Tag Archives: cross-border investment

GBA firms have potential, need finance – He Xiaojun speech

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, this is nothing to celebrate. 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.

Bracing for a drop in Hong Kong

It’s hard to see where Hong Kong is headed, now that the government has decided to invoke emergency powers to ban the use of face masks at protests. There are at least two evident certainties: that protesters will be energized, leading to a rise in violence levels; and that arrest numbers will climb. Beyond that, however, it remains to be seen whether the announcement will hasten a decision in Washington to restrict financial flows through Hong Kong or result in any other damage to the city’s economy caused by a loss of investor confidence.

Key to monitor is whether the decision can be effective in quelling the protests. This, too, is hard to guess at the moment. It will likely embolden the more radical protesters, and radicalize others who had previously been hesitant to commit acts of violence. Yet it will also likely result in violent protesters being taken out of action quicker, blunting the protests as their more charismatic leadership is neutralized. Whether this turns out to be net positive or negative will take time to ascertain.

In the meantime, and apologies if this sounds Cyclopian, but the Greater Bay Area is not likely to be able to chug along as normal and pretend that what’s happening in Hong Kong won’t affect the rest. Putting aside the damage inflicted on the region by plunging international tourism – especially business tourism – it is important to be realistic about the effects of the Hong Kong crisis on the pace and scope of reforms being implemented in the GBA.

Continue reading Bracing for a drop in Hong Kong

HK stares at tourism abyss as funds keep flowing

Hong Kong remains China’s key gateway for foreign investment despite the protests, according to the latest data from Beijing. As SCMP reports, China received US$62.9 billion in foreign direct investment via Hong Kong in the first eight months of this year, accounting for 70 per cent of total inflows. The rise was even sharper once the monthly number for August was calculated: US$7.53 billion, up 29.2% from the same month last year.

It’s hard to blame or credit these flows on anything Hong Kong is doing, as Investment decisions into China are often months, if not years, in the planning. Still, the numbers might bring some comfort at a time when the tourism pillar of the economy is crumbling. 

According to this SCMP report, Causeway Bay is struggling, with one in ten shops standing empty and thousands of staff facing job losses. We think a very painful withdrawal experience lies ahead as the city is forced off the drug that it has been hooked on since 2003. Mainland tourists have other options, including Macau, and once mainland tariffs on imported goods start being completely repealed, they will likely have little reason to come back – even if the protests somehow start to subside.

Across the city, the hotel industry is reeling. But landlords appear to be doing what they do best: forcing management companies to let go of staff while they figure out the best way to reconvert the buildings into office space. And they are in the meantime looking to move their real-estate projects as fast as possible before prices start to fall off a cliff as the government strong-arms them into offering below-market discounts.

Hong Kong needs a big, new vision for its future.