Oriol Caudevilla – Macau Business

OPINION – The Metaverse in Mainland China, Hong Kong and Macau

Oriol Caudevilla — Mon, 13 Feb 2023 16:58:56 +0000

Twenty years ago, Second Life started as a virtual world and quickly attracted 1 million users who created a virtual economy of $500m. Virtual worlds are therefore not new, but the rebranding of Facebook into Meta in October 2021 put an intense focus on virtual worlds and the Metaverse.

Actually, the term Metaverse was coined in Neal Stephenson’s 1992 science fiction novel Snow Crash, where humans, as programmable avatars, interact with each other and software agents, in a three-dimensional virtual space that uses the metaphor of the real world.

Today, the metaverse can be described as a digital reality that combines aspects of social media, online gaming, augmented reality (AR), virtual reality (VR), and cryptocurrencies to allow users to interact virtually. Augmented reality overlays visual elements, sound, and other sensory input onto real-world settings to enhance the user experience. Therefore, apart from cryptocurrencies, VR and AR are the other two most important elements in the development of the metaverse.

Recently, a major concert held in Fortnite was seen by 45 million people and grossed around $20 million, including sales of merchandise. People who otherwise would not have had access to such experiences, due to geography or cost, can now participate.

Critics of the metaverse lament that it is just an existing concept or institution offered as though it were a new one, branding the existing technologies and ideas like VR (virtual reality), AR (augmented reality), AI (artificial intelligence) under a new umbrella. But this might be what the metaverse is really about.

What is the current situation of the Metaverse in China, though? Given that, as I just said, digital assets are normally a very important part of the Metaverse but given the fact that cryptocurrencies are banned in Mainland China, is there a Metaverse in Mainland China and, if so, what does it look like?

The Metaverse wave is indeed hitting China! Baidu was the first Chinese tech company to launch a metaverse app: The Land of Hope, in December 2021. This app was the first signal that China had stepped into the global metaverse market.

Also in 2021, China established its first metaverse association, the Metaverse Industry Committee, under the state-supervised China Mobile Communications Association (CMAC).

Furthermore, as per a recent report named “Into the ChinaVerse: How the Meta wave is hitting China”, by FABERNOVEL, 37 million Chinese online users will have a virtual identity on Metaverse platforms by 2025. Also, 500+ Metaverse companies were named after the Metaverse and 93% of them were registered in 2021 and $8 trillion Market value is the estimated market size of the Metaverse industry in China by Morgan Stanley.

In Mainland China, not only have companies from large corporations to small firms expressed interests in this virtual world, so have been the local administrations across the border. Local governments in Shanghai, Zhejiang, Anhui, Hubei, and Sichuan Provinces also incorporated the metaverse in their economic planning documents.

Shanghai was indeed the first city and province in the mainland to include the metaverse in December 2021 in its 14th five-year blueprint for the electronic information industry covering the 2021-2025 period.

Following this, in April 2022, the Huangpu District of Guangzhou unveiled a proposal for support measures to “accelerate the innovation and development of the metaverse”, the first place in the Guangdong-Hong Kong-Macau Greater Bay to provide official assistance dedicated to the metaverse development. The measures include a housing purchase subsidy of up to RMB5 million (US$756,601) for talents in the metaverse-related aspects, and a subsidy of up to RMB5 million for projects that boast iconic metaverse scenes with the characteristics of Huangpu.

Moreover, investment bank Morgan Stanley remarked in a research note in April that the value of this nascent virtual space could reach US$8 trillion in the Chinese market alone in the future. Technological research and consulting firm Gartner also predicted 25 per cent of people would spend at least one hour a day in the metaverse for work, shopping, education, social interactions and/or entertainment by 2026, when 30 per cent of the organizations in the world would have products and services ready for the metaverse.

Of course, the Metaverse has its risks too, since, as stated by the China Banking and Insurance Regulatory Commission in a statement released in February, the public need to be warned about the rise of allegedly criminal activities of illicit fundraising, frauds and others in the name of metaverse.

This bet on the Metaverse follows China´s bet on Artificial Intelligence (AI). China is certainly at the forefront of new technologies. The digital yuan is a great example of new technologies applied to the area of payments, but China is at the forefront of blockchain technology as well as AI.

Indeed, in 2017, the Chinese government set its sights on being the world leader in AI by 2030, announcing a massive $150 billion investment that far exceeded the capacity of any other country. According to a study by the World Intellectual Property Organization, in 2018, China already owned 57% of the registered AI patents, and 17 of the 20 leading AI institutions in the world were Chinese.

Can there be a metaverse without cryptocurrencies? Metaverse and crypto are two concepts which may exist separately. A token may have utility in both real and virtual worlds, but the concepts need to have a clear synergy with each other.

What about Hong Kong? The Metaverse industry is booming in the Special Administrative Region, since a myriad of companies are currently working on metaverse-related projects and applications.

Following a question by Dr the Hon Tan Yueheng and a written reply by the Secretary for Innovation, Technology and Industry, Professor Sun Dong, in the Legislative Council on November 30, 2022, Professor Dong mentioned the next: “Currently, Hong Kong possesses excellent information and communication technology environment and robust infrastructures such as high-speed communication networks, 5G mobile networks, and a vibrant cloud computing service market. They could facilitate local industries and research institutions to develop technologies related to metaverse (…) On the other hand, the development and application of digital currency will facilitate the development of metaverse industries and applications. Since 2017, Hong Kong has been examining the feasibility of the Central Bank Digital Currency (CBDC). (…)”

As for China´s other Special Administrative Region, Macau, some initiatives have been launched related to the Metaverse. Last June, Macau-based gaming equipment supplier Asia Pioneer Entertainment Holdings Limited launched its new metaverse experience, Mini Macau, aimed at allowing people to explore the city’s tourist attractions digitally. This metaverse version of Macau, “Mini Macau, was launched” in the Sandbox, including as well collection of Asia-themed NFTs designed by Portuguese artist Pedro Lourenço. In addition to this, the Macau Self-Improved Cultural and Creative Think Tank (MSCCTT), which is a local association co-established by the Association of Chinese Enterprises in Macau, the Institute for Cultural Creativity Tsinghua University, and the Macau Cultural and Creative Enterprise Federation, also announced last year in late April that a collection of Macau-themed NFTs by eight artists would be launched in June.

To sum up, the Metaverse will quite likely become an important industry in China these years to come, albeit it will be a Metaverse which Chinese characteristics, i.e., without cryptocurrencies, but with a huge potential, nonetheless. When it comes to Hong Kong, the Metaverse industry is booming there too and in the Special Administrative Region tit will be possible to leverage digital assets, even more so now that, as announced during the Hong Kong FinTech Week, HK is pivoting toward a friendlier regulatory regime for cryptocurrencies shows that it is ready to become an even more important virtual assets hub.

The author is an influential voice in the FinTech area, having advised many FinTech companies and with a very extensive network across the globe. He holds an MBA and a doctorate in Hong Kong real estate law and economics. He is also a well-known international speaker on the areas of Central Bank Digital Currencies and Blockchain.

OPINION – Internationalizing the RMB: how will the Digital Yuan be of help?

Oriol Caudevilla — Sun, 29 Jan 2023 11:31:56 +0000

Even though China’s digital yuan will be beneficial in many different ways, one of the areas where it can bring more value is that of promoting the use of the yuan for cross-border payments, by trying to convert some of the US-dollar-denominated international trade transactions into renminbi-denominated ones, thus trying to challenge the dominance of the US dollar in international trade and finance.

This will not happen overnight, but, if there is enough penetration and acceptance of the digital renminbi in a separate jurisdiction or region, it is conceivable that a trade and finance system parallel to the USD-system can gain critical mass, a system that can allow certain countries to bypass the global banking system and U.S. sanctions.

Indeed, there were high hopes for the renminbi´s (RMB) internationalization in the early 2010s, but results to date have been mixed and even slightly disappointing.

One the one hand, the RMB is among the top five most used currencies in global payments according to SWIFT, up from the 35^th position in October 2010. The RMB rose to a record 3.2% of international payment settlements in January 2022, breaking a record set in 2015.

On the other hand, though, if we analyze these numbers in much more detail, we can see that the RMB has a long way to go before it can challenge the USD, despite the IMF’s adding the Chinese national currency to its special drawing rights (SDR) basket back in 2016 and despite the RMB recently breaking the record set in 2015. According to SWIFT too, in October the greenback was the top currency used in global payments with a 42.1% market share, followed by the euro (34.4%), the British pound (7.85%), the Japanese yen (2.96%) and then the RMB at 2.44%, its lowest point in a year.

However, as Spivak wrote, “One of the main reasons for the yuan’s lack of progress is that it is not freely convertible. Instead, the [PBOC] sets a daily reference rate for the yuan against the dollar, from which trading via interbank currency markets cannot diverge by more than two percent (…) Beijing may wish to promote the yuan’s greater internationalization, but periodic crises have shown that a nonconvertible currency makes it easier to control the impact of economic shocks on domestic financial markets.”

Given that the greenback is currently responsible for roughly 60 percent of global foreign exchange reserves, the Digital Yuan may be the perfect tool for this distance to be reduced, especially thanks to initiatives like the Belt and Road Initiative and RCEP.

Since the yuan is not yet fully convertible, this may hinder the internationalization process of the digital yuan. However, if there is enough penetration and acceptance of the digital renminbi in a separate jurisdiction or region, it is conceivable that a trade and finance system parallel to the USD-system can gain critical mass.

How well this will work in practice, though, still remains a mystery, given that challenging the US dollar’s position in international trade is definitely not easy, therefore any changes will not take place overnight.

Following what I said before, what role can the Digital Yuan play in the RMB internationalization?

China´s Digital Yuan, also known as DCEP, is a Central Bank Digital Currency (CBDC). A CBDC is a new form of central bank money accessible to the public, accepted as a means of payment, legal tender, safe store of value by all citizens, businesses, and government agencies. The major economy leading the CBDC race in Asia (and in the whole world) is China.

In early January 2022, the People’s Bank of China (PBOC) launched the Digital Yuan wallet apps for Android and iOS.

The e-CNY presents many advantages such as promoting financial inclusion, no interest, low cost, payment and settlement, controllable anonymity, security, dual offline payment, etc. Furthermore, since mid-June, China’s digital yuan can now be used for wealth management products and bank loans. This move by China’s central bank extends the use of the digital currency beyond the purchase of consumer goods. In addition, China Construction Bank Corporation (CCB) now allows customers to use the e-CNY for wealth management products on its mobile app.

To me, the Belt and Road Initiative area is the best possible candidate area for China to start internationalizing its Digital Yuan, or at least one of the best two candidates, alongside RCEP.

The Belt and Road Initiative (BRI) is currently a key program for China, and, consequently, it is perfectly possible to imagine how important the expansion of the digital yuan can become for China within the Belt and Road.

This actually goes in line with that I mentioned in some of my previous articles, where I said that Regional Comprehensive Economic Partnership (RCEP), signed on November 15, 2020. Through the RCEP, China will strengthen its trade ties with neighboring countries, and also be able to leverage agreement to facilitate cross-border adoption of its digital yuan to benefit consumers, dealers, bankers and industries across regions.

To sum up, there were high hopes for the renminbi´s (RMB) internationalization in the early 2010s, but results to date have been mixed or even slightly disappointing. However, the e-CNY may be able to boost global wholesale use of the RMB, and the Belt and Road Initiative can be a perfect platform to do so. While facilitating cross-border adoption of the digital yuan, such economic exchanges in the same way will help any of the other central bank digital currencies in Asia. As a side note, Hong Kong can play a key role in helping the yuan to internationalize, given its role as the world´s largest offshore RMB center, given its One Country Two Systems principle and given its expertise in CBDCs as proved by the digital yuan tests for cross-border payments and projects like mBridge and the e-HKD.

OPINION – The technology behind the Digital Yuan

Oriol Caudevilla — Sun, 22 Jan 2023 03:47:29 +0000

Exactly one year ago, in early January, the People’s Bank of China (PBOC) launched the Digital Yuan wallet apps for Android and iOS.

More recently, the People’s Bank of China included the country’s digital currency in calculations of the amount of currency in circulation in December, a first for one of the early adopters of a central bank digital currency (CBDC) and the world’s second-largest economy, according to data released by its central bank two weeks ago.

As stated by the PBOC, “Starting from December 2022, e-CNY in circulation has been included in the amount of currency in circulation (M0). At end-December, e-CNY in circulation stood at RMB13.61 billion. The revision has not caused notable changes to month-end M1 or M2 growth rates of 2022”. There is 13.61 bn yuan (roughly $2 bn) in circulation, which represents roughly 0.13% of the 10.5 tn yuan in circulation.

Also, last week the digital yuan was used to purchase securities for the first time: Soochow Securities enabled e-CNY payments on its mobile application, marking the first use case of the CBDC in securities market trade.

The Digital Yuan is one more example of China being at the forefront of new technologies.

In July 2021, the People´s Bank of China working group published its first and only official report on the digital yuan, “Progress of Research and Development of e-CNY in China.” The report, albeit short, walked through the government’s research and development (R&D) process and took care to distinguish the e-CNY, which is a Central Bank Digital Currency (CBCD), from cryptocurrencies and stablecoins.

Specifically, the report defined e-CNY as the digital version of retail fiat currency with a two-tier operating model: in the first tier, the PBOC issues and controls its supply and doles it out to authorized entities such as commercial banks, telecom operators, and payment service providers; in the second tier, only those authorized entities may distribute it and activate its use in the economy.

When it comes to the role of Blockchain in the Digital Yuan, the PBOC chose a conventional approach to the CBDC design because of the performance and scalability challenges that blockchain presented.

But the PBOC did not totally rule out distributed ledger technologies. In a September 2021 speech, Di Gang, deputy director of its Digital Currency Institute, said that the PBOC was exploring the use of blockchain in three areas: First, in the core layer of Project Inthanon-LionRock prototype blocks, and maintain CBDC balances. Second, in the digital yuan issuance layer, as in the mCBDC project. Here tamper-resistant distributed ledgers could help with reconciliation. Third, in trade finance, as in the proof of concept (POC) linking Hong Kong Interbank Clearing’s blockchain-based eTradeConnect and the PBOC’s trade finance platform.

Here in this case of Trade Finance, blockchain in combination with artificial intelligence and robotic process automation could minimize paper-based and people-driven processes, lower administrative costs, and extend services to small and medium-sized enterprises that typically use open account transactions, where sellers ship and deliver goods before buyers’ payments are due.

In addition to that, China is already very advanced in terms of digital payments and the digital yuan doesn’t disrupt the way to pay (QR code and face payments being already widely used through Alipay and WeChat Pay). Users can use their bank app or wallet (Alipay, WeChat) to connect with the official “digital yuan” wallet to be activated.

However, the biggest innovation is the usage of smart contract technology.

Through smart contracts, users can agree on the use time, use scope and use rules: non-transferrable, non-redeemable, time-out recovery, targeted use, targeted crowd, targeted scene, consumer welfare, coupon reduction, designed merchant consumption, etc.

