The central government is giving serious consideration to a formal proposal submitted by Macau to establish a new kind of stock exchange in the Special Administrative Region. Traded in the offshore Renminbi, stocks listed on this exchange would be heavily weighted toward technology companies, much like the Nasdaq board in New York, and the recently established STAR Market in Shanghai.
It looks like this new market is part of a broader move within the region, if not the rest of country, to embrace diverse means of raising equity for Chinese companies. At the same time, Guangdong is looking into establishing a market like Shanghai’s STAR Market, in Guangzhou. And it has also applied formally to establish a Commodity Futures Exchange, like the Chicago equivalent, in Guangzhou’s Nansha district.
Could this be the start of a major push to get more Guangdong-based companies into the hands of equity investors? It certainly seems so, and there is huge upside room to move on this: just 1.8% of Guangdong’s 45,000 National-Level technology firms are publicly listed. Moreover, the person who revealed the details is just the kind of official to make this clear – and public.
It all came out of a major forum that was held over the weekend in Guangzhou, known as the 8th Lingnan (Cantonese) Forum. One of the speakers was He Xiaojun, Party Secretary and Director of the Guangdong Provincial Local Financial Supervision Administration. He said in his speech that Macau’s new stock exchange plan had been officially reported to the central government, with the obvious intention of establishing it as the “Nasdaq of the offshore RMB market”. It is hoped that the proposal will be approved in time for Macau’s 20th Anniversary on December 20.
But his speech wasn’t only about Macau. The goal, He seems to be saying, would be to get more promising companies into the hands of equity investors as soon as possible, via the establishment of more efficient financing mechanisms, utilizing advanced technology. He also said that the Guangzhou Futures Exchange had been consulting his department and it would likely be approved before the end of this year. The exchange will focus at first on trading carbon emissions.
SCMP has a report on the news, which quotes misguided commentators saying they see Macau as no threat to Hong Kong’s status as an offshore RMB center. This is because none of them know the first thing about Macau besides, perhaps, that Fernando’s serves a great African chicken dish. They don’t know that it matters little whether Macau has as many smart people in the finance industry as Hong Kong does; what matters is how much offshore RMB trading Beijing will allocate to Macau – where, not coincidentally, Bank of China has its single biggest overseas branch – and how many foreigners with the necessary expertise of running a stock exchange Beijing will allow Macau to import.
The Macau Monetary Authority released a statement saying that the idea was still being evaluated. Which doesn’t mean the city won’t grab the opportunity with both hands, ready or not, once Beijing gives it the green light.
He’s speech (in Chinese) is worth reading in detail. Below is an edited version for English readers, in which He explains why the region has a golden opportunity to remake its financial infrastructure.
And here is a link to He’s bio.
Edited transcript of a speech by He Xiaojun, Party Secretary and Director of the Guangdong Provincial Local Financial Supervision Administration:
The central government has launched two major initiatives in the region this year, for which we should all be grateful. They are the Greater Bay Area, and the designation of Shenzhen as a Pioneering Zone for Socialism with Chinese Characteristics. With these, we have the means and the framework to conduct significant reforms, especially of the financial sector.
First, let me share some data points. Looking back on international patent applications for the most recent year available, 2017, we see that the three other “bay areas” of Tokyo, New York and San Francisco registered 22,000, 12,000 and 35,000 patents, respectively. Our Greater Bay Area registered more than 176,000, almost eight times that of Tokyo, 16 times that of New York, and about five times that of San Francisco.
However, most of our patents are in the consumer electronics industry and advanced manufacturing. We must be soberly aware that we remain stuck at the lower end of the industrial manufacturing value-added chain. Basic research is where we are lacking.
This can be improved, but it is going to require a more thoughtful approach to how we use financial resources. Policy-based finance and medium- and long-term credit insurance funds, for instance, can help. These can support the construction of national key laboratories and high-level universities. However, this will take a long time.
What is required mostly is a shift in mindset. I went to Dongguan for research some time ago, where I saw a professor who had just come back from the United States and was doing basic research on robotics development in the Songshan Lake district. He lamented the drive to constantly transform scientific research into commercial success. If your only indicator of the success of research is how much money it can generate, the quality will never be good enough.
Clearly, we are still excessively demanding that our scholars develop their research in the direction of industrialization. We have too many short-term and fast-action requirements. We must start to pay more attention to the next step of long-term funding to conduct major breakthroughs in basic research.
The good news is that we have an incredibly strong foundation on which to build a better model for financing industrial growth. Take supply chain finance. There will always be a need for finance to support the continuous optimization of manufacturing and industrial chains. In this regard, we have an unrivalled supply chain, which just needs a better financing mechanism.
There are currently 500 of what I like to call “professional towns” in Guangdong. The combined GDP of these towns accounts for three average Chinese provinces. Of these, 146 each generate output of more than RMB 10 billion per year. A dozen are above the RMB 100 billion level. Those in Dongguan, Foshan and Zhongshan are particularly eye-catching. Xiaolan Town of Zhongshan produces 70% of the world’s lock cylinders. Guangzhou’s Xintang Town produces 60-70% of the world’s denim. But these towns have not been having an easy time rising up the value-added chain, because of access to finance. This is vital to take the next step of Guangdong’s industrial transformation.
