by 2035”.

Says Amanda Lu, ICBC New Zealand’s deputy CEO: “The New Zealand delegates were very impressed with the way China plans long-term for the future. They are able to attract investment and implement massive infrastructure projects based on a long-term strategy where everyone is aligned to deliver on the future goal.”

“The areas we visited — Singapore, Hong Kong, Beijing and Shanghai — all have a clear vision of the future and long-term infrastructure plans which are well communicated to the public,” she says.
“There are educational hubs set up to help the public and professionals understand the national strategy, city planning, urban development and architecture. The public is brought along on the journey and can see that the outcomes promised are actually delivered.”

ICBC’s fintech focus

Reinforcing the commitment to Xiong’an’s focus on fintech development, ICBC has this month announced a new fintech research centre in Xiong’an. Named the ICBC Information and Technology Co. (ICBC Technology), the new centre is using a capital injection of 600 million renminbi (NZ$134m) to focus on high-tech software and product innovation in fintech.

The Xiong’an New Area Regulatory Commission also officially launched the Xiong’an Requisition and Resettlement Funds Management Blockchain Platform, which applies ICBC’s blockchain technology to the management of the entire process of requisition filing and disbursement of funds.

ICBC group chair Chen Siqing says ICBC Technology will leverage ICBC’s financial and technological advantages to integrate innovative capability and create smart banking strategic measures.
Chen highlighted the “openness genes” of ICBC Technology, with the company expected to serve as a key support for ICBC’s open financial services concept and the implementation of open operations and IT frameworks.

“On the foundation of optimising existing tech institutions, ICBC will use the establishment of a tech company to accelerate and expand the value chain of its own product and services,” he says.
“Following the establishment of ICBC Technology, we will establish specialised, market-based operating mechanisms that suit the demands of fintech development, and explore new models and paths in the areas of innovative R&D, talent incentivisation and the integration of industry, academia, research and application.”

Green panda bonds

A green panda bond is a renminbi-denominated bond issued in mainland China by a foreign entity, with proceeds earmarked for green assets or projects. In issuing a green panda bond, both the regulatory requirements for panda bonds and those for green bonds need to be followed — the bonds must finance eligible green assets that promote the transition to a low-carbon and sustainable economy, and provide clear environmental sustainability and climate change benefits.

Lu says green panda bonds provide an opportunity for overseas green bond issuers looking to diversify their investor base. The booming China green bond market will help fund the investment required to transition to a low carbon and climate resilient economy.

“There is a famous Chinese saying: ‘a fence needs the support of three stakes, and an able fellow needs the help of three other good fellows’.

“It is only through a joint effort and by working together that we will be able to create a sustainable future.”

New Zealand Herald" title="Capital Markets: Fintech revolutionises finance">

New Zealand Herald

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Originally published in the New Zealand Herald

Adapt or die: financial organisations will have to alter their business models to keep up with the changing landscape, writes Tim McCready.

The mobile phone revolutionised the way people engage with their bank, and in the years since, the emergence of more technologies are further shaking up the banking sector — including blockchain, artificial intelligence and big data.

A report from the US Treasury says between 2010 and 2017, more than 3330 new US technology-based firms serving the financial services industry were founded.

Consulting firm EY says half of US consumers now use fintech firms to transfer money rather than traditional methods. This rapid growth is said to be unsettling officials, particularly as young players are perceived to favour rapid growth over risk-management and regulatory compliance.

At this year’s Asian Financial Forum, executives from leading banking, payments and technology companies provided insights into how fintech is transforming their businesses. Though there have been concerns fintech could wipe out traditional finance firms, participants shared how their companies have adapted, the lessons learnt from their evolution.

Customer-first

“There is a perception that conventional banking has been left behind, and fintech is considered a different stream,” says Diana Cesar, group general manager and chief executive, Hong Kong at HSBC.

Cesar disagrees that upcoming fintech companies will displace traditional banking, and says HSBC has been adopting technology for years. But she acknowledges a shift in terms of how technology is applied — the customer is now centre stage when decisions are made by the bank.

“The shift has gone from operations — things like strategic modelling and credit scoring — to how we can enhance the customer experience and journey.

” There is an increasing focus on using data to better understand the customer and offer a service more tailored to their needs.

Cesar explained that when HSBC embarked on this journey, it was used to a servicing model:

customers would use a bank during office hours, and phone banking after hours. “The world has evolved — information services are at everyone’s fingertips on their mobile phone.”

Openness and inclusion

Corporate vice-president, chairman and CEO of Microsoft Greater China, Alain Crozier, says over the past decade Microsoft, already a leader in the industry, was forced to redefine its mission and culture to be much more customer-oriented.

“A major culture change was to open the mindset of our employees. Not just provide technology for technology’s sake, but bring the best for our customers, no matter where they are.”

Crozier says “what was yesterday’s competitors have become today’s customers”. He says Microsoft is opening up its technology so it can be integrated with all other technology.

“The notion of openness and inclusion is fundamental. The power and development of new services will come when you bring data together in one common platform that will help serve customers better.”

Shirley Yu, group general manager for Visa Greater China agrees: “Visa believes in collaboration. It is critical not to restrict others from coming into the market, but making sure we have standards that ensure there is interoperability.”

She points out that even though Visa was formed 60 years ago and could be considered the original fintech business, its ability to adapt means it remains among the biggest.

“If you look at our organisation, more than 50 per cent of our people are in technology,” she says.

“We went public 10 years ago. In the last seven years we have tripled our market cap because we are transforming and changing how we serve our clients.”

Yu says Visa’s core competency is scale; it has 47 million merchants in 220 countries that use its service.