The digital yuan incorporates a variety of elements. For security, it combines a digital certificate system, digital signatures, and encrypted storage to reduce the feasibility of counterfeiting, transaction falsification or reversibility, and double spending, which refers to the risk—particularly when parties exchange digital currency—that one party could concurrently send a single unit of currency to two different accounts. The PBOC has not detailed how its technology solves the double-spending problem, but it claims that its “multi-layer security system” will manage such risks and guarantee the safety of the e-CNY life cycle, from password and data security to privacy of financial information and business continuity.

The Double Spending Problem makes reference to the risk (particularly when a digital currency is exchanged) that a person could concurrently send a single unit to two different sources.

Furthermore, the digital RMB wallet app allows dual offline payments, meaning that payments can be made from the payor to the payee while neither is connected to the internet

For financial inclusion, the system requires no bank account or Internet connectivity (actually, the digital yuan app for android rolled out offline usage and use with a dead battery). Users can obtain and use “smartphone-free hardware wallets” with security chips and based on integrated circuit cards without a bank account; and they can make “dual offline payments,” meaning that the payer can transfer funds to the payee, likely through near-field communications technology. Smartphone users can download the free software wallet app, but it requires linking to one of the “authorized operators”.

Since CBDCs are “programmable money,” each government and central bank must determine where they want to put their focus. Regarding programmability, the PBOC references the use of smart contracts, but not in terms of their inventor Nick Szabo’s definition, “an application that runs in a distributed and trust-minimized manner on a blockchain,” that is, running “on a secure consensus protocol across a network of computers rather than on an individual remote computer or centralized server” and running without reliance on a particular person or organization to secure it.

Payments in e-CNY may be programmable in the way that payments with credit cards are programmable, for example, through application programming interfaces.

A big concern when it comes to CBDCs in general is that of anonymity and privacy. When it comes to China, Mu Changchun, the Director General of China’s central bank Digital Currency Research Institute, explained in a conference that “There’s actually a big misunderstanding about the anonymity issue of the eCNY system.”

In August 2021, the Chinese government formally passed the Personal Information Protection Law (PIPL). “Under that law, the telecom companies cannot release any information, any identity information, to any third parties, including the central bank,” said Mu.

Consequently, neither the central bank, commercial banks, nor payment providers can access the personal information linked to that number. The only transactions accessible to the central bank are via the institutions.

Separately the digital yuan aims to enhance transaction privacy, making it harder for private firms to track a user’s activities between separate merchants. Consequently, all wallets have a sub wallet function (which will use tokenization and encryption) in which each online retail store can have a separate wallet to avoid linking a person across retail outlets.

“The eCNY system collects the least transaction information compared to traditional electronic payment systems,” said Mu. “The concern personally I have is how to effectively prevent and combat money laundering, terror financing and tax evasion under an effective anonymous eCNY system.”

To sum up, China is at the forefront of new technologies. The Digital Yuan is a great example of new technologies applied to the area of payments, but China is at the forefront of Blockchain technology as well as AI.

*The author is an nfluential voice in the FinTech area, having advised many FinTech companies and with a very extensive network across the globe. He holds an MBA and a doctorate in Hong Kong real estate law and economics. He is also a well-known international speaker on the areas of Central Bank Digital Currencies and Blockchain.

OPINION – The RCEP will boost Central Bank Digital Currencies (CBDCs) in Asia.

Oriol Caudevilla — Sun, 15 Jan 2023 09:11:53 +0000

CBDCs

Central bank digital currencies (CBDCs) have been referred to as “the future of payments”, or even “the future of money”, and not without reason.

CBDCs can serve many different purposes and can be designed accordingly: they can replace physical notes; they can be used to improve financial stability as a monetary policy tool, to promote financial inclusion, to fight against financial crime, improve payment efficiency and reduce intermediary risks, etc.

However, CBDCs are not cryptocurrencies, even though there is of course some relation between both categories.

The Regional Comprehensive Economic Partnership (RCEP)

RCEP is indeed one of the world´s largest free-trade deals in history, and it was signed more than two years ago, on November 15, 2020, after eight years of negotiations.

It was initially composed of fifteen countries (all ten members of ASEAN -Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam-, plus China, Japan, South Korea, Australia and New Zealand), that will create a free trade area encompassing 28% of the global economy, 30% of the global population and reaching 2.2 billion consumers.

The deal is estimated to increase the global national income by $186 bn annually by 2030 and to add 0.2% to the economy of its member states and aims to progressively lower tariffs, reduce protectionism and boost investment. Furthermore, it will allow for one set of rules of origin to qualify for tariff reductions with other RCEP members (a common set of regulations mean less procedures, therefore easier movement of goods).

RCEP entered into force on 1 January 2022 for ten original parties: Australia, New Zealand, Brunei Darussalam, Cambodia, China, Japan, Laos, Singapore, Thailand and Vietnam. RCEP then entered into force for the Republic of Korea on 1 February 2022 and for Malaysia on 18 March 2022. Once ratified by all parties, RCEP will be the world’s largest free trade agreement by members’ GDP.

RCEP includes chapters covering trade in goods, trade in services, investment, economic and technical cooperation, and creates new rules for electronic commerce, intellectual property, government procurement, competition, and small and medium sized enterprises.

Leaving aside the economic size of the deal, it marks the first time China, Japan and South Korea have been in a single free trade agreement, and it also marks the first time China enters a nonbilateral free trade agreement of this scale.

From the perspective of China, RCEP aligns with China´s “dual circulation” vision, refocusing on domestic demand while taking advantage of trade and foreign investment. It must also be noted that ASEAN has become China’s largest trading partner followed by the EU and the United States.

In this sense, even though the negotiations to establish the RCEP started in 2012, much before President Donald Trump, it is undeniable that Trump´s protectionism encouraged this agreement. In this regard, President Trump pulled the US out of the Trans-Pacific Partnership (TPP) shortly after taking office, and started in 2018 a counterproductive trade war with China that did not only affect the two countries, but also the economies of many countries tightly integrated into the global value chain.

As stated by Premier Li Keqiang, the RCEP is “a victory of multilateralism and free-trade”. The timing of the pact could not be better. On the one hand, the proposals for formulating the 14th Five-Year Plan (2021-2025) for National Economic and Social Development, emphasize that that China will participate in multilateral and bilateral regional investment and trade cooperation mechanisms, being the RCEP consistent with this goal.

Definitely, the signing of the RCEP agreement was a good step towards supporting economic recovery in Asia, inclusive development, job creation and strengthening regional supply chains.

However, as I said, I would like to focus here on how the RCEP will impact Central Bank Digital Currencies (CBDCs). Even though, according to a report published by the Bank of International Settlements (BIS) in early 2020, 80% of Central Banks in the world are currently working on CBDCs (some are just at an initial research stage, though), Asia seems to be the place where CBDCs arouse more interest.

To me, the RCEP will pave the way for the expansion of CBDCs throughout Asia, including (but not limited to) China´s new Central Bank Digital Currency (CBDC), the digital yuan.

China´s rationale behind the Digital Yuan is multiple: monetary and social policy, technology and innovation, global geopolitics, financial crime prevention…

Nevertheless, not only China will (or may) benefit from the potential of deploying a CBDC through the free trade area created by the RCEP.

Aside from China, many other Asian countries have shown their interest in developing and potentially deploying their own CBDCs. This list includes Thailand, Cambodia, Vietnam, Philippines… as well as Korea and Japan (both the Bank of Korea and the Bank of Japan started their testsin early 2021). Should these other countries finally deploy their own CBDCs, it will mean more market for them as well.

To what extent will the RCEP benefit China´s CBDC? Even though it is too early to say, the free trade area created by RCEP will undoubtedly be a big market for China´s digital yuan (alongside the Belt and Road Initiative), facilitating its cross-border adoption (in the same way that it could be used to facilitate the cross-border adoption of any of the other CBDCs in Asia, even though China seems to have a clear advantage due to its economic relevance and also due to the fact that its tests are much more advanced than those of the rest of neighboring countries).

Conclusions.

To sum up, thanks to the RCEP, China will not only strengthen its trade ties with its neighboring countries, but it will also be able to leverage the agreement to facilitate the cross-border adoption of its digital yuan and to start slowly challenging the global dominance of the US dollar, since, at the end of the day, one of China´s main objectives is to take some of the USD-denominated exports and convert them into yuan-based exports.

But, as I said, other countries like Korea and Japan may benefit from the RCEP too, should they finally decide to launch their own CBDCs once the test phase is over.

OPINION – Macau’s accession to RCEP would bring many opportunities

Oriol Caudevilla — Sun, 08 Jan 2023 13:45:46 +0000

Macau has not yet joined the Regional Comprehensive Economic Partnership (RCEP), but China´s other Special Administrative Region (SAR), Hong Kong, on the other hand, is close to joining it (Mainland China already joined it since was one of RCEP´s founding members). It would be in Macau´s best interest to join it as well, as I will explain below.

RCEP is indeed one of the world´s largest free-trade deals in history, and it was signed more than two years ago, on November 15, 2020, after eight years of negotiations.

Definitely, the signing of the RCEP agreement was a good step towards supporting economic recovery in Asia, inclusive development, job creation and strengthening regional supply chains.

When it comes to Hong Kong, speaking at the Fifth China International Import Expo and the Hongqiao International Economic Forum in Shanghai, Chief Executive John Lee Ka-chiu mentioned Hong Kong entry into the Regional Comprehensive Economic Partnership (RCEP) free-trade pact will bring opportunities to the HKSAR but also to the other members of the pact, since Hong Kong can add value to pact through its business-friendly environment, sound financial system and low tax regime.

As per Mr.Lee´s speech, “Hong Kong is one of the world’s most externally oriented and open economies. We thrive on trade and spare no effort to consolidate our status as an international trading centre, a position affirmed by our country’s National 14th Five-Year Plan. As the world’s largest free trade agreement, the Regional Comprehensive Economic Partnership (RCEP) is an exciting opportunity that Hong Kong very much looks forward to. This is why I announced in my Policy Address last month that we are actively pursuing early accession to RCEP.” Hong Kong´s accession to RCEP will, according to Mr.Lee, further strengthen HK’s business ties with all RCEP members. Mr.Lee finished his speech by reaffirming Hong Kong´s strong and unwavering commitment to free and open trade, against the headwind of unilateralism.

As previously mentioned, the RCEP agreement included mainland China but not Hong Kong and Macau, which means that Hong Kong and Macau needed to apply for his access separately from the Mainland.

As I mentioned in “Opportunities for Macau for 2021” (Macau Business, December 28, 2020), Macau’s future focus will be on finance. In that article, I made reference to a series of financial-related initiatives that may bring many opportunities to the Special Administrative Region in the coming years.

I mentioned Macau trying to diversify its economy by creating a new stock exchange (a NASDAQ-like market denominated in yuan, facilitating fundraising by technology companies from the Bay Area economic hub). I also explained that Macau should leverage its position as a trade and commercial services platform between China and the Portuguese-speaking countries, as well as its involvement in the Guangdong-Hong Kong-Macau Greater Bay Area and the Belt and Road initiative.

Last but not least, I made reference to another interesting initiative, the development of ‘enclave economies´, such as the cooperation demonstration zone located in Zhongshan, or the Traditional Chinese Medicine Science and Technology Industrial Park in Hengqin.

The key element that will help Macau succeed with all these initiatives, and therefore achieve its goals, is China’s “Outline of the 14th Five-Year Plan (2021-25) for National Economic and Social Development of the People’s Republic of China and the Long-Range Objectives Through the Year 2035” — also known as the 14th Five-Year Plan

The 14th Five-Year Plan, in its Chapter 31, focuses on proactively and progressively taking forward the development of the Guangdong-Hong Kong-Macau Greater Bay Area (GBA).

Macau´s accession to RCEP would be great news for both Macau and the Mainland, given that it would reinforce Macau´s and the Mainland´s stance towards multilateralism and free trade. Furthermore, it would help Macau achieve all these economic goals that I just mentioned in the previous paragraphs. Undoubtedly, the importance of Macau as a financial center is much smaller than that of Hong Kong, but Macau can also play a vital role, nonetheless, given its cultural and commercial ties with the Portuguese-speaking world, therefore Macau has the capacity of becoming an RCEP hub for trade with Portugal, Brazil and the Portuguese-speaking countries in Africa.

OPINION – The Digital Yuan as a tool for Cross-Border Payments

Oriol Caudevilla — Sun, 03 Jul 2022 07:30:27 +0000

In early January, the People’s Bank of China (PBOC) launched the Digital Yuan wallet apps for Android and iOS.

As per data gathered in late April, more than 260 million people are already using China’s digital currency, totalizing more than US$13.8 billion worth of transactions. It is available for use in about 23 mainland cities and live on 9 wallets.

China is already very advanced in terms of digital payments and the digital yuan does not disrupt the way to pay (QR codes and face payments are already widely used through Alipay and WeChat Pay).

However, the biggest innovation is the use of smart contract technology. The e-CNY presents many other advantages such as no interest, low cost, payment and settlement, controllable anonymity, security, dual offline payment, etc.

Also, since mid-June, China’s digital yuan can now be used for wealth management products and bank loans. This move by China’s central bank extends the use of digital currency beyond the purchase of consumer goods.

As I mentioned in some of my previous articles, China´s Digital Yuan, also known as DCEP, is a Central Bank Digital Currency (CBDC).

A CBDC is a new form of central bank money accessible to the public, accepted as a means of payment, legal tender, and safe store of value by all citizens, businesses, and government agencies.

Even though more than 80 per cent of Central Banks in the world are currently working on CBDCs (some are just at an initial research stage, though). However, Asia seems to be the place where CBDCs generated the most interest. In this sense, the major economy leading the CBDC race in Asia (and in the whole world) is China.

In this article, I am going to focus on the potential that the Digital Yuan offers for Cross-Border Payments.

China has made some very relevant movements in this area these last few months, movements that show us that expanding the digital yuan internationally is a very important goal for the country.

These are some of the movements:

1. Expansion of the Belt and Road Initiative (BRI)

The Initiative was unveiled in 2013 by China’s President Xi Jinping and until 2016, was known as OBOR – One Belt One Road.

On March 28, 2015, the official outline for the Belt and Road Initiative was issued by the National Development and Reform Commission (NDRC), the Ministry of Foreign Affairs (MOFA) and the Ministry of Commerce (MOFCOM) of the Peoples Republic of China (PRC), with authorization of the State Council.”

BRI aims to “promote the connectivity of Asian, European and African continents and their adjacent seas, establish and strengthen partnerships among the countries along the Belt and Road, set up all-dimensional, multi-tiered and composite connectivity networks, and realize diversified, independent, balanced and sustainable development in these countries.”

According to the official outline, BRI is a global initiative but its nature of building on the historic Silk Road puts a major focus on countries in Asia, Eastern Africa, Eastern Europe and the Middle East, a region mainly composed of emerging markets. According to the Belt and Road Portal, currently, 71 countries are taking part in the Initiative, together representing more than a third of the world’s GDP and two-thirds of the worlds

To me, the BRI area is the best possible candidate area for China to start internationalizing its Digital Yuan, or at least one of the best two candidates, alongside RCEP.

2. Regional Comprehensive Economic Partnership (RCEP)

One of the world´s largest free-trade deals in history, the RCEP was signed on 15 November 2020, after eight years of negotiations, and took effect on 1 January 2022.

