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.

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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.

A smart mobility data platform was recently launched in two Chinese cities — Chengu and Shenzhen.

The platform, known as the “PAIR mobility exchange,” offers the Mobility as a Service (MaaS) promise, of bringing together journey planning, ticketing, and payment for all transport modes into a single application.

The co-founder of the PAIR platform in Australia and New Zealand, Mark Thomas, says Mobility as a Service offers transformational benefits for city residents. These include:

• Safer, expanded services for passengers
• More transparent and lower overall transport costs.
• Reduced traffic congestion with increased transportation efficiency.
• Lower cost of operation for taxi operators with more frequent trips.
• Greatly improved data-driven planning and regulation.

Integrated ticketing platforms are not new. Helsinki-based company Whim recently launched last year in Birmingham in the UK and covers all modes of transport — from public transport, taxis, car hire and bikes. It offers a pay-as-you-go option, as well as an unlimited service, which provides locals with unlimited public transport, all taxi rides within a three-mile radius of their location, and car hire for £349 per month (NZ$675). Berlin and Singapore are also proceeding with MaaS trials and the MaaS Alliance has been formed in Europe as a public-private partnership to facilitate its deployment.

The PAIR platform in Shenzhen will allow customers to integrate multiple ride options together for any particular journey.

The platform not only aggregates existing taxi providers into one online platform, it also allows customers to combine public transport and other sharing economy platforms such as e-scooters to get to their destination.

Thomas says he is now looking to Auckland and Sydney, and says he sees it providing a real solution to both cities’ congestion problems as well as improving big event transport planning.

“PAIR creates a way for cities to better utilise their existing transport assets.

“It is a win-win-win for customers, operators and regulators. Transport users get easier access to a greater range of mobility choices,” he says. “Operators can reach a bigger market and get valuable information to better optimise their operations. Regulators gain new transport planning insights.”