She says Visa is open to new technologies and willing to collaborate with fintech organisations because although the new technologies can be disruptive, Visa can leverage its scale and provide new ways to serve its clients. In order to stay ahead, Yu says Visa is prepared to change everything it does — including its business model.

As an example, Visa has traditionally focused on serving the most affluent.

Yet studies the company has conducted into millennial behaviour have shown younger generations are not attracted to the traditional Visa rewards programme.

“If we focus on the affluent it brings a lot of business for us, but we have to capture millennials today, to make sure we capture their life cycle,” says Yu.

“They want instant gratification — so we’re rethinking how we design loyalties.”

From batch to real-time

Tony McLaughlin, Managing Director, Emerging Payments and Business Development, Treasury and Trade Solutions of Citi, says changes taking place in the payments field are “visible and stark.”

He says cryptocurrency and other distributed ledger technology present a radical vision of the future of money, which could ultimately lead to a re-engineering of the fiat currency system.

But the other major change McLaughlin has seen implemented by many countries in a much quieter way is real-time payment systems and open banking.

“Cryptocurrency is the noisiest development, but the true story is the quieter movement from batch to real-time — that’s where the real action is,” he says.

McLaughlin explains banks are still built on batch processes, which doesn’t marry up well with real-time banking. Payment systems like AliPay, WeChat Pay and open banking in the United Kingdom are all part of the shift towards a 24/7/365 system.

He says the concept of end-of-day and cut off times are all artefacts of batch processes, and the transition into real-time is going to be enormously challenging.

“Organisations can delude themselves for a long time milking existing business models.

“In this day and age, banks must see the writing on the wall if they don’t adapt,” says McLaughlin.

Balkans: Meeting of cultures in Bosnia and Herzegovina (NZ Herald)

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After an unusual border welcome, Tim McCready finds a welcoming world of contrasts during a tour of Bosnia and Herzegovina.

Thumbing his way through my New Zealand passport, carefully considering each page, the Serbian border officer looked up at my Serbian friend and asked him to translate a question for me: “What do I need to do to move to New Zealand?”

I laughed. But the officer glared at me and asked the question again. He wasn’t kidding.

“Tell him we need skilled workers in hospitality and tourism … and construction,” I said.

Without even a hint of a smile, he nodded at me, handed back the passport, and motioned us on into Bosnia and Herzegovina.

We left Serbia’s capital Belgrade early in the morning, heading southwest towards Trebinje — Bosnia and Herzegovina’s southernmost city. The eight-hour drive passed through dramatic scenery. Soaring rugged mountains covered in thick forest, dotted with small villages, magnificent clear winding waterways, and the occasional brutalist concrete structure, honouring those who have died in battles from the country’s turbulent past. Today, many of them are crumbling away — their ruins a bleak reminder of the economic problems of the region.

TREBINJE 
Game of Thrones has popularised the charm of Croatia’s Dubrovnik. It has become so inundated by cruise ships and visitors that Unesco has threatened to revoke its status as a World Heritage Site if numbers aren’t limited. On the other hand, Trebinje — just 30km away — is relatively quiet. There is a real sense of activity, but it is real-life, day-to-day activity — not tourism. The old town’s untouched Ottoman architecture, stone houses and towering walls make it one of Bosnia and Herzegovina’s most picturesque cities, and a credible rival against the circus of Dubrovnik.

Sipping coffee at a cafe on the edge of the city square, I watched the sun creep over the old city walls and on to the local farmer’s market that surrounded me. The central square converts to a market each day, with stalls selling local produce, cheese and rakija (a fruit brandy popular in the region) — and the sweetest, juiciest strawberries I have ever tasted. As in much of the Balkans, food here is fresh, tasty and very, very cheap.

The clear blue water of the river Trebisnjica flows through the city, passing under the city’s impressive Ottoman bridge — built in 1574 and painstakingly transported stone by stone 5km downstream in the 60s to avoid damage during the construction of a dam. I was yet to learn that in this region, bridges — with extraordinary pillars, impressive arches and ornate brickwork — were masterpieces waiting to be discovered.

But despite the beauty of Trebinje, one of the country’s most visited tourist destinations is 120km north — the small town of Medjugorje: the site of an alleged apparition of the Virgin Mary in 1981.

MEDJUGORJE

As we made our way toward one of the most important religious sites on the planet, we stopped briefly for lunch at the Kravica waterfall. The falls are truly one of Europe’s hidden gems: beautiful clear water cascades down vast cliffs, wrapping around to create a stunning natural amphitheatre surrounding the lakeside. A few brave visitors were in the water — despite being ice cold year-round, it’s a popular spot for a dip.

Another 20 minutes in the car brought us to the main street of Medjugorje. It was a world away from the tranquillity of the waterfall, and felt more akin to driving the Las Vegas Strip — if you swapped the grand casinos for religious-themed souvenir stores and high-rollers for Catholics.

The town has become one of the most popular pilgrimage sites for Catholics in the world. It has a population of about 2000, yet receives more than one million tourists each year. It is estimated that 30 million pilgrims have visited the town since the reputed apparitions seen by six children in the early 1980s.

Souvenir stores line the main street, selling all kinds of religious memorabilia: jewellery, rosary beads, Jesus on the cross in all sizes, and even beer — branded with the apparition site, of course. Whether you are visiting Medjugorje for religious purposes or not, you cannot deny that the creation of such a bustling economic livelihood for the formerly modest agricultural village is nothing short of impressive.

Buying a heavily marked-up bottle of water from a convenience store close to the apparition site, I was approached by the shopkeeper with a recognisably thick American accent:

“Is this your first apparition visit?” she asked. I nodded and told her it wasn’t a typical destination for me. “I’m here every year from Wisconsin,” she told me, proudly explaining that she comes from the first approved apparition site in the United States. “I come back here during the summer high season and make an absolute killing,” she said, as she handed back my change.