It is composed of fifteen countries, all ten members of the Association of Southeast Asian Nation (ASEAN): Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam, plus China, Japan, South Korea, Australia and New Zealand, that will create a free trade area encompassing 28% of the global economy, 30% of the global population and reaching 2.2 billion consumers.

The deal is estimated to increase the global national income by $186 billion annually by 2030 and add 0.2 per cent to the economy of its member states and aims to progressively lower tariffs, reduce protectionism and boost investment. Furthermore, it will allow for one set of rules of origin to qualify for tariff reductions with other RCEP members (a common set of regulations means fewer procedures, therefore easier movement of goods).

From the perspective of China, RCEP aligns with China’s “dual circulation” vision, refocusing on domestic demand while taking advantage of trade and foreign investment. It must also be noted that ASEAN has become China’s largest trading partner followed by the EU and the United States.

Undoubtedly, the ongoing COVID-19 pandemic has undoubtedly confronted the whole world with an unprecedented challenge. The signing of the RCEP agreement is a good step towards supporting economic recovery in Asia, inclusive development, job creation and strengthening regional supply chains. RCEP will pave the way for the expansion of CBDCs throughout Asia, including (but not limited to) China´s new CBDC.

Aside from China, many other Asian countries have shown their interest in developing and potentially deploying their own CBDCs. This list includes Thailand, Cambodia, Vietnam, the Philippines as well as Korea and Japan (both the Bank of Korea and the Bank of Japan started their tests recently, in early 2021). Should these other countries finally deploy their own CBDCs, it will mean more market for them as well.

3. Joint venture with SWIFT

China’s central bank announced in February 2021 that a newly established joint venture with SWIFT and four Chinese institutions will offer localized financial services to make cross-border transactions more stable and secure. As China’s financial industry continues to open up to the outside world, more domestic institutions use the global financial network and information services provided by SWIFT.

But some Chinese medium and small-sized banks have reported unstable connectivity to the SWIFT network, affecting their cross-border transactions, the People’s Bank of China (PBOC) said. The new entity will operate financial messaging services through a local network and set up a localized data warehouse to monitor and analyze cross-border payment messaging, the PBOC added.

The joint venture also involves China’s home-grown cross-border settlement system, Cross-border Interbank Payment and Clearing (CIPS), the Payment and Clearing Association of China, a self-regulatory association for the payments industry, and the PBOC’s Digital Currency Research Institute.

To sum up, both BRI and the free trade area created by the RCEP will undoubtedly be two big markets for China’s digital yuan. While facilitating cross-border adoption of the digital yuan, such economic exchanges, in the same way, will help any of the other central bank digital currencies in Asia.

The author is a very influential voice in the FinTech area, having advised many FinTech companies and with a very extensive network across the globe. He holds an MBA and a doctorate in Hong Kong real estate law and economics. He is also a well-known international speaker in the areas of Central Bank Digital Currencies and Blockchain.

OPINION – China’s Digital Yuan and the Belt and Road Initiative

Oriol Caudevilla — Sun, 24 Apr 2022 13:49:41 +0000

China launched its pilot digital yuan on Tuesday, Jan. 4, 2022. The digital currency works through a mobile app, e-CNY, which is available on Android and Apple app stores.

One month later, in February 2022, China started to offer the Digital Yuan at Winter Olympics to Test Overseas Appeal, marking the Digital Yuan´s first actual international test run, to the point that digital yuan transactions beat out Visa at Winter Olympics venue.

As I mentioned in some of my previous articles, China´s Digital Yuan, also known as DCEP, is a Central Bank Digital Currency (CBDC).

A CBDC is a new form of central bank money accessible to the public, accepted as a means of payment, legal tender, safe store of value by all citizens, businesses, and government agencies.

Even though more than 80% of Central Banks in the world are currently working on CBDCs (some are just at an initial research stage, though). However, Asia seems to be the place where CBDCs generates the most interest. In this sense, the major economy leading the CBDC race in Asia (and in the whole world) is China.

Hong Kong, through the Hong Kong Monetary Authority (HKMA), is currently engaged in 3 CBDC-related projects: the digital yuan (its tests in the Special Administrative Region), the mCBDC Bridge Project and the electronic Hong Kong Dollar (e-HKD).

However, in this article, I am not going to focus on Hong Kong, but on the potential that the Belt and Road Initiative (BRI) offers to China´s Digital Yuan.

China’s digital yuan will be beneficial in many different ways, but one of the areas where it can bring more value is that of promoting the use of the yuan for cross-border payments, by trying to convert some of the US-dollar-denominated international trade transactions into renminbi-denominated ones, thus trying to challenge the dominance of the US dollar in international trade and finance.

The Belt and Road Initiative (BRI) is a key program for China, and, therefore, it is easy to imagine how important the expansion of the digital yuan can become for China within the Belt and Road.

According to the Belt and Road Initiative´s website, “BRI is a transcontinental long-term policy and investment program which aims at infrastructure development and acceleration of the economic integration of countries along the route of the historic Silk Road. The Initiative was unveiled in 2013 by China`s president Xi Jinping and until 2016, was known as OBOR – One Belt One Road. On March 28, 2015, the official outline for the Belt and Road Initiative was issued by the National Development and Reform Commission (NDRC), the Ministry of Foreign Affairs (MOFA) and the Ministry of Commerce (MOFCOM) of the People`s Republic of China (PRC), with authorization of the State Council.”

According to the official outline, BRI is a global initiative but by its nature of building on the historic Silk Road puts a major focus on countries in Asia, Eastern Africa, Eastern Europe and the Middle East, a region mainly composed of emerging markets. According to the Belt and Road Portal, currently 71 countries are taking part in the Initiative, together representing more than a third of the world`s GDP and two thirds of the world`s population.

To me, the BRI area is the best possible candidate area for China to start internationalizing its Digital Yuan, or at least one of the best two candidates, alongside RCEP.

This actually goes in line with that I mentioned in “Regional trade pact will pave way for digital yuan”, where I said that Regional Comprehensive Economic Partnership (RCEP), signed on November 15, 2020, and which came into effect this month, on January 1^st, 2022, through the RCEP, China will strengthen its trade ties with neighboring countries, and also be able to leverage agreement to facilitate cross-border adoption of its digital yuan to benefit consumers, dealers, bankers and industries across regions.

To sum up, both BRI and the free trade area created by the RCEP will undoubtedly be two big markets for China’s digital yuan. While facilitating cross-border adoption of the digital yuan, such economic exchanges can also help any of the other central bank digital currencies in Asia.

The author works as a FinTech Advisor and Researcher. He holds an MBA and a doctorate in Hong Kong real estate law and economics. He has worked as a business analyst for a Hong Kong publicly listed company and has given seminars on Central Bank Digital Currencies and Blockchain in many international conferences and universities.

OPINION – The digital yuan and other CBDC projects: how can Hong Kong and the GBA benefit from them

Oriol Caudevilla — Sun, 23 Jan 2022 09:36:20 +0000

Now that the People’s Bank of China has launched the Digital Yuan wallet apps for Android and iOS, and now that the Digital Yuan is about to be fully rolled out very soon, it seems like the perfect time to review what CBDCs are, what advantages they can have, main ongoing projects… especially when it comes to Hong Kong and the Greater Bay Area (GBA).

In this article, I will focus on the digital yuan and e-HKD, leaving the mCBDC Bridge project for a future article, whilst analyzing what advantages both projects can bring to HK and how can HK leverage them through its involvement in the Greater Bay Area (GBA) blueprint.

CBDCs

China´s Digital Yuan, also known as DCEP, is a Central Bank Digital Currency (CBDC).

Central bank digital currencies (CBDCs) have been referred to as “the future of payments”, or even “the future of money”. A CBDC is a new form of central bank money accessible to the public, accepted as a means of payment, legal tender, safe store of value by all citizens, businesses, and government agencies.

However, CBDCs are not cryptocurrencies, even though there is of course some relation between both categories.

The Digital Yuan and its tests in Hong Kong

The digital yuan will be the start of a new era in payments worldwide, allowing China to be the first major economy to deploy its own central bank digital currency (CBDC).

In April 2020, after six years of work (the research commenced in 2014), the Chinese Government announced the launch of the tests of the country’s central bank digital currency (CBDC), DCEP (Digital Currency Electronic Payment) or Digital Yuan, in four major cities (Shenzhen, Suzhou, Chengdu and Xiong’an), notwithstanding the COVID-19 pandemic.

On 14 August, China took a step further: its Ministry of Commerce announced that a pilot run of the country’s CBDC would begin in several new areas very soon such as the Greater Bay Area (GBA), which includes the two Special Administrative Regions of Hong Kong and Macau. The tests in Hong Kong started in 2021.

Since CBDCs are “programmable money”, it will be up to each government and central bank to decide where they want to put their focus. To me, one of the main reasons behind the Chinese government eventually launching its digital yuan is promoting the use of the yuan for cross-border payments, thus converting some of the US-dollar-denominated international trade transactions into renminbi-denominated ones, and slowly challenging the dominance of the US dollar in international trade and finance.

Therefore, it might help propel the yuan to international reserve status. It is in China´s interest to not only make the Digital Yuan become an effective domestic tool for facilitating consumers’ retail payments but to also enhance the yuan as a payments currency in the global financial system. A cross-border deployment of the digital yuan will help take some of the USD-denominated exports and convert them into yuan-based exports, thus challenging the global domination of the USD.

This is the reason why the tests in Hong Kong (and Macau) are very important for China, since, until then, China had been mostly focused on domestic use cases for its DCEP which facilitate consumers´ retail payments. However, the testing of the Digital Yuan in Hong Kong, which is one of the major financial hubs in the world, is a great first step to enhance the yuan as a payments currency in the global financial system.

However, the digital yuan does not aim to replace the Hong Kong dollar, since the digital yuan tests in Hong Kong and Macau (and its future deployment once the tests are complete) aim at cross-border transactions. Since Hong Kong is one of the most open and global cities in the Bay Area, China will be able to leverage this circumstance to promote its digital currency on a global stage, so it is undoubtedly a win-win for all the parties involved.

The electronic Hong Kong Dollar (e-HKD).

On October 4, the Hong Kong Monetary Authority (HKMA) released a technical whitepaper on retail central bank digital currency (CBDC), titled “e-HKD: A technical perspective”.

As per the press release issued by the HKMA that day, part from the continued and expanded collaborative effort with peer central banks on cross-border application of wholesale CBDC, the HKMA has started a study on the prospect of issuing retail CBDC in Hong Kong, the e-HKD, covering both technical and policy considerations, and aims to come up with an initial view by the middle of 2022.

Building on the model for retail CBDC that the HKMA is jointly investigating with the Hong Kong Centre of the BIS Innovation Hub, the Whitepaper explores potential technical design options for issuing and distributing retail CBDC.

The HKMA began researching CBDCs under Project LionRock in 2017, and has since then actively collaborated with other central banks in broadening their knowledge of wholesale CBDCs.

Building on the knowledge and experience in wholesale CBDCs, in June 2021, the HKMA commenced Project e-HKD, which is a retail or general-purpose CBDC project that aims to study the feasibility of the e-HKD, which led to the whitepaper published last October 4.

The e-HKD will just be an electronic version of a bank note, and the mechanism of issuing the digital currency will be the same as that for physical bank notes under the currency peg system, without affecting the monetary base. The existing Hong Kong dollar peg with the US dollar will remain in place.

This announcement follows the Fintech 2025 strategy unveiled in June this year by the HKMA, whose second strategic pillar was for the HKMA to strengthen its research work to increase Hong Kong’s readiness in issuing CBDCs at both wholesale and retail levels.

Fintech 2025 aims to encourage the financial sector to adopt technology comprehensively by 2025, and also, as per Yue’s words, to “promote the provision of fair and efficient financial services” for the benefit of Hong Kong residents and the economy.

Fintech 2025 seems consistent with Hong Kong’s current role as a global fintech and trading hub. Indeed, Hong Kong’s future is not so much about remaining as the gateway to the mainland but mostly about keeping and enhancing its current status as one of the world’s most important financial centers by adopting the very economic initiatives that are relevant to the development blueprint for the Guangdong-Hong Kong-Macao Greater Bay Area.

In that sense, Fintech 2025 is aligned with the 14th Five-Year Plan (2021-25) for National Economic and Social Development and the Long-Range Objectives Through the Year 2035, which recognized Hong Kong’s economic potential at the national level.

What about Macau?

What about Macau, though?

In April, Macau moved a step closer to the potential introduction of a digital currency, thus seeking to better combat money laundering and tax evasion.

The Macau Government announced that it plans to amend laws to regulate the issuance of a virtual legal tender. According to Chief Executive Ho Iat Seng, the government will work with China’s central bank to “study the feasibility of issuing a digital currency”.

Although no formal plans have been announced on whether or how a digital currency would be implemented, some industry players worry that the mandatory use of a digital currency as the only option for buying gambling chips would be negative for Macau casinos by essentially eliminating the junket system.

Nevertheless, it seems that, in that case, the currency issued would be the digital yuan too, not an e-Pataca, which means that, if Macau finally introduces the digital yuan for its domestic operations, an e-Pataca would make little sense.

In other words, Macau´s plans are to use China´s Digital Yuan, not their own CBDC.

As I told Reuters last April 22, “The digital yuan is important for casinos to control the money flows but it’s part of a bigger strategy which involves Macau becoming diversified,” (Macau’s digital yuan plans deal a fresh blow to casino junkets, April 22, 2021).

Diversification is, therefore, the key: Macau’s future focus will be on finance. I already mentioned Macau trying to diversify its economy by creating a new stock exchange (a NASDAQ-like market denominated in yuan, facilitating fundraising by technology companies from the Bay Area economic hub).

I also explained that Macau should leverage its position as a trade and commercial services platform between China and the Portuguese-speaking countries, as well as its involvement in the Guangdong-Hong Kong-Macau Greater Bay Area and the ‘Belt and Road’ initiative.

However, Macau´s shift towards finance will not be complete until the moment the region manages to create and maintain a strong Fintech and start-up ecosystem.

In other words, with or without digital yuan, Macau needs to create and maintain a strong FinTech ecosystem, since the GBA becoming a reality will bring many opportunities to Macau now that the Special Administrative Region is refocusing towards finance, but in order for Macau to fully tap into all these opportunities, it should develop a much stronger FinTech ecosystem.

Hong Kong’s FinTech 2025 Strategy is a good example that Macau should follow.

Conclusions

Hong Kong should keep up its good work when it comes to further integrating into the Guangdong-Hong Kong-Macao Greater Bay Area, since Hong Kong’s future is not so much about remaining as the gateway to the mainland but mostly about keeping and enhancing its current status as one of the world’s most important financial centers by adopting the very economic initiatives that are relevant to the development blueprint for the Greater Bay Area.

Thus, economic integration is the key to Hong Kong’s future success. While its role as the gateway to China has diminished, the special administrative region remains one of the world’s most important financial hubs and will remain so (or even increase its importance) thanks to its further integration with the mainland through many initiatives, such as the Greater Bay Area blueprint. Hong Kong’s potential has been once again recognized by Beijing in its 14th Five-Year Plan. In other words, Hong Kong’s future is linked to that of the mainland.

From its involvement in the Greater Bay Area, Hong Kong will reap the benefits from different projects and initiatives, among them all the CBDC-related projects above mentioned. The timing is perfect.

