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Greater Bay Area: World’s Innovation Lab (2/3)

Why the Greater Bay Area Is More Than Just China’s Answer to Silicon Valley Plus Wall Street

· smart city

{{{Matteo Pantalfini}}}

The Greater Bay Area, a megalopolis comprising nine Guangdong’s cities plus Hong Kong and Macau, epitomises Aristotle’s “the whole is greater than the sum of the parts”. The global innovation hub builds on Shenzhen’s phenomenal technology output, Hong Kong’s unique financial prowess and Guangzhou’s AI-augmented industrial capabilities. China’s long-held vision is being turned into the model innovation megaregion of the future.

In the first part of the three-parts series, we unfolded the overall potential of the Greater Bay Area, as well as deep dived into Shenzhen’s role as its technology nerve centre. In this second part, we touch on Hong Kong’s financial ecosystem as the primary platform for financing innovation within the Greater Bay Area. Finally, in the third part, we will describe Guangzhou’s role as the AI-driven industrial hub of the Greater Bay Area.

For long time, Hong Kong has been enormously capital rich and attractive to international talents. Also, it has maintained a fantastic financial infrastructure. Most remarkably, Hong Kong has played the unique and peerless role of global connector between Mainland China and the rest of the world.

Fast forward to 2020, the SAR has been squashed by more than a year of social upheaval, the disruption from the pandemic, the uncertainty arising from the introduction of the national security law and, more recently, the paused IPO of Ant Financial. Despite these first-ever threats, Hong Kong’s status as a major financial hub is not in jeopardy and will play a critical part in the broader ambitions for the GBA.

Hong Kong Retains Asia’s Greatest Financial Stature

Hong Kong’s financial prowess stems from its historic role as the primary connector between Chinese and global finance. Without even listing their names, most (if not all) major international finance companies not only have a physical presence in Hong Kong, but they maintain their APAC headquarters in the Special Administrative Region.

As long as large international institutions benefit from low taxation, an established financial market, and privileged access to Mainland China’s colossal economy, Hong Kong’s financial standing is secure.

Hong Kong has ensured facilitated access to Mainland China’s investment opportunities since the time it became a British colony. Much time later, in 2000, the variable interest entity (VIE) structure was pioneered. The VIE structure has been facilitating offshore financing of Chinese businesses in TMT and other regulated industries until today.

According to the Law Society of Hong Kong, the VIE structure grants to an offshore holding company (the Offshore SPV) the rights and benefits normally associated with the ownership of a Chinese onshore operating activity (the VIE) without holding actual equity ownership, thereby enabling foreign investors to invest in regulated sectors in China despite foreign equity ownership restrictions or prohibitions.

The GBA plan will certainly boost liberalizations of investment restrictions and reforms of investment approval processes. However, the VIE structure will still be China’s trump card mainly for two reasons. First, it has been supporting the offshore financing of onshore entities for 20 years. Second, more than a few years are still required to achieve perfect parity between the terms and conditions of investment by Chinese and non-Chinese investors.

Hong Kong Tops the 2020 Global Innovation Index

The Global Innovation Index (GII) 2020 assesses which economies consistently hold the top global spots on particular GII innovation facets, such as VC, R&D, entrepreneurship, or high-tech production. Overall, these facets are represented by an aggregation of innovation indicators and the GII score is assigned to each country by counting the number of innovation indicators in which its economy scores best worldwide.

According to this statistics, Hong Kong holds the top spot, with 12 innovation indicators in which its economy scores best worldwide. The U.S. follows, with 9 top-ranked indicators. China holds 8 top-ranked indicators and secures the 3rd spot together with Israel and Luxembourg.

Hong Kong’s remarkable result should not come as a surprise. The SAR counts 3360 start-ups, more than USD 37 billion in VC investments and, most importantly, committed over USD 100 billion funding for innovation and technology developments. Among the recent funding commitments, the figure below enlists the seven most relevant.

Fig.1 – Hong Kong’s recent funding commitments for innovation and technology developments. Financing innovation is a primary focus for the Government of Hong Kong. Source: adapted from Invest Hong Kong.

Hong Kong’s Distinctive Allure as VC Hot Spot

Covid-19 has exacerbated the decline in VC deals. Rather than financing small and diverse start-ups, venture capitalists now prefer to dedicate themselves to the quest for unicorns or go for mega-deals, supporting proven business models.

As a consequence, because money to fund innovative ventures are drying up - especially for early-stage and R&D-intensive start-ups with a longer timeline for commercialization -, VC investments will accumulate more and more in just a few VC hot spots.

According to the latest ranking by INSEAD, the top eight VC hot spots worldwide include both Mainland China and Hong Kong. China, along with India, is also the only emerging economy in this list.

Fig.2 – VC hot spots: venture capital penetration in selected economies. Mainland China and Hong Kong SAR are both among the top 8 VC hot spots worldwide. Sources: CTB Research, Cornell SC Johnson College of Business, INSEAD and the World Intellectual Property Organization.

Hong Kong’s Superb Asset Management and Fundraising Capabilities

As a sophisticated international financial centre, Hong Kong’s private equity business ranks 2nd in Asia by asset under management, amounting to some USD 160 billion as of June 2020.