MOSTAR

Like Medjugorje, Mostar is bursting with tourists. Colourful bazaars and restaurants line the crowded cobblestone streets; historic houses and mosques spill down the cliffs surrounding the old town. Limestone steps lead to hidden restaurants, their terraces overlooking the river and its infamous bridge — the perfect venue for Turkish coffee … or drinks late into the night.

Of all the spectacular bridges in Bosnia, when referring to the “Old Bridge” (Stari Most), it can mean only one: the medieval bridge of Mostar that spans the Neretva river. The bridge — symbolically linking the Muslim east with the Christian west for 427 years — was destroyed during the breakup of Yugoslavia in the 90s, ripping apart the city’s unity.

It was painstakingly rebuilt to its former glory in 2004 and using the same local stone as the original bridge; in 2005 it was added to the Unesco World Heritage list. When reconstructed, Unesco said of the bridge: “The Old Bridge area, with its pre-Ottoman, eastern Ottoman, Mediterranean and western European architectural features, is an outstanding example of a multicultural urban settlement. The reconstructed Old Bridge and Old City of Mostar is a symbol of reconciliation, international co-operation and of the coexistence of diverse cultural, ethnic and religious communities.”

Nowadays, the bridge is brimming with souvenir stalls that jostle for space. From the top, locals jump a dangerous 24m into the cold Neretva River below. This ancient tradition has become a moneymaking exercise as divers wait until they have collected enough money from the eager crowds that gather before taking the plunge.

SARAJEVO

My last stop — 130km north of Mostar — was Sarajevo, Bosnia and Herzegovina’s capital and largest city. Arriving close to dinnertime, I pushed my way through the narrow streets of the Old Town — the city’s historic precinct and cultural heart that dates back to the 15th century. Stalls sell coffee, copperware, trinkets and souvenirs that spill out on to the cobblestones.

The sights and smells from Bascarsija (the old bazaar) consumed my senses, and on an empty stomach, the smoky rich smell of cevapi and onions that fills the air was impossible to resist: a Balkan speciality of grilled mince shaped into a small sausage, served with flatbread. A generous meal sets you back just a few dollars.

Following dinner, I left the gritty and overcrowded winding labyrinth of the Old Town and stepped out into Sarajevo’s main boulevard — previously dubbed Sniper Alley due to the danger it presented during the Bosnian War, now transformed to a trendy high street that features all the top names you’d expect anywhere in the world.

The Siege of Sarajevo, lasting 1425 days, was the longest siege of a city in modern military history. The atrocities that took place are difficult to fathom, but the abandoned buildings and bullet holes that remain in facades act as a constant, cruel reminder.

“Why would you want to visit war-torn Bosnia?” my brother asked before I left New Zealand.

“Are you sure it’s safe?” asked my mum.

To many, the mention of Bosnia and Herzegovina conjures up memories of the war in the 90s. Images from the television news of the tragedy there remains etched into hearts and minds: shelling and gunfire, buildings alight across the city, and genocide — the atrocities resulted in 100,000 dead and more than two million refugees.

The city still has a way to go. Minefields laid during the siege remain in the hills. Signs remind you that venturing too far off the beaten track is absolutely forbidden.

But Sarajevo — with an eclectic, energising vibe — is now a beacon of hope for peace and multicultural tolerance. One of the city’s taglines is “meeting of cultures”, and the juxtaposition between East and West is evident. Sarajevo has been a city of religious diversity for centuries — Muslim Bosniaks, Catholic Croats, Orthodox Serbs and the Jewish community live side by side.

As I made the journey back to Serbia’s capital Belgrade, the words of the Serbian border officer continued to echo in my mind.

“What do I need to do to move to New Zealand?”

Despite the extraordinary vistas and rich culture, the economic situation of the region means locals often don’t have the financial freedom to allow them to appreciate it. The older generation is nostalgic about the days when Yugoslavia was under the leadership of the adored Tito; the younger generation desperately wants something better than what the region has given them and their parents. The atrocities of the recent past are never far from anyone’s minds.

But tourism numbers are growing and creating new opportunities. The World Tourism Organisation claims that Bosnia and Herzegovina will have the world’s third-highest tourism growth rate between 1995 and 2020 ( admittedly this comes from a low base, given the conflict in the 1990s).

Natural beauty with majestic waterfalls, ancient towns steeped in a complex history, hearty food and welcoming people.

Whatever these words conjure up, it probably isn’t Bosnia and Herzegovina. But it should.

China Business: 2019 – a year of challenges (NZ Herald)

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Earlier this year I travelled to Hong Kong to attend the Asian Financial Forum.

The forum, now in its 12th year, brings together financial and business leaders, global policymakers and financial regulators from over 40 countries and regions.

While the theme of the Forum this year was “creating a sustainable and inclusive future,” it was unsurprising this was clouded by the uncertainty hanging over the United States-China trade negotiations, fears of growing protectionism, populism and wider geopolitical tensions.

In her opening address, Hong Kong’s chief executive Carrie Lam wished attendees success in finding innovative new ways to excel in 2019 —  but acknowledged it will likely be a considerable challenge this year.

She was, of course, referring to the trade discord between the world’s two largest economies —  as well as lingering uncertainties in other parts of the world.

“For many economies —  including Hong Kong —  moderated growth and, for many companies, diminished business and financial results appear inevitable,” she said.

The more than 3300 attendees agreed —  the audience were given the chance to vote on sentiment throughout the forum.