The author works as a FinTech Advisor and Researcher. He holds an MBA and a doctorate in Hong Kong real estate law and economics. He has worked as a business analyst for a Hong Kong publicly listed company and has given seminars on Central Bank Digital Currencies and Blockchain in many international conferences and universities.

OPINION – The electronic Hong Kong Dollar (e-HKD): one more CBDC project in Hong Kong.

Oriol Caudevilla — Mon, 13 Dec 2021 08:34:23 +0000

The Hong Kong Monetary Authority (HKMA) first mentioned its plan to explore a digital currency (electronic Hong Kong Dollar or e-HKD) as part of its Fintech 2025 strategy unveiled in June.

Following this, on October 4, the HKMA released a technical whitepaper on its retail central bank digital currency (CBDC), titled “e-HKD: A technical perspective”. As per the press release issued by the HKMA that day, part from the continued and expanded collaborative effort with peer central banks on the cross-border application of wholesale CBDC, the HKMA has started a study on the prospect of issuing retail CBDC in Hong Kong, the e-HKD, covering both technical and policy considerations, and aims to come up with an initial view by the middle of next year.

The e-HKD will allow the public to use this form of electronic payment to shop, dine or make money transfers.

Central bank digital currencies (CBDCs) have been referred to as “the future of payments”, or even “the future of money”, and not without reason. Hong Kong, once again, has been at the forefront of this.

A CBDC is a new form of central bank money accessible to the public, accepted as a means of payment, legal tender, safe store of value by all citizens, businesses, and government agencies. There are many possible motivations behind CBDCs: they can replace physical notes; they can be used to improve financial stability as a monetary policy tool, to promote financial inclusion, to fight against financial crime, improve payment efficiency and reduce intermediary risks, etc.

In this sense, Mr Eddie Yue, Chief Executive of the HKMA, said, “The Whitepaper marks the first step of our technical exploration for the e-HKD. The knowledge gained from this research, together with the experience we acquired from other CBDC projects, would help inform further consideration and deliberation on the technical design of the e-HKD. We also look forward to receiving feedback and suggestions from the academia and industry to enrich our perspectives.”

The HKMA began researching CBDCs under Project LionRock in 2017, and has since then actively collaborated with other central banks in broadening their knowledge of wholesale CBDCs.

As I said, this announcement follows the Fintech 2025 strategy unveiled in June this year by the HKMA, whose second strategic pillar was for the HKMA to strengthen its research work to increase Hong Kong’s readiness in issuing CBDCs at both wholesale and retail levels.

As I mentioned in “HKMA´s Fintech 2025 strategy is big step forward” (China Daily HK Edition, July 16, 2021), Fintech 2025 aims to encourage the financial sector to adopt technology comprehensively by 2025, and also, as per Yue’s words, to “promote the provision of fair and efficient financial services” for the benefit of Hong Kong residents and the economy.

I also mentioned that Fintech 2025 seems consistent with Hong Kong’s current role as a global fintech and trading hub. Indeed, Hong Kong’s future is not so much about remaining as the gateway to the mainland but mostly about keeping and enhancing its current status as one of the world’s most important financial centers by adopting the very economic initiatives that are relevant to the development blueprint for the Guangdong-Hong Kong-Macao Greater Bay Area.

Hong Kong will not walk alone in this area, since the fintech scene on the Chinese mainland is developing very fast too. In this sense, Hong Kong (and Macao, to a lesser but very relevant extent) can undoubtedly play a vital role in China’s fintech scene, given Hong Kong’s current position as one of the most important financial centers in the world and given that its fintech industry has the potential to develop much faster now that it can leverage its involvement in the Greater Bay Area blueprint.

To sum up, not only Hong Kong is in a perfect position to leverage the digital yuan tests and future deployment to enhance its status as one of the world’s most important financial centers, but it is also in a perfect position to explore the possibility of an e-HKD as well, showing once again that the HKMA and therefore Hong Kong are at the forefront of the CBDC race. Hong Kong has been for decades one of the world’s most important financial centers and will remain so, but it is wise to keep improving and embracing technologies in order to keep its leading position and never be left behind.

The author works as a FinTech Advisor and Researcher. He holds an MBA and a doctorate in Hong Kong real estate law and economics. He has worked as a business analyst for a Hong Kong publicly listed company and has given seminars on Central Bank Digital Currencies and Blockchain in many international conferences and universities.

OPINION – Sustainable Finance and Green FinTech will undoubtedly play an important role in Asia

Oriol Caudevilla — Mon, 22 Nov 2021 04:37:38 +0000

Last week, Hong Kong sold US$3 billion of green bonds, pricing its first euro tranche to sharpen Hong Kong´s edge as center for green finance. The entire offering of Eurobonds and dollar-denominated debt was triple the size of the first US$1 billion green bond sold in 2019, and the green bond offering comprised a US$1 billion 10-year tranche, a €1.25 billion (US$1.42 billion) 5-year tranche, and a €500 million 20-year tranche.

According to the Hong Kong Monetary Authority (HKMA), the 20-year tranche of the latest offering was the longest euro-denominated green bond issued by an Asian government. Actually, it underscores the city’s HK$175.5 billion (US$22.5 billion) plan for green bonds over the next five years as Hong Kong strives to become an international green financial center.

Is turning green just a passing fad or is it an area with huge potential? To me, it’s definitely the latter, as I will explain next.

Introduction to Green Finance

Green Finance, according to the UN Environment Program, aims to “increase level of financial flows (from banking, micro-credit, insurance and investment) from the public, private and not-for-profit sectors to sustainable development priorities. A key part of this is to better manage environmental and social risks, take up opportunities that bring both a decent rate of return and environmental benefit and deliver greater accountability.”

Green bonds are the most common green finance instrument. According to the International Capital Market Association´s (ICMA) “Green Bond Principles”, “Green Bonds are any type of bond instrument where the proceeds will be exclusively applied to finance or re-finance, in part or in full, new and/or existing eligible Green Projects and which are aligned with the four core components of the GBP”, that is, Use of Proceeds, Process for Project Evaluation and Selection, Management of Proceeds and Reporting.

The US, China and France are the three biggest issuers of green bonds. Presently, the European Central Bank holds around 20% of all euro-denominated green debt, even though it only started buying corporate bonds as recently as 2016, which indicates that the bank sees this as a way to further its own green agenda.

The green bond markets have been going strong for over a decade. Since the green bond market first opened in 2007, more than USD$1 trillion worth of green bonds have been issued globally as investors have started to see a sustainable and profitable investment option. Actually, oversubscription – where demand has exceeded the number of green bonds available – has become the norm for green bond issuances.

Globally, the green bond market could be worth $2.36 trillion by 2023, and, to some extent, it is regarded as a way of meeting the needs of environmentalism and capitalism simultaneously.

In this article, I am going to focus on the current status of Green Finance in a few locations in Asia:Hong Kong and Macau, Mainland China and Singapore.

1. Hong Kong and Macau

Regarding Hong Kong, in June 2018, the Government launched the Green Bond Grant Scheme to subsidize eligible green bond issuers in obtaining certification under the Hong Kong Quality Assurance Agency’s (HKQAA) Green Finance Certification Scheme. In September 2018, the Hong Kong Green Finance Association was set up, bringing together some 100 market practitioners and business front runners to promote Hong Kong as a green finance capital.

After that, in August 2020, Financial Secretary Paul Chan, during his budget speech, announced that the HK government would be issuing HKD$66 billion (USD$8.5 billion) in green bonds in the coming 5 years.

And, only a few months ago, the HK Government launched green bonds worth $2.5 billion, to be available on the Hong Kong Stock Exchange and the London Stock Exchange on February 2, under the Government Green Bond Program. The offering includes $1bn 5-year bonds at 0.635%, $1bn 10-year bonds at 1.414% and $500 million 30-year bonds at 2.431%.

Leaving aside the figures, what is more important about this offering is the fact that, according to the data provided by a press release issued by the Hong Kong Monetary Authority (HKMA) on January 27, the 30-year tranche is also the first 30-year green bond to be issued by an Asian government, and the longest tenor to be issued by the HKSAR Government, which means that Hong Kong is at the forefront of Green Finance in Asia.

The deal attracted strong interest from a diverse group of conventional and green investors: Asian institutional investors were allocated 65% of the total, investors from Europe were allocated 20% and US investors received 15% of the total.

In this sense, the HKSAR Government published its Green Bond Framework in 2019, which sets out how green bond proceeds will be used to fund projects that will improve the environment and facilitate the transition to a low carbon economy.

Hong Kong is thus in a perfect position to leverage its involvement in the Greater Bay Area (GBA) blueprint to serve as the GBA Green Finance Centre.

As to its neighbor Special Administrative Region, Macau, itsgreen finance scene is not as advanced as Hong Kong´s one (which makes perfect sense, given the fact that Hong Kong is one of the world´s leading financial centers, whereas Macau´s transition into finance is just starting), even though there have been some movements in this area. For example, in October 2019, the Bank of China in Macau carried out ‘green’ bond issues worth RMB 7 billion (US$876.8 million) in three currencies (dollar, euro and renminbi).

Given the fact that the Macau Government promotes economic diversification and at the same time advocates low-carbon and sustainable development, green finance would be a very interesting area for Macau to focus as part of its future shift towards finance. In this sense, green finance has been pointed out by the Macau authorities as one of the bets for a future renminbi stock market to develop “a modern financial industry, diversification of the economy and strengthening cooperation projects between China and Portuguese-speaking countries”.

Therefore, Macau should leverage its belonging in the Portuguese-speaking world to try to take advantage of the many opportunities offered by Green Finance.

2. Mainland China

In the report delivered at the 19th National Congress of the Communist Party of China in 2017, President Xi Jinping emphasized that building an ecological civilization would be a “millennium project for the sustainable development of the entire nation”, and stressed the need to “construct a market-oriented system of innovation for green technology, develop green finance, as well as expand energy conservation and environmental protection industries, clean production industries, and clean energy industries.”

Following this, in his speech at the general debate of the 75th session of the United Nations General Assembly on September 22, 2020, President Xi pledged that China will strive to peak its carbon dioxide emissions before 2030 and achieve carbon neutrality before 2060.

Both the reduction of high-carbon investments and the increase in low-carbon and zero-carbon investments are tasks of the green financial system.

China first proposed building a green financial system in 2015 and has since developed a framework of such a system. In this sense, China’s green loans are now the largest in the world, and its green bond market is ranking the second.

As we can see, green has become an imperative for the transition and development of the economy as one of China’s five major development concepts. By 2030, China is expected to require RMB 3tn- RMB 4tn (USD 424bn -USD 566bn) in green investment annually. Green bonds are an ideal financing tool to support the required investment.

As of July 2020, six provinces and nine regions were approved as green finance pilot zones. The green finance pilot zone programme is unique to China and provides an opportunity to test specific strategies locally, before rolling them out nationally.

As stated by Climate Bonds Initiative´s “China´s Green Bond Issuance and Investment Opportunity” report, China has led the world in kickstarting a domestic green bond market with robust policy support including clear definitions and strong regulatory guidance for green finance. The next phase of the market’s growth will require local and global harmonization as well as tightening of green definitions, credit enhancement to enable medium-sized issuers into the market and greater efforts at market awareness and transparency.

As we can see, Mainland China has become a green finance powerhouse through the development of a quite advanced green financial system.

Singapore

The Lion City aims to be a hub for green finance in Asia as well. The Monetary Authority of Singapore (MAS) has formed a network with seven other central banks in the world, the Central Banks and Supervisors Network for Greening Financial System, which intends to promote sharing of experience and best practices in green finance with other countries.

Along with forming the network, the MAS has established a Green Bond Grant Scheme to promote and ensure the issuance of green bonds in Singapore. Parallelly, the Association of Banks in Singapore published Guidelines on Responsible Financing to promote and support environmental, social, and governance (ESG) disclosures. The Singapore Exchange asks its member firms to strictly comply with the ESG disclosures.

Aside from that, in late 2020 Singapore launched its first institute focused in green finance research and talent development, the Singapore Green Finance Centre (SGFC), which will tap the strengths of Imperial College Business School and the Lee Kong Chian School of Business at Singapore Management University (SMU) in climate science, financial economics and sustainable investing.

The center is supported by the Monetary Authority of Singapore (MAS) and nine founding partners: Bank of China, BNP Paribas, Fullerton Fund Management, Goldman Sachs, HSBC, Schroders, Standard Chartered Bank, Sumitomo Mitsui Banking Corporation, and UBS Group AG.

In a joint statement, the two academic institutions and MAS said that SGFC’s multi-disciplinary research and training will enable financial institutions, corporates and policymakers to improve the management of environmental risks, develop financial solutions to promote environmental sustainability, and design policies for a sustainable future.

As of today, Singapore is ASEAN´s largest green finance market. ASEAN’s total green bond issuances from 2016 to 2019 was approximately only US$8.1 billion (S$10.8 billion), of which 55 per cent was contributed by Singapore.

In this sense, even though Singapore still has plenty of room to grow, there exists a strong demand for green bonds and Singapore’s Budget 2021 recognizes not only the appetite, but also the need to focus on pathways toward becoming a global city of sustainability.

Conclusions

To sum up, the COVID-19 pandemic has shown the world that the need for a more sustainable future is real and immediate, therefore green finance is more necessary than ever.

Hong Kong is already becoming a very important hub for green finance and it should keep moving forward, whereas Macau is at an early stage in this area, compared to HK, but it has plenty of room to grow as well, given Macau´s current focus in finance and its connection with the Portuguese-speaking world.

Mainland China has become a green finance powerhouse through the development of a quite advanced green financial system and is actually the second biggest issuer of green bonds in the world, just behind the US.

Singapore is currently ASEAN´s largest green finance market and is aiming to become a green finance hub.

Green finance in general, and green bonds in particular, are not only a good opportunity from an environmental perspective, but they are also a good business opportunity. Actually, it is hard to find a financial product that is sustainable and can meet the goals of both helping to protect the environment and being a good investment opportunity, economically speaking. This is probably why green finance has become much more important all across the globe, and it should become even more important than it is now, since it offers countless opportunities.

The author works as a FinTech Advisor and Researcher. He holds an MBA and a PhD in Hong Kong real estate law and economics. He has worked as a business analyst for a Hong Kong publicly listed company and has given seminars on Central Bank Digital Currencies and Blockchain in many international conferences and universities.

OPINION – Towards an electronic Hong Kong Dollar (e-HKD), towards an e-Pataca as well?

Oriol Caudevilla — Tue, 05 Oct 2021 04:06:59 +0000

A Central Bank Digital Currency (CBDC) is a new form of central bank money accessible to the public, accepted as a means of payment, legal tender, safe store of value by all citizens, businesses, and government agencies. Undoubtedly, the pandemic has turbocharged a global financial technology revolution.

Central bank digital currencies have been referred to as “the future of payments”, or even “the future of money”, and not without reason. Hong Kong, once again, has been at the forefront of this, through its digital yuan tests, its participation in the mCBDC Bridge Project (formerly known as LionRock Project), and, now, through the study of a possible electronic Hong Kong Dollar (e-HKD).

The Digital Yuan is a Central Bank Digital Currency (CBDC), and CBDCs are not cryptocurrencies, even though there is of course some relation between both categories.