Most of these enterprises are small and medium-sized. This is why we have started to build a financing platform for SMEs in Guangdong, since July 17. It makes good use of big data and blockchain technology to build up trustworthy credit profiles for these companies. It is working already, with a good case study being the conglomerate TCL (based in Huizhou). All of TCL’s SME suppliers can now get unsecured loans, which will help them to rebuild and restructure the industrial chain, and further improve the quality of the industry. We are leading the country in this effort.
At the same time, we are also building a platform for the registration and protection of intellectual property. Everyone knows that SMEs have many talents, but they are all light on assets. What they have in abundance is intellectual property rights. Therefore we are raising their capacity to access credit by placing a higher value on that IP.
We are also determined to create the right multi-level financing platform to support the cultivation of “star” enterprises. We need to be more like Japan and South Korea, which have clear plans to cultivate at least 100 companies with global clout. This doesn’t always mean they must be large. They have found that they can have technological leadership in the cross-border trade chain at the SME level. Such stars will be grown into the multinational behemoths of the future.
Guangdong is also preparing such a plan to cultivate star enterprises that can grow into major multinational enterprises.
We have some already: companies with enormous potential that can become global giants with the right access to funding. Take Shenzhen Guangfeng Technology, which recently listed on the Shanghai STAR market, as an example. It makes 150-inch, high-tech laser-projected TVs, which sell for RMB 1.5 million each. Before its recent listing, Guangfeng was valued at between RMB 1 billion and RMB 2 billion. Although its stock price has experienced twists and turns after the listing, it has recently stayed at a market cap of around RMB 15 billion.
Transsion Technology is another. This Shenzhen-based company entered the African market in only 2012, selling cheaper mobile phones. It now has almost half of the entire African market and is currently valued around RMB 38 billion.
We need to bring more of such enterprises to our capital market and cultivate our own stars.
Look at it this way. There are now 600 listed companies in Guangdong, but we have 45,000 state-level high-tech enterprises based here – which means only 1.8% are listed. Under the guidance of the CSRC, Guangdong will address this. We will dig out more star enterprises and encourage them to raise public equity.
Macau could play a valuable role in this endeavour. When I was in Shenzhen, we helped the Macau SAR government draft a plan for the Macau Stock Exchange. I hope that it will become the Nasdaq equivalent for the offshore Renminbi. The plan has been sent to the central government, and I hope that it will be approved before the 20th Anniversary ceremonies are held (on December 20).
We can also use “green finance” to help our technological innovation efforts become more competitive at the international level. In Guangzhou, we have established a national-level “green financial experimental zone”. Guangdong’s carbon emissions trading already accounts for 70% of the national total this year. This is why it makes sense to establish the Guangzhou Futures Exchange. It should be approved before the end of this year.
These things will make Guangdong and the entire Greater Bay Area’s financial innovation initiatives speed up.
Looking at the demand side of the equation, it is clear that we need to catch up. The Greater Bay Area has a population of 77 million, with per-capita GDP exceeding US$20,000. That is a developed-country level, with high potential for a takeoff in consumer spending. But these consumers need more sophisticated financial products.
Look at the statistics. Online shopping in Guangdong ranks first in the country. Of 100 households, 43 have cars. Residential property markets turn over 100 million square meters of space every year. Seven of the country’s 12 youngest cities are here, with the average age of residents at least 10 years younger than the Yangtze River Delta. We need a better financial industry.
This is all before the rise of the industrial internet, thanks to the rollout of new 5G mobile networks, which will provide a golden opportunity for equipment leasing. Guangdong will be at the forefront of development of the industrial Internet of Things. This will quickly become a RMB 1 trillion industry. Through financial leasing, enterprises can better sell products that will be rapidly upgraded, rather than relying on longer product life-cycles.
The Greater Bay Area’s future clearly lies in cross-border finance. We have always attached great importance to this aspect, and we are applying technological solutions quickly. For example, we recently launched a provincial trade financing platform using blockchain technology. Orders are encrypted and tracked, verified with Customs and external management. There is no “false water” trade finance data, in other words. This platform is being trialed at the moment and is expected to be put into use by the end of October. Such innovations will provide a good support for cross-border capital flow monitoring.
The iterative development of the financial industry itself is a very important area of technological innovation. Take the example of Webank (owned by Tencent), which opened less than three years ago. It has loans outstanding of RMB 3 trillion, with 150 million registered users, 70% of whom are blue-collar workers – and of these, 37% did not have any prior credit record. The bank’s average loan size is just RMB 8,000. They have extended more than 300,000 corporate loans without any written materials, approved within the same day.
Where is our banking industry going? Webank’s general ledger system is built on blockchains. It has fewer than 2,000 staff, half of whom are science and technology personnel. The ecology of the banking system itself is also changing.
Ping An Technology is another great example. It has more than 1,700 patents on financial technology, the world’s No. 1, surpassing Bank of America and many others. The company has 99,000 software engineers. Its voiceprint recognition, facial recognition, and artificial intelligence technology is world-leading.
Indeed, the development of technology is changing our world. Those who don’t keep up can only expect their financial leadership to be affected. Therefore, in the next step, we must pay special attention to the renewal and development of financial technology, and lead our financial technology companies to jointly promote the progress of everyone.