When asked about the outlook for the global economy in 2019, just 15 per cent of respondents were optimistic; 47 per cent were pessimistic. This is in dramatic contrast to the 2018 Forum, where 58 per cent were optimistic and just 6 per cent were pessimistic

A follow-up question asked the source of risk for global financial stability this year: US-China trade tensions came out on top with 77 per cent of respondents.

This was followed by monetary policy normalisation (10 per cent), cyber breaches and security risks (7 per cent) and Brexit and fiscal discipline in the European Union (6 per cent).

Perhaps in light of the concern around China uncertainty, attendees at the forum felt that Southeast Asia offered the best guarantee of investment return for 2019 (39 per cent). This was followed by China (35 per cent), the United States (16 per cent), Japan (3 per cent) and Western Europe (2 per cent).

Hong Kong’s Financial Secretary Paul Chan said that global uncertainty weighs heavily on global investment and business sentiment, and adds downside risk to economic growth and increased volatility in financial markets.

Although Hong Kong is part of China under the “One Country, Two Systems” principle, it has distinct advantages for attracting investment — including operating with a strong rule of law based on English common law, independence of the judiciary, a simple tax system, and respected intellectual property protection.

Chan said Hong Kong’s position as the freest economy in the world comes with an assurance that protectionism won’t happen there.

“We support free trade and the multilateral trading system, as well as the free flow of capital, people and information.

“Indeed, it is the cornerstone of our economy,” he says.

“The International Monetary Fund has commended Hong Kong’s prudent macroeconomic policies.

“The fund noted that our long-standing buffers will help Hong Kong maintain stability despite the increasing risks confronting global growth.”

He noted that the Government is enhancing the regulatory regime and the resilience of the financial markets to help Hong Kong maintain financial stability amid heightened external uncertainties.

But US-China trade tensions, the economic slowdown in China, cooling property prices and volatility in the stock market have had a demonstratable impact.

The trade-reliant Hong Kong economy expanded at just 1.3 per cent in the fourth quarter of last year — significantly down on the 2.9 per cent GDP growth recorded in the third quarter.

Export growth was near-zero, a dramatic decrease from the 6 per cent average in the first three quarters. Retail sales were also down.

Denis Beau, First Deputy Governor of the Bank of France, told the forum: “the world economy is facing a maturing financial and economic cycle, but we are far from a downturn”.

Overall, financial intermediaries were much better equipped to withstand shocks than during the financial crisis in 2008.

Burkhard Balz, executive member of Deutsche Bundesbank (Germany’s central bank) said uncertainty was significantly higher than 20 years ago — due to disintegration (referencing Brexit), political disturbances and trade tensions — but  “by historical standards, volatility is not high”.

Other keynote speakers, including Vice-President of the China Banking and Insurance Regulatory Commission, Wang Zhaoxing, recognised that despite the challenges, there were still many opportunities.

He was confident the Chinese economy would remain stable because of the potential for supply and demand in the country and said although the opening up of China’s banking and insurance sector had so far been gradual, President Xi announced an acceleration which has been welcomed globally.

Wang said China’s central government would focus on five key areas this year: the real estate market, local government debt, the influence of global markets, monetary policy in developed countries, and the trade relationship between China and the United States.

“China will continue to work with other Asian countries to strengthen collaboration and promote the development of the Asian economy and financial markets,” he said.

In response to the Forum’s theme, participants were polled on what the biggest challenge was to achieve a sustainable future globally.

A total of 43 per cent said it was a “reluctance to trade higher cost today for better sustainability for future generations”.

This was followed by “reluctance by some governments to adopt policies for sustainable development” (23 per cent), “insufficient attention to environmental, social and governance factors in asset markets” (21 per cent), “lack of financially viable green projects” (10 per cent), and “lack of green funding” (3 per cent).

Tim McCready travelled to the Asian Financial Forum as a guest of the Hong Kong Government.

China Business: 2019 – Exchange securing a future (NZ Herald)

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Tim McCready talks to James Fok, Head of Group Strategy at the Hong Kong Exchange

Herald: What sets the Hong Kong Exchange apart from other exchanges around the world?

Fok: We’re one of the top several exchanges in terms of market capitalisation in the world. We have been number one in IPOs in six of the last 10 years. In many ways, we have a fantastic business — particularly leaning on mainland China and helping Chinese companies from the 1990s onwards raise capital from international markets. Unlike many other cash equity exchanges around the rest of the world, we have quite a lot of growth in our core business. While in New York you’re seeing the number of listed companies fall year-on-year, we’re seeing the number of listed companies go up.

Going back almost 10 years now, we recognise that mainland China is also changing in the way in which it operates and is structured. The first H-share company [companies incorporated in mainland China that are traded on the Hong Kong Stock Exchange] to IPO on the exchange was Tsingtao Brewery Group in 1993. At that time there wasn’t a lot of capital in China, so if Chinese companies wanted to raise capital they had to come out into international markets, and Hong Kong was a place that enabled them to do that.

Herald: With China opening up over past decades, how has the Exchange’s relationship with China changed?

Fok: Today there is a huge surplus of capital in China — notwithstanding the economy slowing down. There is over US$25 trillion sitting in Chinese deposit accounts that has not been deployed into capital markets. We still see a big opportunity with China, not necessarily with Chinese companies coming out to raise capital — although they are continuing to do that — but to try and find a way for Chinese investors to be able to diversify their investment in international markets.

Chinese financial market needs are also becoming a lot more complex. Chinese companies and individuals are doing a lot more things internationally, and supply chains are such that they are making sure they squeeze every bit of margin out of everything. That means they have to hedge a lot of the input prices such as metals and commodities. China is rich in many ways, but in terms of natural resource commodities it is generally having to import to supplement its own domestic production. On top of that, doing more business internationally means that there is foreign exchange risk, interest rate risk on foreign currencies, etc.