As I mentioned in some of my previous articles, both Hong Kong and Macau are poised to play a key role when it comes to Digital Yuan´s tests and future roll-out.

Furthermore, HK is also studying now the feasibility of issuing its very own electronic Hong Kong Dollar (e-HKD).

On October 4, the Hong Kong Monetary Authority (HKMA) released a technical whitepaper on retail central bank digital currency (CBDC), titled “e-HKD: A technical perspective”.

As per the press release issued by the HKMA that day, a part from the continued and expanded collaborative effort with peer central banks on the cross-border application of wholesale CBDC, the HKMA has started a study on the prospect of issuing retail CBDC in Hong Kong, the e-HKD, covering both technical and policy considerations, and aims to come up with an initial view by the middle of next year.

What about Macau, though?

In April, Macau moved a step closer to the potential introduction of a digital currency, thus seeking to better combat money laundering and tax evasion.

In other words, Macau´s plans are to use China´s Digital Yuan, not their own CBDC.

However, Macau´s shift towards finance will not be complete until the moment the region manages to create and maintain a strong Fintech and start-up ecosystem.

Hong Kong’s FinTech 2025 Strategy is a good example that Macau should follow.

The author works as a FinTech Advisor and Researcher. He holds an MBA and a doctorate in Hong Kong real estate law and economics. He has worked as a business analyst for a Hong Kong publicly listed company and has given seminars on Central Bank Digital Currencies and Blockchain in many international conferences and universities.

OPINION – The Virtual Banking race is heating up in East Asia

Oriol Caudevilla — Mon, 16 Aug 2021 01:30:15 +0000

Virtual banks, also called neobanks, primarily deliver retail banking services through the internet or other electronic channels instead of physical branches.

It is commonly believed that the development of virtual banks will promote FinTech and innovation and offer a new kind of customer experience by helping to promote financial inclusion, since neobanks normally target the retail segment, including the small and medium-sized enterprises (SMEs).

Even though some people use the term “virtual banking” as a synonym of “digital banking”, there is a difference between them: digital banks are often the online-only arm of a bigger player in the banking sector, whilst neobanks are completely digital, existing independently to traditional banks (even though a neobank may be backed by a traditional bank).

In other words, digital banking refers to those digital services offered to us by traditional banks, while neobanks or virtual banks are new banks that exist only online and, for example, do not have any physical branches of any sort.

It is no longer possible for banks to keep offering the same services that they have been offering for decades without adapting to the current times. Ideally, virtual banks should be faster, more efficient and operate at a much lower cost structure than traditional banks, since there is less expenditure on property rent and manpower.

There is no doubt that virtual banks are thriving throughout the world. There are multiple reasons behind this, such as the cost of smartphones and data continuing to fall, regulatory attitudes are changing and evolving, the pandemic is further accelerating the adoption of digital as the primary form of interaction…

As explained in the report “Digital Challenger Banks: A Desire, A Dream, A Vision” by the Singapore FinTech Association, Boston Consulting Group and BCG Expand FinTech Tower (November 2020), since 2015, there has been a 200% increase in the number of neobanks globally, of which 45% are in Americas, 35% are in EMEA and 20% are in APAC.

Still according to this report, generally speaking, regulators are increasingly active in bank licensing, facilitating the entry of new players.

Despite APAC not being yet the region where we can see a bigger increase in the number of virtual banks, this region, especially Southeast Asia (same as South Asia, including India, Pakistan and Bangladesh), offers many opportunities to neobanks, since South East Asia is home to an unbanked population of more than 290 million people.

In Southeast Asia, only 18% of the population has access to credit, lower than the proportion of digital-ready population (37%) based on World Bank Global Findex data. This undoubtedly provides a supportive environment and impetus for consumer lending to catch up as income levels rise.

In this article, I am going to focus on the current situation of virtual banks in Hong Kong (and Macau), and Singapore.

Hong Kong and Macau.

Over these last few years, Hong Kong has been developing itself into a leading FinTech hub. One of the areas boosting the pace of digital transformation is that of virtual banking. In March 2019, the Hong Kong Monetary Authority (HKMA), Hong Kong´s de facto central bank, announced the issuance of the very first virtual banking licenses. This came after the publication by the HKMA of the “Guideline on Authorization of Virtual Banks” in May 2018.

As of today, 8 virtual banks exist in Hong Kong after having been approved by the HKMA and after having been officially launched in 2020: Airstar Bank (its services were launched in June to the public), Ant Bank (which officially opened for business in late September and also operates in Macau), Fusion Bank (which announced the full public launch of its public services in December, being the last of the eight virtual banks to commence operations), livi Bank (which opened its virtual doors in August), Mox Bank (launched in late September), Ping An OneConnect Bank Limited (it started its pilot trial in June under the Fintech Supervisory Sandbox -FSS- of the HKMA and officially started operations in late September), WeLab Bank (launched in late July), and ZA Bank (which officially opened in March, thus becoming the first virtual bank in the region).

Hong Kong´s eight virtual banks are a key pillar for the coming smart banking era and are a clear example of how digital transformation has become a top priority.

These 8 virtual banks have several elements in common, such as the fact that all of them commenced operations in 2020, and also the fact that the eight are backed by key players in the areas of finance and technology. In this sense, for example, Ant Bank is wholly owned by Ant Group, Mox Bank has been created by Standard Chartered in partnership with PCCW, HKT and Trip.com, Fusion Bank is backed by Tencent, ICBC’s Hong Kong unit, HKEX, Hillhouse Capital and Perfect Ridge…

Regarding the neighbouring Macau, this region, more than ever, is in a perfect position to take the opportunities offered by virtual banking. Even though many people still (wrongly) think of Macau as just a gaming hub, the truth is that the former Portuguese colony is attempting to diversify its economy and become competitive in many more areas.

So far, only 2 virtual banks operate in the region: Ant Bank Macau, launched last year, and the Macau Development Bank. The Financial System Act, passed in the 1990s, does not specifically set out rules for virtual banking business, but lenders are allowed to conduct online business.

Singapore.

Singapore´s move towards FinTech is not new either. In 2014, Prime Minister Lee Hsien Loong announced plans to make the city-state the world’s first ‘Smart Nation’ by 2030, using technology to improve the economy and enhance the standard of living. In this sense, one of the three pillars of the Singapore Smart Nation Initiative is the digital economy. As part of the country’s drive to efficiency and productivity, the Ministry for Communications and Information announced plans in May 2018 to digitize every business and every industry.

The Monetary Authority of Singapore (MAS), Singapore’s central bank and financial regulator, is also helping to create a ‘smart financial center’ where technology is used to increase efficiency and create more opportunities.

As part of the first digital banking symposium held in Singapore in early November, the Singapore Fintech Association (SFA), Boston Consulting Group and Finastra unveiled their report “Southeast Asia: Coming of the Digital Challenger Banks”, in which the current status and future opportunities of neobanks and challenger banks in Southeast Asia are analyzed.

The report notes that upcoming Digital Challenger Banks in Singapore have a tremendous opportunity across the broader SEA region, which is set for strong economic and demographic growth in the coming decade. By 2030, the gross domestic product of Asean-5 – Indonesia, Malaysia, the Philippines, Singapore and Thailand – is projected to reach US$4.3 trillion. This will make it the world’s sixth-largest economic bloc.

On December 4, the Monetary Authority of Singapore (MAS) announced four successful digital bank applicants in the end: 2 DFBs (digital full bank) and 2 digital wholesale bank licenses (DWBs), being one of these two DWBs an entity wholly owned by Ant Group. Out of the 21 applications filed, 14 of which were initially shortlisted, and 4 successful applicants were just announced by the MAS.

The 4 digital bank license winners were Singtel & Grab (DFB), Sea Limited (DFB), Ant Financial (DWB), and Greenland Financial Holdings, Linklogis Hong Kong & Beijing Co-operative Equity Investment Fund Management (DWB).

According to the MAS, the successful applicants must meet all relevant prudential requirements and licensing pre-conditions before MAS grants them their respective banking licenses. MAS expects the new digital banks to commence operations from early 2022.

It is also worth noting that three Chinese tech giants were initially competing for these DWBs in Singapore: Ant Group, but also Xiaomi and ByteDance. Ant Group applied for the license alone, while Xiaomi (with AMTD) and ByteDance lead respective consortia, showing us that these digital bank licenses in Singapore are also of interest to Mainland China companies.

The idea behind these digital banking licenses is to open up the market for the benefit of lower customers’ costs and to allow underserved segments to be targeted by the new entrants.

Conclusions.

Virtual banks are blossoming all over the world, since it is no longer possible for banks to keep offering the same services that they have been offering for decades without adapting to the current times

In Hong Kong, virtual banks may not be so important when it comes to promoting financial inclusion, since the amount of underbanked people is low, but the 8 existing virtual banks are a key pillar for the coming smart banking era and are a clear example of how digital transformation has become a top priority.

In Singapore, same as in Hong Kong, the unbanked populations is small, but, nonetheless, the upcoming virtual banks will open up the market for the benefit of lower customers’ costs and to allow underserved segments to be targeted by the new entrants.

Neobanks definitely have a huge opportunity to grow in the whole of Asia while adding value to the societies of the respective countries by helping them to promote financial inclusion.

The author works as a FinTech Advisor and Researcher. He holds an MBA and a doctorate in Hong Kong real estate law and economics. He has worked as a business analyst for a Hong Kong publicly listed company and has given seminars on Central Bank Digital Currencies and Blockchain in many international conferences and universities.

OPINION – Macau needs a scheme like the HKMA’s Fintech 2025 Strategy to properly support its Fintech Development

Oriol Caudevilla — Tue, 20 Jul 2021 07:53:17 +0000

As I mentioned in “Opportunities for Macau for 2021” (Macau Business, December 28), Macau’s future focus will be on finance. In that article, I made reference to a series of financial-related initiatives that may bring many opportunities to the Special Administrative Region in 2021 and in the coming years.

The 14th Five-Year Plan, in its Chapter 31, focuses on proactively and progressively taking forward the development of the Guangdong-Hong Kong-Macau Greater Bay Area (GBA).

However, I made in my article no specific reference to the area of FinTech. In my opinion, Macau needs to develop its FinTech scene much more intensely if the Special Administrative Regions wants to fully take advantage of all the opportunities offered by the GBA in the context of China´s 14^th Five-Year Plan.

Even though all the initiatives above mentioned are very relevant and will certainly bring many benefits to Macau and will help it move its shift toward finance, in order for the Special Administrative Region to become a FinTech stronghold in the Greater Bay Area (GBA), it needs to develop a clear strategy that helps Macau build a much stronger FinTech ecosystem.

Macau´s shift towards finance will not be complete until the moment the region manages to create and maintain a strong Fintech and start-up ecosystem. This ecosystem cannot certainly be, at least for the time being, as strong as those of Hong Kong and Shenzhen, but it can be strong, nonetheless.

In this sense, Macau should follow the example set by Hong Kong and the Hong Kong Monetary Authority (HKMA), albeit, as I said, it is not fair to compare one of the world’s most important financial centers, Hong Kong, with Macau, whose shift into finance is still very recent, so we cannot expect Macau’s FinTech ecosystem to rival with that of Hong Kong.

Last June 8, the Hong Kong Monetary Authority (HKMA) unveiled “Fintech 2025”, its new strategy aimed to drive Hong Kong’s FinTech development these coming years. Said strategy was outlined by Mr. Eddie Yue, Chief Executive of the HKMA, in his opening remarks for a fintech seminar organized by the Hong Kong Association of Banks.

Fintech 2025 aims to encourage the financial sector to adopt technology comprehensively by 2025, and also, as per Mr. Yue´s words, “to promote the provision of fair and efficient financial services for the benefit of Hong Kong citizens and the economy”.

The Strategy is based on 5 pillars, i.e.:

All banks go fintech: The HKMA will continue to promote the all-round adoption of fintech by HK banks and encourage them to fully digitalize their operations, from front-end to back-end. The HKMA will issue further supervisory guidance and continue to “walk the talk” by digitalizing its supervision through the use of advanced technologies.
Future-proofing Hong Kong for Central Bank Digital Currencies (CBDCs): The HKMA will strengthen its research work to increase HK’s readiness in issuing CBDCs at both wholesale and retail levels.

It has been working with the Bank for International Settlements (BIS Innovation Hub HK Centre) to do research on retail CBDCs and will begin a study on the eHKD to understand its use cases, benefits, and risks.

It will also continue to collaborate with the People’s Bank of China in supporting testing of the digital yuan in HK (in this sense, for further information, please refer to my article “Digital yuan good for HK’s international financial hub status”, China Daily HK Edition, May 26).

3. Creating the next-generation data infrastructure: HKMA will take the lead in enhancing the city’s existing data infrastructure and building new ones, including, among others, DLT-based credit data sharing platform, to facilitate consent-based data sharing.

4. Expanding the fintech-savvy workforce. The HKMA aims to collaborate with various strategic partners to groom all-round fintech talent, both students and practitioners, through various initiatives, including developing fintech-specific training programs and qualifications.

5. Nurturing the ecosystem with funding and policies.

According to Mr. Yue, “Fintech is, without doubt, a key growth engine for the financial industry in the post-pandemic era, and now is the right time to double down on our efforts to grasp the opportunities. “Fintech 2025” sets out our vision in this regard. I urge all stakeholders to join forces with the HKMA. Together, we can take our city’s fintech ecosystem to new heights.”

Moreover, the timing for unveiling such a strategy seems perfect. On the one hand, consumer behavior is changing due to the COVID-19 pandemic, thus turbocharging a financial technology (FinTech) revolution all over the world. On the other hand, Hong Kong, after two bumpy years, is in a perfect position to tap even more into all the opportunities offered by FinTech, thus becoming even more and more important in this area.

Given that both Hong Kong and Macau -to a lesser but very relevant extent- can undoubtedly play a vital role in China’s FinTech scene, and also given the fact that Hong Kong’s and Macau’s FinTech industry has the potential to develop much faster now that it can leverage its involvement in the Greater Bay Area (GBA) blueprint, it would be the right time for Macau´s authorities to develop a blueprint similar to the HKMA’s FinTech 2025 Strategy,

To sum up, the GBA becoming a reality will bring many opportunities to Macau now that the Special Administrative Region is refocusing towards finance, but in order for Macau to fully tap into all these opportunities, it should develop a much stronger FinTech ecosystem. Hong Kong´s FinTech 2025 Strategy is a good example that Macau should follow.

The author works as a FinTech Advisor and Researcher. He holds an MBA and a doctorate in Hong Kong real estate law and economics. He has worked as a business analyst for a Hong Kong publicly listed company and has given seminars on Central Bank Digital Currencies and Blockchain in many international conferences and universities.

OPINION – China’s crackdown on cryptocurrencies: Environmental impact and financial stability

Oriol Caudevilla — Thu, 24 Jun 2021 01:30:01 +0000

Last Monday, June 21^st, the People’s Bank of China (PBOC, China’s central bank) announced that it had recently summoned several major banks and payments companies to call on them to take tougher action over the trading of cryptocurrencies.

As per the statement published by the PBOC that day, banks were told to not provide products or services such as trading, clearing and settlement for cryptocurrency transactions. This follows an order from the previous Friday to stop Bitcoin mining in the Sichuan province.