In addition, the launch of the wealth management pilot scheme (Wealth Management Connect) will provide investors with greater product diversity, asset allocation options and risk management tools. Eventually, by further promoting RMB internationalisation, the Wealth Management Connect will be one of the primary conduits of capital flow into the GBA.

Moreover, Hong Kong’s reputation as a destination for global fundraising is undebated. 99 IPOs were filed in Hong Kong as of September 2020. Since then, further USD 20 billion have been raised through new offerings and an additional four companies are taking orders for offerings worth up to USD 810 million in total, according to HKEX. These figures add up to the even larger ones in the pipeline.

According to Dealogic, Hong Kong is expected to have its best year for new listings since 2010. The SAR has led the world in new listings for seven of the past eleven years.

Fig.3 – Hong Kong: asset management hub and global fundraiser. Source: adapted from Invest Hong Kong.

Secondary Market’s Bulls: Trading the Hang Seng Index and Through the Connect Programs

Hong Kong’s stock market is liquid, vital and resilient. The main board daily average turnover value hit USD 120 billion in September 2020, up 60% from the USD 76 billion recorded the previous year.

Fig.4 – Hong Kong stock market’s liquidity and resilience. Source: adapted from Invest Hong Kong.

The Hang Seng Index has been nimbly riding the waves of volatility unleashed by the pandemic and, as of the end of December 2020, is just 10% away from its January 2020’s peak value.

Furthermore, the connect schemes represented a crucial steppingstone for China’s opening up to the outside world. They definitely were among the most exciting and dramatic changes of the past few years for global financial markets.

When first introduced, the Shanghai-Hong Kong Stock Connect freed the individual investor from having a specific quota or license. It also allowed retail investors on both sides to participate. Finally, the scheme increased by nearly 50% the overall market access quota levels.

Since then, the Stock Connect has gained breath-taking trading volume and the Bond Connect followed. By tapping on the immense Chinese bond market, the average daily turnover for the Bond Connect surged by 12 times to USD 3 billion already in September 2020.

Fig.5 – Statistics for the Stock Connect and the Bond Connect, two major milestones for China’s ever-increasing financial market access. Source: adapted from Invest Hong Kong.

Hong Kong Is the FinTech’s Capital of Asia

FinTech is becoming pervasive. The number of FinTech companies in Hong Kong are over 600. The accumulated investment in those companies providing exclusively fintech services amounts to USD 1.5 billion. Consumers in Hong Kong are quick in keeping up with the latest trends. Their adoption rate is now over 70%, from 32% recorded in 2017.

Fig.6 – Hong Kong’s developments testify for the city’s readiness to become Asia’s capital for FinTech. Sources: Invest Hong Kong, Accenture, EY Global Fintech Adoption Index 2019 and Survey on FinTech Adoption and Innovation in the Hong Kong Banking Industry.

Even more remarkably, 86% of banks adapted or plan to adapt FinTech solutions. In this regard, the Hong Kong Monetary Authority (HKMA)’s authorization of virtual banks in Hong Kong is certainly a major achievement in catapulting the SAR into the smart banking era.

According to HKMA, virtual banks are defined as banks which primarily deliver their services through the internet or other forms of electronic channels, instead of physical branches. By design, virtual banks target the retail segment, including the small and medium-sized enterprises. Thus, they will play a major role in further boosting financial inclusion in China and beyond.

As of 30th of November 2020, HKMA authorised eight virtual banks.

Fig.7 – The 8 virtual banks authorised by HKMA, as of 30th of November 2020. Source: Hong Kong Monetary Authority.

Hong Kong Boasts Asia’s Most International Talent Pool

Hong Kong is still the most international Asian city. One of the reasons is the worldwide reputation of its universities, which hold strong positions in global higher education rankings since longer than Tsinghua University and Peking University, currently leading in Asia. Since recently, universities and scientific research institutions in Hong Kong are even encouraged to apply for Central Budget-Funded Science and Technology Programs, as well as to open branches in Mainland China.

Hong Kong universities’ partnerships with major players headquartered in the Mainland are also worth noting. Among these partnerships, the most acclaimed are the WeChat-HKUST Joint Lab on Artificial Intelligence Technology and the CUHK-SenseTime joint effort for the development of an automatic face recognition system with over 99% of accuracy.

The Greater Bay Area is the central government’s top-down master plan to integrate the two SARs of Macau and Hong Kong with nine cities in southern Guangdong, the richest province of China.

The plan’s boldness has no peers in recent history. Mostly because of the SAR’s “one country, two systems” framework, the integration pushed by the Greater Bay Area’s plan cannot be directly compared to the European Union’s “single market” aspiration.

Constitutional intricacies such as distinct legal systems, currencies and capital account regimes cause currency fluctuations and inefficiencies in cross-border capital flows, two major challenges that are being addressed but far from being solved.

However, the overall potential that may be unleashed by the realization of this grand strategy is close to unimaginable.

Hong Kong’s international financing platforms would complement Shenzhen’s world-leading technology output to complete Guangzhou and its surrounding cities’ AI-driven industrialization, as we will see in the last part of this three-part series.

 

All opinions expressed in this essay represent my personal views only.

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