The role Hong Kong needs to play going forward is a much more comprehensive one. Not just the capital formation centre that we have continued to be, but we need to become a wealth management centre and a risk management centre for China as well. International investors coming here continue to come here for the Chinese exposure. They now have the option of going to the mainland directly, but many still find challenges in going directly onshore.

Now, as well as bringing Chinese companies here directly to list, the exchange is helping to provide a channel in which investors on both sides of the border can access each other’s market without the product or company being directly listed there.

We are providing a gateway for people to go in using their broker in Hong Kong — without having to open new accounts onshore — allowing access to the onshore market in as frictionless way as is possible, where we manage the differences in market structure.

Equity is still a large piece of the business, but more and more we have been shifting towards different asset classes as well — the most obvious was our acquisition of the London Metal Exchange in 2012.

Herald: How are new advances in fintech reshaping how you’re operating?

Fok: Stock exchanges are the original fintech businesses. Technology has driven our business for a very long time. But what seems to be happening at the moment in the technology space is that we have a confluence of factors that are forcing a huge acceleration in the pace of change.

That change, in many ways, has been hugely disruptive. You only have to look at retail businesses and what Amazon has done to those to understand that. When you look at stock exchanges and you look at the fundamental business model — providing a centralised place for people to buy and sell securities — generally that model is very efficient. But in every other facet of our business — ranging from clearing and settlement, the ways companies communicate with their investors, through to the day-to-day operational processes — that is now disrupted.

When you look at the ability of robotics and artificial intelligence to replace a lot of fairly menial — and actually relatively sophisticated but process-driven jobs — it’s phenomenal. We have had to, like everyone else, look at how we adopt technology into our business to drive efficiency.

Many businesses do this as a way to cut costs. There is an element to which that is true for us, but actually it goes much beyond that. Because everyone investing in our market has to use us, if we are inefficient as a market and as an infrastructure, it imposes a significant cost on all the market participants which ultimately affects Hong Kong’s competitiveness.

Herald: How is the exchange helping to attract smaller start-ups to Hong Kong?

Fok:  Last year we undertook the largest set of listing reforms we have done in 25 years. We launched three new chapters of our listing rules — all of which were targeted at new economy companies, but two in particular:

We launched a segment of our main board that caters to pre-revenue biotech companies. Many R&D companies when they come to market don’t have revenue, let alone profit. The biotech board allows companies from the biotech sector to come here and list. Prior to these changes companies had to at least have revenue.

The second component is to allow weighted voting rights. These allow founders to maintain control even if they are diluted below 50 per cent of the shareholding of the company. We didn’t offer these kinds of governance structures here, so we saw a lot of Chinese companies in the tech space find themselves in the US market.

We were number one for IPOs last year for the amount of money raised, and 32 per cent of that money raised came from companies listing under the new chapters.

Herald: The Hong Kong Exchange signed a Memorandum of Understanding with the NZX early last year. What was the purpose of this for the HKEX?

Fok: The long-term ambition for us is to develop the product offering in Hong Kong more widely. It is largely an equities market still today, and when you look at trading and market capitalisation, something like 80 per cent of turnover is on mainland Chinese companies. While this is precisely what attracts international investors, as we open up to more direct mainland China investors who already have a lot of China product to invest in onshore, we need to diversify our offering.

New Zealand isn’t the only country we have signed an MoU with.

Of course, on the stock side, New Zealand is not one of the highest priority markets — most Chinese investors looking to diversify will look to the US market. Instead, the purpose is to bring a more diverse range of products to the exchange. New Zealand has done very well in the agricultural milk future space — something that is potentially of relevance to mainland Chinese consumers, particularly given their consumption.

Promoting confidence

The NZX and Hong Kong (HKEX) exchanges signed a Memorandum of Understanding in January 2018 to further promote confidence and co-operation in Asia-Pacific markets. Under the terms of the memorandum, the exchanges seek to promote market development by considering opportunities in a range of areas, including foreign investment, derivatives, depository receipts, listed debt, dual listings and exchange-traded funds.

The NZX says:

  • This global alliance supports NZX’s commitment to increase its international presence, and our desire to expand the reach and connection of the New Zealand market, because growth in New Zealand’s public markets will come from having a wider range of listed products and increased market activity. Global alliances we initiated and are continuing to build with the Hong Kong, Singapore, Shanghai and Nasdaq exchanges support this.
  • NZX and HKEX have continued to work together since the memorandum was signed in January 2018. In April, NZX Regulation recognised the regulatory regimes and requirements for the Hong Kong, Singapore and Toronto exchanges. This allows companies listed on these exchanges to seek a secondary listing on NZX.
  • Seeking new ways to retain and attract customers has been a priority for NZX. It is vital to growing New Zealand’s public markets. Over the past 12 months, we progressed alliances with global peers to ensure that an NZX listing connects New Zealand issuers with the world.
  • Our relationships with the Nasdaq, Singapore, Hong Kong and Shanghai exchanges, and the transformation in our service offering to issuers, ensures we are developing a product that is relevant and competitive.

China Business: Why you can’t contain China (NZ Herald)

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We’re in the midst of important structural shifts, says former World Bank President Robert Zoellick. Tim McCready reports

“China has had enormous progress over 40 years. It has had the most historic reduction of poverty in humankind,” says former World Bank President Robert Zoellick.

Zoellick, who led the World Bank through the global financial crisis and served as a US trade representative under President George W. Bush, points out that while Asian growth rates have been healthy, they have not been able to return to the levels they had before the 2008 financial crisis.