These movements do not come as a surprise, since the Chinese Government has been intensifying its crackdown on crypto currencies these last few weeks, a crackdown that started in September 2017, when the Government took a series of regulatory measures related to crypto currencies, mainly due to the concern over financial risks associated with such assets.

For example, the practice of raising funds through initial coin offerings (ICOs) is completely banned in China. On September 4, 2017, seven Chinese central government regulators -the People’s Bank of China (PBOC), the Cyberspace Administration of China (CAC), the Ministry of Industry and Information Technology (MIIT), the State Administration for Industry and Commerce (SAIC), the China Banking Regulatory Commission (CBRC), the China Securities Regulatory Commission (CSRC), and the China Insurance Regulatory Commission (CIRC)- jointly issued the Announcement on Preventing Financial Risks from Initial Coin Offerings (ICO Rules) for purposes of investor protection and financial risk prevention.

Under the ICO Rules, ICOs that raise cryptocurrencies, such as Bitcoin and Ethereum, through the irregular sale and circulation of tokens are essentially engaging in public financing without official authorization, which is illegal.

Last month, in May 2021, Chinese-mainland authorities took a tougher stand on cryptocurrencies by imposing a new ban covering services that had not been mentioned previously.

Financial institutions and payment companies have now been barred from providing services concerning cryptocurrency transactions, and investors have been warned against engaging in speculative crypto trading. In other words, institutions must not accept virtual currencies, use them as a means of payment and settlement, nor offer their clients services involving cryptocurrencies, such as registration, trading, clearing and settlement.

At the same time, China, on one hand, is promoting the Digital Yuan, and, on the other hand, the Chinese Government is adopting a tough approach on cryptocurrencies and virtual-currency trading platforms, as I have just explained.

Is that consistent? Indeed, it is.

This is so because, unlike what some people think, the Digital Yuan is a Central Bank Digital Currency (CBDC), and CBDCs are not crypto currencies.

The rationale behind CBDCs and cryptos is actually the opposite: whilst CBDCs are Central Bank Money adopting a digital form (therefore, legal tender issued by a central bank, representing a claim against that central bank) and thus centralized, crypto currencies are a key pillar of the movement known as DeFi (Decentralized Finance) and are established by private entities and supported by numerous distributed nodes that are incentivized through block rewards to maintain the network. In other words, the rationale behind CBDCs is centralization, while the one behind cryptos is the opposite.

But, why this crackdown on crypto currencies?

Cryptos pose certain risks and challenges, such as their volatility (financial risks), as well as regulatory and energy consumption-related risks, which need to be solved, especially those concerning energy consumption.

I myself am not against crypto currencies, but I am aware that these risks need to be taken into consideration.

When it comes to the environmental footprint, the main issue comes from bitcoin mining. Investopedia defines “bitcoin mining” as the “process by which new bitcoins are entered into circulation, but it is also a critical component of the maintenance and development of the blockchain ledger. It’s performed using very sophisticated computers that solve extremely complex computational math problems”.

An analysis published in February by the Cambridge Centre for Alternative Finance said bitcoin mining uses more electricity annually than the whole of Argentina, consuming around 121.36 terawatt-hours annually, which is, undoubtedly, a very high amount and an environmental conundrum.

The mainland’s latest crackdown on bitcoin mining and trading has forced many cryptocurrency miners to halt all or part of their operations in the country. China accounts for up to 65 percent of the world’s bitcoin mining, especially in the Inner Mongolia autonomous region, which accounts for 8 percent globally — more than the total amount in the United States.

Therefore, if bitcoin mining is a problem worldwide due to its high energy consumption, it is even a bigger problem in China due to the fact that almost two-thirds of the world’s mining activities takes place there.

Although the ban on bitcoin mining has drawn criticism, I think it is perfectly in line with China’s current goals. Under the 14th Five-Year Plan (2021-25) for National Economic and Social Development and the Long-Range Objectives Through the Year 2035, China aims to reach its carbon emissions peak before 2030 and become carbon neutral before 2060.

When it comes to the financial risks, it is undeniable that, despite crypto currencies offering many opportunities, their high level of volatility makes them a risky asset class that should be approached carefully.

To sum up, is China’s ban compatible with its policies? To me, it is. It is fair and respectable for every country to adopt a different approach toward cryptocurrencies. While some countries, like Singapore, can be more “crypto-friendly”, other nations may take a tougher stand, like China, and it is understandable.

China’s latest ban on cryptocurrencies seems perfectly in line with its policies, especially when it comes to bitcoin mining and the goal of becoming carbon neutral as listed in the 14th Five-Year Plan.

Besides, there is no contradiction in China promoting the digital yuan on one hand and encouraging Chinese companies to seize the opportunity offered by blockchain technology on the other, while it takes a tougher line against cryptocurrencies and virtual-currency trading platforms, since central bank digital currencies (like the digital yuan) and cryptocurrencies are not the same.

The author works as a FinTech Advisor and Researcher. He holds an MBA and a doctorate in Hong Kong real estate law and economics. He has worked as a business analyst for a Hong Kong publicly listed company and has given seminars on Central Bank Digital Currencies and Blockchain in many international conferences and universities.

OPINION – Developing Macau’s Financial Industry in the Context of China’s 14th Five-Year Plan

Oriol Caudevilla — Mon, 17 May 2021 04:37:50 +0000

As I mentioned in “Opportunities for Macau for 2021” (Macau Business, December 28), Macau’s future focus will be on finance. In that article, I mentioned a series of financial-related initiatives that may bring many opportunities to the Special Administrative Region in 2021.

For starters, I mentioned Macau trying to diversify its economy by creating a new stock exchange (a NASDAQ-like market denominated in yuan, facilitating fundraising by technology companies from the Bay Area economic hub) and embracing both the Belt and Road Initiative (which offers many opportunities to Macau given its belonging to the Portuguese-speaking world) as well as the Greater Bay Area (GBA) project.

I also mentioned that the fact that China will start its Digital Yuan tests soon in Macau is a clear sign of the importance of the former Portuguese colony in the present and future of China. The DCEP is going to bring a myriad of opportunities to Macau, which is in a perfect position to be leveraged on this initiative.

In third place, I also explained that, committed to being the trade and commercial services platform between China and the Portuguese-speaking countries, as well as being part of the Guangdong-Hong Kong-Macau Greater Bay Area and the ‘Belt and Road’ initiative. Macau, for example, could serve as a point of connection between Mainland China and some Portuguese-speaking countries in Africa for the usage of the DCEP.

And, last but not least, I made reference to another interesting initiative, the development of ‘enclave economies´: Macau could exploit the infrastructure of several bases built in the Guangdong Province, such as the cooperation demonstration zone located in Zhongshan, or the Traditional Chinese Medicine Science and Technology Industrial Park in Hengqin.

The 14th Five-Year Plan, in its Chapter 31, focuses on proactively and progressively taking forward the development of the Guangdong-Hong Kong-Macau Greater Bay Area (GBA).

Certainly, Macau will benefit tremendously from participating in the Bay Area’s development, which brings together the two special administrative regions of Hong Kong and Macau plus nine municipalities in Guangdong province. The Bay Area, dubbed by the media as “China’s answer to Silicon Valley”, has a combined population of over 69 million and a GDP of around US$1.5 trillion (comparable to that of the Tokyo Bay Area and the New York Metropolitan Area).

From its involvement in the Greater Bay Area, Macau will benefit from different projects and initiatives, such as, for example, the Wealth Management Connect Scheme. Last Thursday, May 6, China’s regulators announced new draft rules for the cross-border Wealth Management Connect scheme. A RMB 150 billion ($23.2 billion) ceiling for the trading quota (southbound and northbound) was set for the pilot scheme, a move that will quite likely accelerate the timing of the official launch. Market participants believe the official scheme launch will be officially launched once the Hong Kong-Mainland border reopen.

The Wealth Management Connect Scheme will allow Macau residents to buy onshore wealth management products sold by Chinese banks, while Bay Area residents can invest in products sold by Macau´s banks.

The scheme will greatly boost the assets under management over the next decade, with global private banks and big players likely to tap into the Bay Area opportunities, according to a Bloomberg Intelligence report.

Unlike Macau, Hong Kong has a stock exchange (the fourth single largest stock market in the world) and has had previous “connect schemes”: the Stock Connect and the Bond Connect Schemes. The Stock Connect scheme was launched in November 2014, bringing together the Hong Kong, Shanghai and Shenzhen stock exchanges, allowing international, Hong Kong and mainland investors to trade securities across the three markets through the trading and clearing facilities of each exchange, while the Bond Connect was launched in 2017, now covering over 2,000 eligible equities and bonds in Shanghai, Shenzhen and Hong Kong.

Aside from the GBA blueprint, Macau can benefit from other economic initiatives, such as Green Finance, as I mentioned in “Opportunities offered by Green Finance and Green Bonds to Hong Kong and Macau” (Macau Business, March 1).

Since the priority for Macau -and most places- right now (and, to some extent, opportunity) is to mitigate the economic effects of the pandemic, one of the many possible ways to do so would be by embracing Green Finance even more, and Macau doing so would be consistent with China´s goal to reach its carbon emissions peak before 2030 and become carbon neutral before 2060, as listed in the country’s 14th Five-Year Plan (2021-25).

Therefore, Macau tapping into green and sustainable finance is not only beneficial for the special administrative region, but also consistent with China’s objective of paying enormous attention to sustainability and climate change.

Macau´s green finance scene is not as advanced as Hong Kong´s one, even though there have been some movements in this area. For example, in October 2019 In October, the Bank of China in Macau carried out ‘green’ bond issues worth RMB 7 billion (US$876.8 million) in three currencies (dollar, euro and renminbi).

Therefore, Macau should leverage its belonging in the Portuguese-speaking world to try to take advantage of the many opportunities offered by Green Finance.

To sum up, the GBA becoming a reality will bring many opportunities to Macau now that the Special Administrative Region is refocusing towards finance.

The author works as a FinTech Advisor and Researcher. He holds an MBA and a doctorate in Hong Kong real estate law and economics. He has worked as a business analyst for a Hong Kong publicly listed company and has given seminars on Central Bank Digital Currencies and Blockchain in many international conferences and universities

OPINION – Virtual banking and financial inclusion

Oriol Caudevilla — Mon, 26 Apr 2021 04:05:38 +0000

As I mentioned in “The future of financial inclusion in China” (February 8, 2021), China’s impressive economic growth has dramatically reduced poverty during these last 30/40 years. In 1981, only 40 years ago, two out of three mainland Chinese lived below US$1 a day.

By 2010, the country had lifted an astonishing 680 million people out of poverty—more than the entire current population of Latin America. But, at the same time that poverty has been reduced, inequality has been rising. Undoubtedly, an important factor that drives inequality is the significant disparity in the levels of access and usage of financial products and services among people.

Not having access to a bank branch, though, does not mean that most of these citizens do not have access to a smartphone: it is common to see rural areas where people have wide access to smartphones, but they have no physical bank branches of any sort.

One of the areas that can play a key role in promoting financial inclusion, in China and elsewhere, is that of virtual banking.

Virtual banks, also called neobanks, primarily deliver retail banking services through the internet or other electronic channels instead of physical branches. It is commonly believed that the development of virtual banks will promote FinTech and innovation and offer a new kind of customer experience by helping to promote financial inclusion, since neobanks normally target the retail segment, including the small and medium-sized enterprises (SMEs).

According to the World Bank´s Global Findex database, globally, 1.7 billion people do not have a bank account, and policymakers struggle to provide affordable, safe and accessible financial services to the unbanked population. With about 190 million unbanked adults, India is second only to China among developing countries in the number of residents who do not have bank accounts or participate in the formal financial sector, followed by Pakistan (100 million), and Indonesia (95 million).

Therefore, virtual banks have a huge opportunity to grow in these areas while adding value to the societies of the respective countries by helping them to promote financial inclusion since they allow people who live in remote areas with no bank branches available, but who own a cell phone, to become part of the financial system.

When it comes specifically to Hong Kong and Macau, over these last few years, Hong Kong has been developing itself into a leading FinTech hub. Hong Kong’s fintech industry has the potential to develop much faster now by leveraging its involvement with the Greater Bay Area (same as Macau), and also now that COVID-19 is changing consumer behaviour and turbocharging Hong Kong’s FinTech revolution, forcing Hong Kong’s banking and financial services industry urgently to adapt.

One of the areas boosting the pace of digital transformation is that of virtual banking. In March 2019, the Hong Kong Monetary Authority (HKMA) announced the issuance of the very first virtual banking licenses. This came after the publication by the HKMA of the “Guideline on Authorization of Virtual Banks” in May 2018.

As of today, 8 virtual banks exist in Hong Kong after having been approved by the HKMA and after having been officially launched in 2020.

Regarding Macau, this region, more than ever, is in a perfect position to take the opportunities offered by virtual banking. Even though many people still (wrongly) think of Macau as just a gaming hub, the truth is that the former Portuguese colony is attempting to diversify its economy and become competitive in many more areas.

To sum up, virtual banks are blossoming all over the world, including Hong Kong and Macau, since it is no longer possible for banks to keep offering the same services that they have been offering for decades without adapting to the current times.

Neobanks definitely have a huge opportunity to grow in the whole of Asia while adding value to the societies of the respective countries by helping them to promote financial inclusion.

As I said, having access to a transaction account is a first step towards financial inclusion since it allows people to store money, and send and receive payments. Virtual banking may become a very effective tool when promoting financial inclusion in Mainland China, since will allow people who live in remote areas with no bank branches, but who own a cell phone, to become part of the financial system.

The author works as a FinTech Advisor and Researcher. He holds an MBA and a doctorate in Hong Kong real estate law and economics. He has worked as a business analyst for a Hong Kong publicly listed company and has given seminars on Central Bank Digital Currencies and Blockchain in many international conferences and universities.

OPINION – Blockchain in Banking: Use Cases

Oriol Caudevilla — Mon, 19 Apr 2021 02:30:27 +0000

In my article “Blockchain-based trade finance platforms offer many opportunities to Mainland China and HK” (January 11, 2021), I mentioned that applying blockchain technology to trade finance will help to reduce many inefficiencies, since traditional trade finance processes (e.g., Letter of Credit) are still a resource-intensive operation due to the physical exchange of documents, for this industry has not seen many changes these last centuries despite the world´s quick evolution.

I also mentioned that Hong Kong seems to be doing quite well in this area since Hong Kong´s blockchain-based trade finance eTradeConnect platform is a leading platform in the Asia Pacific Region.

Related to this, the People’s Bank of China, alongside the China Banking Regulatory Commission, the China Securities Regulatory Commission, and the Foreign Exchange Bureau, proposed in May 2020 a blockchain-based trade finance platform to cover the whole Greater Bay Area, including Macau as well, of course.

Regarding the benefits of using blockchain in trade finance, we can cite the fact that it will speed up transaction settlement times, it will increase transparency between all parties, it will reduce costs and it will unlock capital (capital that would be temporarily not available, waiting to be transferred between parties involved in the transaction), while providing payment certainty to sellers, as well as mitigating risks and increasing financing revenues for banks

However, trade finance is not the only banking-related area where the use of Blockchain may prove to be very beneficial for all the parties involved, especially for the banks.

Even though blockchain is best known for underpinning the operation of crypto currencies such as Bitcoin, this technology can be used in countless other areas, such as banking, Central Bank Digital Currencies (CBDCs), healthcare, smart contracts, financial services, supply chain management, insurance, IoT, video games…

As mentioned in my latest article, blockchain is the technology likely to have the greatest impact on the future of the world economy.

Unfalsifiable and impossible to change once a record has been added, blockchain is a distributed database stored on multiple computers as a massive number of identical copies. More specifically, blockchain is part of the Distributed Ledger Technologies (DLT), being a digital register, whose entries are grouped in blocks, concatenated in chronological order, and whose integrity is guaranteed using encryption.

Although its size is destined to grow over time, it is immutable because its content is no longer modifiable unless invalidating the entire data structure. To ensure consistency between the various copies, the addition of a new block is globally regulated by a shared protocol. Once the addition of the new block is validated, each node updates its local copy.

When it comes to the use of Blockchain in Banking, aside from trade finance, Blockchain can also be used in other banking-related areas such as payments, clearance and settlement systems, Know Your Customer (KYC) and fraud prevention, securities, loans and credit, accounting, auditing, and P2P transfers.

I cannot go through each one of the areas to analyze how advantageous it would be for banks to incorporate the use of Blockchain in them, but the general idea is that Blockchain would help to reduce costs and make processes much more efficient.

For example, in regard to clearance and settlement systems, distributed ledgers can reduce operational costs and bring us closer to real-time transactions between financial institutions, since, currently, moving money around the world is a logistical challenge to many banks.

A simple bank transfer needs to bypass a complicated system of intermediaries, such as custodial services, before it reaches its destination. Furthermore, the bank balances need to be reconciled across the global financial system, which comprises a broad network of funds, asset managers, traders, and more. Blockchain could help to make the processes much smoother.

To make the most of blockchain, banks ought to develop first the infrastructure required to operate a global network using matching solutions. To me, only a widespread adoption of blockchain will lead this technology to disrupt the sector.

Nevertheless, this investment will bring many benefits, since, once fully adopted, blockchain is expected to enable banking institutions to process payments faster and more accurately, all the while reducing transaction processing costs. Overall, blockchain-enabled banking applications will deliver a better customer experience and help traditional banking institutions to compete/cooperate with fintech startups.

Note that I said “compete/cooperate”: initially, traditional banks saw the rise of FinTech with concern, while now most traditional banks have realized that, in order for them to grow and grasp all the opportunities, they need to collaborate somehow with the fintech world.

Given the fact that challengers and incumbents alike try to cater to the ever-evolving expectations of customers, their relationship is becoming more collaborative than combative, which is really good news.

To sum up, banks and financial institutions in Hong Kong and Macau should continue to explore all the many opportunities offered by Blockchain.

Hong Kong is quite advanced when it comes to the use of Blockchain-based trade finance platforms, but there are still many other areas in the banking industry where the use of Blockchain would be certainly beneficial for HK and Macau-based banks, since it would help them reduce costs and make processes more efficient.

The author works as a FinTech Advisor and Researcher. He holds an MBA and a doctorate in Hong Kong real estate law and economics. He has worked as a business analyst for a Hong Kong publicly listed company and has given seminars on Central Bank Digital Currencies and Blockchain in many international conferences and universities.

OPINION – NFTs (Non-Fungible Tokens), an area full of opportunities

Oriol Caudevilla — Tue, 06 Apr 2021 03:41:51 +0000

If late 2020 and early 2021 were the time when everybody seemed to talk about cryptocurrencies in general, and Bitcoin in particular, now part of the media attention has been shifted towards the concept known as NFT (Non-Fungible Token), which is one of Blockchain’s many applications aside from cryptocurrencies.

Most of the media interest for NFTs began in early March, just one month ago, when a digital-only artwork was sold at Christie’s auction house for $69m. The winning bidder did not receive any physical painting or print, but a unique digital token, the NFT.

A fungible asset is an item that consists of many identical parts that can be readily interchanged, like money. Nevertheless, if something is non-fungible, it is impossible to interchange it for something else since it has unique properties.

NFTs, which are supported by the Ethereum blockchain, are unique assets in the digital world that can be bought and sold like any other piece of property. The digital tokens can be thought of as certificates of ownership for virtual or physical assets.

What are the differences between NFTs (for example, music, artworks, and digital collectibles) and cryptocurrencies? Cryptocurrencies are fungible (it is possible to trade, for example, one Bitcoin for another Bitcoin), whereas NFTs are non-fungible (each NFT is unique and cannot be traded at equivalence).

Since NFTs provide or transfer ownership of a digital asset, preventing others from claiming ownership by just copying it online, they can actually offer many opportunities to the arts and music industry.

In the music world, NFTs offer hope of a valuable new revenue stream. For example, earlier in March, the US band Kings of Leon raised more than $2 million by auctioning off NFT versions of their new album, according to Rolling Stone magazine, of which a quarter went to a solidarity fund for live event workers.

As to the arts industry, collectors and speculators have spent more than $200 million on an array of NFT-based artwork, memes and GIFs in February alone, according to market tracker NonFungible.com, compared to $250 million throughout all of 2020. And that was before the digital artist Mike Winkelmann, known as Beeple, sold that piece for a record-setting $69 million at Christie’s on March 11, to which I made reference in the second paragraph of this article.

To me, NFTs are one more step towards the Blockchain revolution.

Blockchain is undoubtedly changing the world for the better. As explained by Don and Alex Tapscott in their book “Blockchain Revolution”: “The first generation of the digital revolution brought us the Internet of information. The second genera ion—powered by blockchain technology—is bringing us the Internet of value: a new, distributed platform that can help us reshape the world of business and transform the old order of human affairs for the better”.

In this sense, blockchain is the technology likely to have the greatest impact on the future of the world economy. Just as an example, China Central Television (CCTV) defined blockchain´s economic value in 2018 as “10 times more valuable than the internet”.

Considered for long a new technology, blockchain is developing fast, and is quickly becoming a key player in many industries, like the financial one.

If there was no doubt of the importance of blockchain technology a few years ago, the ongoing COVID-19 pandemic, which has certainly confronted the whole world with an unprecedented challenge, has turbocharged a financial technology (Fintech) revolution worldwide in general, and also a Blockchain revolution in particular.

COVID-19 is changing consumer behaviour, quite likely forever, and all the industries need to adapt, including the banking and financial services industry. Digital transformation has quickly become the top priority for those countries not wanting to be left behind.

Unfalsifiable and impossible to change once a record has been added, blockchain is a distributed database stored on multiple computers as a massive number of identical copies. More specifically, blockchain is part of the Distributed Ledger Technologies (DLT), being a digital register, whose entries are grouped in blocks, concatenated in chronological order, and whose integrity is guaranteed using encryption.

Although its size is destined to grow over time, it is immutable because its content is no longer modifiable unless invalidating the entire data structure.

To ensure consistency between the various copies, the addition of a new block is globally regulated by a shared protocol. Once the addition of the new block is validated, each node updates its local copy.

Even though blockchain is best known for underpinning the operation of cryptocurrencies such as Bitcoin, this technology can be used in countless other areas, such as smart contracts, financial services, supply chain management, insurance, IoT, video games…

To sum up, NFTs may offer many opportunities to Hong Kong and Macau, especially now that Hong Kong is so eager to promote its West Kowloon Cultural District and other art related projects.

The author works as a FinTech Advisor and Researcher. He holds an MBA and a doctorate in Hong Kong real estate law and economics. He has worked as a business analyst for a Hong Kong publicly listed company and has given seminars on Central Bank Digital Currencies and Blockchain in many international conferences and universities

OPINION – Hong Kong, Macau, and the Index of Economic Freedom

Oriol Caudevilla — Mon, 22 Mar 2021 03:29:29 +0000

Heritage Foundation has recently dropped Hong Kong and Macau from its 2021 Index of Economic Freedom, a list which is topped by Singapore.

Basically, the Heritage Foundation said that its annual Index of Economic Freedom, issued on Thursday, March 4, no longer included Hong Kong and Macau because it “measures economic freedom only in independent countries where governments exercise sovereign control of economic policies.” In other words, the Foundation implies that both the Governments of HK and Macau have lost their sovereignty when it comes to controlling its economic policies.

According to the Foundation, even though the citizens in HK and Macau enjoy more economic freedom that the average Mainland China citizens, “developments in recent years have demonstrated unambiguously that those policies are ultimately controlled from Beijing”.

To me, the decision of removing HK and Macau from the Index is completely wrong, and shows a profound lack of understanding of how the One Country, Two Systems principle works in both Hong Kong and Macau, as well as a profound lack of understanding of what the National Security Law was and what it actually implied for Hong Kong.

Let me start from the beginning: following the 1984 Sino-British Joint Declaration, in 1997 Hong Kong returned to China under the “one country, two systems” principle, by which HK would continue to enjoy its distinct political, socioeconomic, and legal arrangements under a unified China, for at least fifty years without change (note “at least”, which means that 2047 does not need to be at all the end of the One Country Two Systems formula).

In the case of Macau, in 1987, Portugal and China signed the Sino-Portuguese Joint Declaration which said the territory would be returned to China on 20 December, 1999, under the One Country Two Systems formula, with the same conditions as Hong Kong: Macau has its own government, legal and financial affairs.

Actually, the One Country Two Systems formula is considered to have worked even better in HK than in Macau, since, the citizens of Macau have not challenged it , whereas some Hong Kong residents have been challenging this principle repeatedly these last few years.

The One Country Two Systems formula has worked well enough, allowing Hong Kong to become stronger than it was, albeit the 2019-2020 riots.

As a matter of fact, in 2017, exactly 20 years after the handover I did some research comparing, from a socioeconomic perspective, Hong Kong of 1997 with Hong Kong of 2017.

The data showed that Hong Kong was in better shape in 2017 than in 1997. While the people’s life expectancy increased by eight years for men and women to 82 and 88 years, respectively, in the past 20 years, the public rental housing stock increased from 704,300 apartments in 1997 to more than 760,000 in 2017.

The thing that makes some people claim that the One Country Two Systems principle formula has been undermined is the passing of the National Security Law (NSL) last year, but, let’s make no mistake, the NSL was not and will not be an attempt to undermine the status quo, but simply a way to put an end to the unsustainable situation that HK was living due to the protests.

Almost every nation has laws to protect its national security (the US has this kind of laws too). Yet some businessmen and investors have been worried over the national security law passed by the National People’s Congress, China’s top legislature.

The new legislation has proven to be beneficial because it brought back stability and security whilst preserving Hong Kong´s special status, which, as I said, has not been challenged.

Back in June, senior Chinese officials tasked with the Hong Kong portfolio publicly asserted that 99.9 per cent of Hong Kong people will not be affected by this new law, since it targets only separatist activities, subversion of State power, terrorism, and foreign interference.

Nine months later, I reckon that most HK citizens can state that they have indeed not been affected by the NSL in any negative way and their lives have not changed, at least not due to the NSL.

So, if the US also has laws to protect national security, the same as most countries, and if most laws from other countries are actually harsher, what’s this fuss about? To me, HK has been used regularly as a pawn of the US-China Trade War initiated by former President Trump (even labelled by some as the New Cold War between the US and China).

As Hong Kong’s Financial Secretary Paul Chan Mo-po said, the city still enjoys its economic competitiveness with the free flow of capital continuing under One Country Two Systems and the rule of law is respected in the city. In other words, regardless of the indexes, Hong Kong is still one of the world’s most important financial hubs and one of the best places in the world to do business in.

And Macau is undoubtedly focusing on finance, by leveraging opportunities such as the new stock exchange, the digital yuan tests in the region and the development of enclave economies, most notably Hengqin. Index or no index, Macau is also becoming a financial hub within the Greater Bay Area (GBA).

The author works as a FinTech Advisor and Researcher. He holds an MBA and a doctorate in Hong Kong real estate law and economics. He has worked as a business analyst for a Hong Kong publicly listed company and he has given seminars at HKU on Shadow Banking in China and at several universities in Macau on China´s new digital yuan.

OPINION – Hong Kong – the Digital Yuan and cryptocurrencies

Oriol Caudevilla — Mon, 15 Mar 2021 07:46:15 +0000

In my previous article, I analyzed the regulatory attitude of Mainland China towards cryptocurrencies, whereas, in this article, I am going to analyze the regulatory attitude of one of China´s two Special Administrative Regions, Hong Kong, towards cryptos.

As explained last week, the Digital Yuan is a Central Bank Digital Currency (CBDC), and CBDCs are not cryptocurrencies, even though there is of course some relation between both categories (CBDCs could to some extent be categorized as stable coins).

As I said, the rationale behind CBDCs and cryptos is actually the opposite: whilst CBDCs are Central Bank Money adopting a digital form (therefore, legal tender issued by a central bank, representing a claim against that central bank) and thus centralized, cryptocurrencies are a key pillar of the movement known as DeFi (Decentralized Finance).

Both Hong Kong and Macau are poised to play a key role when it comes to Digital Yuan´s tests and future roll-out. This is so because, unlike the tests conducted thus far in the Mainland (focused on domestic payments), the tests in Hong Kong and Macau will focus on cross-border payments, and a cross-border deployment of the Digital Yuan is China´s main rationale behind its CBDC, since it will help take some of the USD-denominated exports and convert them into yuan-based exports, thus challenging the global domination of the USD.

In this sense, last December 4, Hong Kong’s Monetary Authority (HKMA) Chief Executive Eddie Yue announced that the HKMA and the Digital Currency Institute of the People’s Bank of China are discussing the technical pilot testing of using the Digital Yuan for making cross-border payments, and are making the corresponding technical preparations.

Hong Kong, as the largest offshore yuan trading center and a crucial part of the Guangdong-Hong Kong-Macau Greater Bay Area, will be a good case study for the use of the Digital Yuan for cross-border transactions, and Macau will be so as well. It is in China´s interest not only to make the Digital Yuan become an effective domestic tool for facilitating consumers´ retail payments, but also to enhance the yuan as a payments currency in the global financial system.

However, all these things I just explained in the last paragraphs apply to the Digital Yuan and to the importance that its tests in Hong Kong and Macau will have, but what about Hong Kong´s regulatory attitude towards cryptocurrencies?

Mainland China has undoubtedly adopted a tough stance on cryptocurrencies, but this is not the case in Hong Kong.

Ashley Alder, the CEO of the Securities and Futures Commission (SFC), announced in early November, during the Hong Kong FinTech Week, a proposed new licensing regime for virtual assets trading in Hong Kong, with the launch of public consultation (which was due on January 31, 2021) on legislative proposals designed to enhance anti-money laundering and counter-terrorist funding (AML and CTF) in Hong Kong.

Hong Kong will regulate all cryptocurrency trading platforms operating in the financial hub, changing its previous opt-in approach. All cryptocurrency trading platforms that operate in the Special Administrative Region, or target investors there, will need to apply for an SFC license. According to Ashley Alder’s speech, “successful applicants would be subject to expectations covering their financial resources, experience and the soundness of their business and risk management“.

The operators must make sure there are no retail investors trading on their platforms, which should only be available to professional investors who have over HK$8 million ($1m) in assets, according to Clara Chiu, director of licensing and head of the FinTech Unit of the SFC.