At the recent Asian Financial Forum he sent a message that the Asian growth model that was so successful for many decades would need to change.

Zoellick says  Asian economic policymakers have traditionally had a longer time-horizon.

“The old model began by relying on manufacturing at the low end of supply chains. It then integrated upward — adding efficiencies, learning, productivity — but relied on the assistance of exports to developed economies.

“I think that perspective is especially valuable today because we’re in the midst of some very important structural shifts.”

Though Asia has accounted for two-thirds of global growth in recent years, markets are nervous as major shifts are taking place: the end of the quantitative easing experiment and transition to a tightening cycle, slower growth in real trade over the past decade compared to the 20 years before the financial crisis, productivity increases in Asia, and the ongoing trade dispute between China and the US.

“Trade policies and rising economic nationalism around the world have disrupted commerce and created a great deal of uncertainty,” says Zoellick.

“Traditionally, governments put tariffs on final goods, but from 2010 to 2016 they focused on temporary trade barriers, targeting cross-border supply chains for raw materials and components.”

But while President Donald Trump’s hefty tariffs may have been intended to help US manufacturers by making foreign goods comparatively more expensive,  in reality, import taxes imposed on intermediate goods like steel and aluminium are pushing up prices of products manufactured in the US.

Belt and Road part of a new era

Zoellick says Japan, South Korea and Taiwan all offer cautionary tales — a bias towards incumbency and instrumentalisation has slowed the innovation process — and a rapidly ageing population and lower population growth are changing the dynamics. “We can see some of those trends in China today as well.

“One of the main challenges is: will Asia grow old, before it grows rich and wealthy?” he asks.

He says the new Asian model will need to focus on new and different types of supply chains, to meet the changing needs — first off — of the region itself.

He points to the Greater Bay Area as an example of how this transformation has already started in Hong Kong and China.

The Greater Bay initiative, established by the Chinese Government, links Hong Kong, Macau, and nine other cities within the Guangdong Province into an integrated economic and business cluster.

The 11 cities have a combined population of close to 68 million people — greater than the world’s largest city cluster of 44 million in Tokyo — and a GDP of around US$1.4 trillion (NZ$2.06 trillion).

The 55km Hong Kong-Zhuhai-Macau bridge-tunnel system which opened last year cut the drive time between the cities from up to three hours, down to just 30  minutes.

Zoellick sees the Greater Bay Area as a huge opportunity, but says the challenge for Hong Kong will be not only the hard infrastructure — railways, bridges, roads — but some of the soft connectivity to move capital, information, and people.

“Policies will have to focus on new cross-border logistics networks and the barriers that impede them, such as new infrastructure to facilitate trade, services, environmental conditions, energy access, standards, rules and a whole series of soft infrastructure issues, such as customs and tax procedures,” he says.

Zoellick says China’s Belt and Road Initiative could be an important part of the new Asian model — if it is correctly developed.

“Frankly, the world is still unclear about the real purpose of Belt and Road. Is it a move for geopolitical dominance across Asia?

“Is it a plan to export overproduction from some of the materials industries in China? Or is it a new corridor for development? How will other countries benefit?”

He says although it is important to focus on the new regional opportunities and obstacles of the Belt and Road Initiative, Asia must stay global in outlook. “For example, even with President Trump’s protectionism, consider the US economy.

“The private sector will continue to be the engine for innovation in the United States — whether it is big data, different business models, or biologics in medicines — Asia must keep linked into that to remain competitive and adaptive.”

A trade leadership vacuum

Zoellick says another important factor shaping trade in Asia is the way President Trump has seen the US abandon its previous role as a key player developing new rules for global trade.

“After some 70 years of a US-led system, I suspect that much of the world has taken the public good aspect for granted,” he says.

“People sometimes reacted against US behaviour and didn’t always agree with it, but because the United States is an innovative economy working at the cutting edge, US officials had to press for new norms and rules to help adapt the international system — in areas such as services, intellectual property rights, transparency, anti-corruption, investment, and even currency manipulation.

“When you consider developments in big data, along with things like personal sensors and innovation in medicines, they can have huge effects on health and are significant business opportunities — but only if the world develops the appropriate legal framework.

“Traditionally, the World Trade Organisation could help do this. But today the WTO is adrift.

“It will not be able to negotiate new rules unless the United States, European Union, China and others can reinvigorate the WTO.”

Zoellick says China might offer an alternative system, but if they do, the world is more likely to end up with a managed trade system.

“The big powers will emphasise national champions, political priorities and sovereign protections over a rule of law framework in which markets will operate relatively freely,” he says.

“That has very large implications for the small and medium-sized economies that have benefited enormously from a rules-based system over past decades.”

The ongoing trade war

Zoellick says that for the near term, he expects to see friction, accusations, and negotiations between China and the US become a fact of life and add to ongoing uncertainty.

But some of the tensions between the two economic giants go beyond Trump and are concerns held across the American political spectrum and among voters.

“A transactional deal would not address the fundamental issues which are causing widespread concern in the United States — including questions about the Belt and Road Initiative and the ‘Made in China 2025’ strategy, which has created anxiety that China intends to dominate advanced technology.

“These concerns are part of the political debate in the US,” he says. “The US cannot decouple from or contain China, but it can work together with China to make sure the rules are followed.”

Zoellick says that although Trump is a protectionist by nature, he will be sensitive to the market.

As he begins to think about his re-election — and particularly if the US economy slows down — he is more likely to do a deal.

“However, if there is a deal, I think we have to recognise that it is more  likely to be a truce than a solution,” Zoellick says. “Part of my concern is that I’m not sure President Trump thinks in systemic terms.  He thinks in deal-making transactional terms.”

China Business: Taking a fresh approach (NZ Herald)

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The fresh food e-commerce business is growing in China as Tim McCready reports

Chinese e-commerce giant Alibaba Group launched the sale of fresh produce in 2016 with the introduction of its Hema supermarket chain. These stores have been established as a test bed for what Alibaba calls the “New Retail” concept: the blurring between shopping online and offline.

In order to keep products fresh, Hema’s fresh grocery items are packaged in small quantities — with just enough food portioned out for a small Chinese family.

The supermarket — which doubles as a warehouse and logistics facility — encourages shoppers to buy online using their mobile phones. Alibaba’s smart logistics technology means that as long as the consumer lives within a 3km radius of the store, products will make it into their hands within 30 minutes of ordering.

Last year, Hema supermarkets in Beijing and Shanghai launched a 24-hour delivery service — again with a 30-minute delivery window.

“We found that New Retail doesn’t only merge online with offline, but also connects day with night,” said Hema CEO Hou Yi. The around-the-clock offering includes most items in store, aside from some fresh produce. Cooked meals are available for delivery until 1am.

Hema’s presence in China has expanded rapidly, with the chain now in 80 locations across the country.

Consulting firm iResearch says China’s fresh food e-commerce industry grew by 59.7 per cent in 2017 to 139.1 billion renminbi (NZ$30.13b), noting that fruit is the most popular food item purchased online. Dairy products and vegetables ranked second and third, respectively.

More players are moving into the fresh grocery space. China’s second-largest e-commerce retailer behind Alibaba, JD.com, last year launched its 7Fresh supermarket chain. Like Hema, 7Fresh focuses on fresh food, and promises 30-minute delivery to locations within 3km of a physical store. During its trial period, JD.com said more than 10,000 customers visited the 7Fresh supermarket each day.

JD.com now plans to open 1000 grocery outlets in the next three to five years.

“Our goal is to expand 7Fresh supermarkets into every first and second-tier city and the surrounding areas of those cities,” says Wang Xiaosong, CEO of 7Fresh.

Another fresh produce e-commerce platform, MissFresh, was founded in 2014, and now operates in 20 Chinese cities, specialising in one-hour deliveries of produce.

In September last year, MissFresh completed its Series D fundraise, raising US$450 million (NZ$661 million) from investors that include Goldman Sachs and Tencent Holdings Ltd.

At the time of the raise, founder and CEO Xu Zheng said MissFresh planned to set up 10,000 front-end warehouses in 100 cities around China, which will allow them to provide one-hour deliveries of fresh produce to 100 million families.

The funds from the raise would be used to develop the company’s supply chain, cold chain logistics infrastructure and its smart retail technology.

Food safety, traceability and provenance

Along with a focus on fresh food and fast delivery, supermarkets in China are placing an increased importance on demonstrating food safety and provenance to consumers.

This stems from various food safety incidents in China — most notably the 2008 melamine milk scandal — which have created deep distrust from consumers in food supply chains.

Detail on the origin of products can also help them to stand out as premium products in the minds of the consumer.

Alibaba’s Hema supermarkets encourage customers to scan QR barcodes that accompany every product with their phone. This allows them to receive further information: including how to prepare it, recipe ideas, and its provenance.

Details of the journey of a fresh food item from farm-to-store can include pictures of the distributor’s business licences and food-safety certificates, information on when a particular crop was harvested and the date the item was delivered to the store. For products that need to be kept at a particular temperature — such as meat and fish — the system can provide details on how cold the inside of the delivery truck was during transit.

To further bolster the confidence customers have in its products, Alibaba joined a consortium of four Australian and New Zealand companies last year, to introduce a food traceability system based on blockchain technology.

The consortium — known as the “Food Trust Framework” — includes New Zealand’s dairy giant Fonterra and New Zealand Post, along with Australia’s Blackmores and Australia Post.

A joint statement said of the initiative: “it will use an immutable central ledger to achieve end-to-end supply-chain traceability and transparency throughout the supply chain to enhance consumer confidence and build a trusted environment for cross-border trade.”

The supply chain traceability cross-border trial recently concluded. An Alibaba spokesperson says:

“Following the success of the trial, Alibaba Group will continue to invest in and develop solutions to provide brands and consumers increased confidence and assurance in the supply chain for products sold from New Zealand to Chinese consumers.”

Rural growth

It is estimated that 27 per cent of China’s internet users are based in rural areas, and e-commerce giants are keen to tap into this market, with plans underway for massive development and expansion into inland regions.

Last year, JD.com received approval from China’s Civil Aviation Administration to test a drone delivery network in the northwestern Shaanxi province.  The company also announced plans to build 185 drone airports in Southwest China.

JD.com, which has already been operating drones for deliveries since 2016, says it hopes the new drone airports will allow agricultural products from Sichuan to be delivered anywhere in China within 24 hours. “Due to the high costs of logistics, agricultural products sell at a higher price in cities while industrial products sell at higher prices in rural remote areas,” says CEO Liu Qiangdong.

Alibaba has established a “Rural Taobao” initiative, that aims to sell products to regional customers at urban prices, and create efficient supply chains for rural produce.

As part of the project, Alibaba has established a network of 30,000 e-commerce service centres that enable villagers to purchase products online.

General manager of Rural Taobao Bill Wang says: “We want to improve the living conditions of China’s rural regions. To do so, we need to provide high-quality goods, personalised services, smart logistic solutions and prices comparable to that of the cities.”

These moves from e-commerce giants align with the Chinese Government’s National Strategic Plan for Rural Vitalization from 2018 to 2022, which calls for significant progress in rural rejuvenation. The plan has ambitious goals to close the gap between urban and rural areas, eliminate poverty and improve governance in the countryside.

China Business: Changing landscape (NZ Herald)

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Ye Miao, head of the Asia Team at James & Wells talks to Tim McCready about the foreign investment law passed recently in China.

 Herald: What areas will the new foreign investment law address?

The new Foreign Investment Law, passed by the Chinese National Congress on  March 15, 2019, and coming into force on 1 January 2020, seeks to promote foreign investment into China by further easing market access for foreign businesses and encouraging foreign investment on a government administrative and policy level.

The new law addresses specific areas of concern for foreign businesses looking to invest in China, such as forced technology transfers. It also intends to help strengthen intellectual property (IP) protection and level the playing field in terms of market competition between foreign and domestic businesses.

Herald:  Will the new law allay uncertainty about doing business in China?

It’s important to consider the new law as a framework for the Chinese Government to set out its principles and intentions to further ease market access in China and respond to some of the concerns held by foreign businesses and investors in the China market. It is not necessarily a prescriptive set of rules that govern every eventuality. There is an expectation, however, that it will lead to stronger, more efficient compliance and enforcement.

There are some very promising principles in it.  For instance, Article 22 specifically enunciates the principle of protecting the intellectual property rights of foreign investors and enforcing them against infringing parties, consistent with Chinese intellectual property law.

Importantly for foreign investors, Article 22 also affirms that foreign investors will not be forced into technology transfers as part of their investment into China.

Article 23 also seeks to further protect the trade secrets of foreign investors from being disclosed by government officials and employees.

Other principles set out in the new Foreign Investment Law include:

  • Restriction of investment based on a negative list of specific industries/fields. Outside of these, the Chinese Government will afford the same national treatment to foreign investment.
  • In Government procurement processes, foreign businesses will be given equal treatment as local Chinese businesses.
  • Confirmation that capital invested in China, and profits made by foreign investors may freely be transferred in and out of China.
  • Stronger wording that Government will not seek to impose unwarranted actions that interfere with the business activities of foreign enterprises, and that the Government will fulfil policy and contractual commitments with foreign investors and enterprises.
  • Compensation and complaint mechanisms where commitments are broken and/or the where there is any infringement of the foreign business’ lawful rights.

Some commentators have rightfully noted that the new law still lacks substance in a number of areas, due to its breadth and vagueness.

While this is a cause for concern, it is important to remember that it is not uncommon for Chinese law to be set out as a framework of principles and intentions, necessitating further development and interpretation.

Herald:  How will this impact on the business environment for foreign firms?

This will ultimately depend on interpretation of the new law, and related laws and enforcement of these principles by Chinese authorities.  We hope it will drive a change of business and administrative behaviour in specific areas such as those relating to intellectual property theft or the disclosure of trade secrets, but we cannot expect change to happen overnight.

Overall, China has become a much better and often very lucrative place to invest and do business in over the past two decades.  We are cautiously optimistic that the principles and intentions set out in the new law represent further progress.

Herald: What are the challenges New Zealand businesses face when interacting with the China Trademark Office?

One of the significant challenges facing the Chinese Trademark Office (CTMO) and the Trademark Review and Adjudication Board (TRAB) is the rising volume of trademark applications, oppositions and proceedings.  According to the most recent statistics in China, there are over 18  million trademarks registered in China.

In 2018 alone, the CTMO received almost 7.4 million applications and examined over 8 million.

That represents over 20,000 applications and 22,000  examinations per day.

This puts immense pressure on the CTMO to both process the applications quickly and to act by the book, and has resulted in examiners often taking very conservative positions. Very prescriptive interpretations are taken where there are prior marks that include even minor similarities with the applied for trademark, which means an estimated 50 per cent or more of all applications are now rejected in the first instance. Applicants then have just 15 days to respond.

Therefore, it’s important for a business to consider its options in depth and to engage a trademark professional to assess the examination report and respond to it by the deadline. Often, objections can be overcome at the TRAB appeal level where there is more time for examiners to consider the applications and evidence in support, or through other actions.

Where the TRAB issues an unfavourable decision, an appeal can still be made to the Beijing IP Court. Unfortunately, however, these processes can be time-consuming and costly, so it is worthwhile to have back-up plans and an overall strategy in place. Unfortunately, the high volume of applications can mean that your potential brand (words and logos) may already be taken by someone else. As such, it is wise to consider checking the availability of your brand as trademarks in the development stage of your branding, so that you don’t overcommit on a brand that you may not be able to use or register in your chosen markets.

Herald:  How do you see the long-term outlook for IP protection in China?

China has been updating and improving its intellectual property laws and process over the past decade, and it is continually doing so. For instance, it is currently in the process of updating its patent laws, and has recently had high-level discussions as to its trademark laws and processes. These discussions have involved IP professionals as well as businesses.

While there are still frustrating processes and wait times, the overall goals of the IP authorities are admirable.

They have sought to recruit more examiners to help reduce examination times, set up the Beijing IP court to deal with specific IP matters expediently, and taken drastic steps to reduce trademark squatters.

Herald: Are New Zealand businesses ready to take advantage of the changing opportunities in China?

Some are well-prepared, others less so. In addition to a good product or service, it’s important that New Zealand businesses have a good story, and that they properly assess opportunities in key markets.

We strongly recommend carrying out due diligence in advance of entering China, and engaging someone on the ground with knowledge of your industry or sector.

And of course, we recommend taking early and appropriate steps to protect your IP and trade secrets.

And be mindful of the different cultural forces in play — what works in New Zealand does not necessarily work in other markets like China.