The new regulations will cover all types of virtual assets’ trading platforms operating in Hong Kong, as well as overseas platforms targeting local investors.

Related to this, the FinTech Association of Hong Kong, in his Response to the Public Consultation on Legislative Proposals to Enhance Anti-Money Laundering and Counter-Terrorist Financing Regulation in Hong Kong (February 1, 2021), welcomed the continued endeavors of the Financial Services and the Treasury Bureau (FSTB) to enhance anti-money laundering and counter-terrorist financing (AML/CTF) regulation in Hong Kong.

The association considered, among many other things, that “a balanced approach should be taken that serves to mitigate the risks of financial crime and which protects Hong Kong persons, but also which does not unnecessarily impose restrictions on doing business in Hong Kong. We do feel however that the current legislative proposals require further calibration to more appropriately balance these factors”

To me, the proposed regime will be mostly beneficial, since it will put everyone in a level playing field and will give investors a safety net, thus helping the digital asset market to grow in the long run by giving investors more confidence in this new asset class.

However, excluding retail investors from accessing virtual asset services in Hong Kong does not seem a good solution. This segment represents a significant portion of the market, and, more importantly, this investor groups is the one that, due to its nature, precisely needs more regulatory protections. As stated by the FTAHK, “to willfully allow such activity to be driven offshore, and potentially towards unregulated venues, does not feel in our opinion to be in the best interest of the investing public.” Therefore, retail investors should, in my opinion, be allowed to access virtual asset services.

To sum up, Hong Kong is eager to promote CBDCs, not only through testing the Digital Yuan for cross-border payments, but also through engaging in other CBDC-related projects, such as the Inthanon-Lion Rock Project. However, when it comes to cryptocurrencies, the approach in Hong Kong is different from that in the Mainland: the Special Administrative Region is more friendly towards cryptocurrencies, although the proposed new legislation has some areas that should be discussed and perhaps even amended, such as excluding retail investors from accessing virtual asset services in Hong Kong.

The author works as a FinTech Advisor and Researcher. He holds an MBA and a doctorate in Hong Kong real estate law and economics. He has worked as a business analyst for a Hong Kong publicly listed company and he has given seminars at HKU on Shadow Banking in China and at several universities in Macau on China´s new digital yuan.

OPINION – China’s approach towards the Digital Yuan and cryptocurrencies

Oriol Caudevilla — Mon, 08 Mar 2021 03:39:45 +0000

In my latest articles, I have analyzed many aspects of the Digital Yuan, such as its importance, its future tests in Hong Kong and Macau, its latest developments… However, I have made very little mention to crypto currencies.

This is so because, unlike what some people think, the Digital Yuan is a Central Bank Digital Currency (CBDC), and CBDCs are not crypto currencies, even though there is of course some relation between both categories (CBDCs could to some extent be categorized as stable coins).

They are also are established by private entities and supported by numerous distributed nodes that are incentivized through block rewards to maintain the network. In other words, the rationale behind CBDCs is control, while the one behind cryptos is the opposite.

Related to this, and just as an example the Bank of Korea (BOK), South Korea´s Central Bank, recently tried to shed more light on this issue: in early February, the BOK published the results of the research conducted last year on the legal issues surrounding CBDCs.

In that report, the BOK concluded that the comparison with virtual assets such as cryptocurrencies are difficult, since a CBDC “has a clear issuer”, the central bank, and is based on the exclusive power of that issuer. This differs from virtual assets, which are described as digital certificates with economic value that can be traded or transferred electronically.

That being said, CBDCs have many technical similarities with crypto currencies. To some extent, CBDCs aim to take from cryptocurrencies the convenience and security and combine those features with the major characteristics of the conventional banking system, in which money circulation is regulated and reserve-backed.

Focusing on the Digital Yuan, China´s CBDC has adapted some technical features from the world of cryptocurrencies, i.e. the use of both online and hardware wallets, and the use of two-key architecture to secure transactions. Aside from that, China´s Digital Yuan system, unlike crypto currencies, is not entirely blockchain-based, but it partially uses blockchain. In general, CBDCs don´t need Blockchain, but it might be compatible and useful, to use this technology.

Generally speaking, it is considered that blockchain could be useful for wholesale CBDC. In contrast to retail CBDC, wholesale CBDC is limited to commercial banks, clearing institutions or other entities that have traditionally had access to central bank reserve.

In this sense, following what I said before, the Digital Yuan will be operating through a two-tier structure, in which China´s Central Bank, the People´s Bank of China (PBOC), issues the digital currency to commercial banks and institutions without the employment of blockchain technology, but the financial institutions could give out the digital yuan to the public through blockchain.

Having all this in mind, is Mainland China´s attitude toward the Digital Yuan and crypto currencies consistent? Yes, it is. Many people have asked me about this topic, finding it confusing to see a country like China promoting its Digital Yuan while adopting a tougher stance on crypto currencies, but, as I said before, there is no contradiction in that, since CBDCs are not cryptos.

In other words, a country can promote its own CBDC while adopting a tough stance on cryptos, and a country can also promote its own CBDC while being permissive and tolerant with cryptos. Both ideas are not intertwined.

In this regard, China, on one hand, is promoting the Digital Yuan, and, on the other hand, the Chinese Government is encouraging Chinese companies to seize the opportunity offered by blockchain technology, while it is adopting a tough approach on cryptocurrencies and virtual-currency trading platforms.

Needless to remind here all the examples of how China is promoting the Digital Yuan, and, when it comes to promoting Blockchain, a few examples of China´s friendly approach to blockchain are the fact that China Central Television (CCTV) defined blockchain’s economic value in 2018 as “10 times more valuable than the internet”.

President Xi speaking as part of the 18th collective study of the Political Bureau of the Central Committee in Beijing in October 2019, also said that the country needs to “seize the opportunity afforded by blockchain technology”. President Xi´s statements on blockchain were believed to be his first in-depth remarks on the technology.

However, when it comes to crypto currencies, in recent years, especially since September 2017, the Government has taken a series of regulatory measures to crack down on activities related to crypto currencies, mainly due to the concern over financial risks associated with such assets.

For example, the practice of raising funds through initial coin offerings (ICOs) is completely banned in China.

On September 4, 2017, seven Chinese central government regulators – the People’s Bank of China (PBOC), the Cyberspace Administration of China (CAC), the Ministry of Industry and Information Technology (MIIT), the State Administration for Industry and Commerce (SAIC), the China Banking Regulatory Commission (CBRC), the China Securities Regulatory Commission (CSRC), and the China Insurance Regulatory Commission (CIRC)- jointly issued the Announcement on Preventing Financial Risks from Initial Coin Offerings (ICO Rules) for purposes of investor protection and financial risk prevention.

Also, the ICO Rules impose restrictions on the primary business of cryptocurrency trading platforms. According to the ICO Rules, the platforms are prohibited from converting legal tender into cryptocurrencies, or vice versa. They are also prohibited from purchasing or selling cryptocurrencies, setting prices for cryptocurrencies, or providing other related agent services.

Furthermore, the ICO Rules prohibited financial institutions and non-bank payment institutions from directly or indirectly offering services for ICOs and cryptocurrencies, including opening bank accounts or registration, trading, clearing, or liquidation services.

Nevertheless, it is not illegal to hold Bitcoins and other cryptocurrencies or even to buy or sell them in China. No PRC law or regulation prohibits Chinese investors from holding cryptocurrencies or trading crypto currencies.

This seems to be consistent with an early notice jointly issued by five Chinese government agencies led by PBOC back in 2013, which defined Bitcoin as a special virtual commodity, but not a currency.

That notice also explicitly provides that Bitcoin does not have legal status as a currency and should not be circulated and used in the market as a currency. This should still be the position taken by PBOC as of today.

To sum up, there is no contradiction with China´s tough stance on privately-issued crypto currencies and its promotion of blockchain technology and the Digital Yuan, since we talking about concepts that, despite being related to some extent, are not the same.

In my next article, I am going to analyze the regulatory attitude towards cryptos in Hong Kong and Macau, where the situation (especially in Hong Kong) is very different from that in Mainland China.

The author works as a FinTech Advisor and Researcher. He holds an MBA and a doctorate in Hong Kong real estate law and economics. He has worked as a business analyst for a Hong Kong publicly listed company and he has given seminars at HKU on Shadow Banking in China and at several universities in Macau on China´s new digital yuan.

OPINION – Opportunities offered by Green Finance and Green Bonds to Hong Kong and Macau

Oriol Caudevilla — Mon, 01 Mar 2021 04:45:33 +0000

As mentioned in my latest article, economic diversification is certainly a key component to reach a sustainable economic development. Diversification is very important for both Hong Kong and Macau.

I also explained that the last two years in Hong Kong have not been easy, since 2019 proved to be one of Hong Kong´s most traumatic periods due to civil unrest, and 2020/2021 have not been any easier thus far due to the COVID-19 pandemic.

As to Macau, despite not suffering the hardships that Hong Kong went through in 2019, and despite controlling the COVID-19 pandemic remarkably well, the former Portuguese colony is not immune to the consequences of the pandemic.

For example, tourist arrivals in Macau have dramatically dropped in 2020, as well as the gambling revenues, which plunged 70.5 per cent in November YoY. Consequently, the first priority for Macau (and, to some extent, opportunity) is to mitigate the economic effects of the pandemic, and one of the many possible ways to do so would be by embracing Green Finance.

Related to this, the green bond markets have been going strong for over a decade. Since the green bond market first opened in 2007, more than USD$1 trillion worth of green bonds have been issued globally as investors have started to see a sustainable and profitable investment option. Actually, oversubscription – where demand has exceeded the number of green bonds available – has become the norm for green bond issuances.

So far, Hong Kong is much more advanced than Macau when it comes to embracing the opportunities offered by Green Finance and Green Bonds (which makes perfect sense, given the fact that Hong Kong is one of the world´s leading financial centers, whereas Macau´s transition into finance is just starting).

In June 2018, the Government launched the Green Bond Grant Scheme to subsidize eligible green bond issuers in obtaining certification under the Hong Kong Quality Assurance Agency’s (HKQAA) Green Finance Certification Scheme. In September 2018, the Hong Kong Green Finance Association was set up, bringing together some 100 market practitioners and business front runners to promote Hong Kong as a green finance capital.

And, only a few weeks ago, the HK Government launched green bonds worth US$2.5 billion, to be available on the Hong Kong Stock Exchange and the London Stock Exchange on February 2, under the Government Green Bond Program.

The offering includes US$1 billion 5-year bonds at 0.635%, US$1 billion 10-year bonds at 1.414% and US$500 million 30-year bonds at 2.431%.

Leaving aside the figures, what is more important about this offering is the fact that, according to the data provided by a press released issued by the Hong Kong Monetary Authority (HKMA) on January 27, the 30-year tranche is also the first 30-year green bond to be issued by an Asian government, and the longest tenor to be issued by the HKSAR Government, which means that Hong Kong is at the forefront of Green Finance in Asia.

Undoubtedly, Hong Kong is striving to become a hub for green finance. As stated by Hong Kong´s Chief Executive Carrie Lam Cheng Yuet-ngor on her remarks at the Hong Kong Quality Assurance Agency Online Symposium – Sustainable Finance Hong Kong 2020 on October 23, “many global problems that governments around the world are coping with call for sustainable development. To name a few, climate change, water shortage, food supply and as illustrated by the COVID-19 pandemic, public health. Sustainable development needs funding and investment and we are seeing growing demands for financial options and solutions. (…) Being an international financial centre, Hong Kong is well positioned to offer the needed financial services and capture the opportunities available.”

Furthermore, Hong Kong is in a perfect position to leverage its involvement in the Greater Bay Area (GBA) blueprint to serve as the GBA Green Finance Centre.

What about Macau, though?

As I mentioned before, Macau´s green finance scene is not as advanced as Hong Kong´s one, even though there have been some movements in this area. For example, in October 2019 In October, the Bank of China in Macau carried out ‘green’ bond issues worth RMB 7 billion (US$876.8 million) in three currencies (dollar, euro and renminbi).

Therefore, Macau should leverage its belonging in the Portuguese-speaking world to try to take advantage of the many opportunities offered by Green Finance.

To sum up, the COVID-19 pandemic has shown the world that the need for a more sustainable future is real and immediate, therefore green finance is more necessary than ever. Hong Kong is already becoming a very important hub for green finance and it should keep moving forward, whereas Macau is at an early stage in this area, compared to HK, but it has plenty of room to grow as well, given Macau´s current focus in finance and given Macau´s connection with the Portuguese-speaking world.

The author works as a FinTech Advisor and Researcher. He holds an MBA and a doctorate in Hong Kong real estate law and economics. He has worked as a business analyst for a Hong Kong publicly listed company and he has given seminars at HKU on Shadow Banking in China and at several universities in Macau on China´s new digital yuan. He is currently a member of the Blockchain, Digital Banking and Greater Bay Area Committees at the Fintech Association of Hong Kong (FTAHK).

OPINION – Hong Kong should grasp the opportunities offered by Islamic Finance

Oriol Caudevilla — Tue, 23 Feb 2021 08:00:21 +0000

Economic diversification is certainly a key component to reach sustainable economic development. Diversification is very important for both Hong Kong and Macau, even though, in this article, I will just talk about Hong Kong, since I have already covered economic diversification in Macau in some of my latest articles.

We need to bear in mind that the last two years in Hong Kong have not been easy. 2019 proved to be one of the Special Administrative Region´s most traumatic periods due to civil unrest, and 2020/2021 thus far have not been any easier due to the COVID-19 pandemic.

COVID-19 is plunging its embattled economy further into recession. The unemployment rate jumped to 6.6 per cent in the October-to-December period from 6.3 per cent previously, returning to levels not seen since December 2004, according to a government report.

Local businesses are struggling under strict social distancing measures and a lack of tourism (the arrival of visitors declined drastically), with restrictions on group gatherings.

According to the Hong Kong Tourism Board, visitor arrivals from all points for the period of January-July 2020 was down by 91.2 per cent, compared with the same period in 2019, resulting in the reduction of visitors from more than 40 million to just 3.5 million.

Nevertheless, this international financial center, renowned for its resilience, is primed to grasp any opportunity that promises to secure its regional financial dominance. Aside from the many initiatives that I have been mentioning throughout my latest articles (Hong Kong’s new era of FinTech, the Wealth Management Connect Scheme, the rise of virtual banking, the Digital Yuan tests and future deployment as a cross-border payments tool…), there is one area to which not enough people pay attention to, in my opinion.

That area, which could bring a myriad of opportunities to Hong Kong, is the area of Islamic Finance.

Islamic Finance is a financial system which operates according to Islamic Law (sharia).

Like the conventional financial system, Islamic Finance features institutions such as banks, capital markets, investment firms, etc.

A basic feature that differentiates Islamic Finance from regular finance is the fact that interest charges (riba) are prohibited. Even though Islamic theories of economics have existed for more than a millennium, the modern Islamic Finance industry made its debut only in the 1970s.

There is now a clear recognition of the importance of Islamic Finance in the global financial system, and not only in Muslim countries.

According to the 2018 Islamic Financial Services Industry Stability Report by the Islamic Financial Services Board in Malaysia, the Islamic financial services industry’s total value has exceeded the US$2 trillion mark. The main growth drivers were sukuk (sharia-compliant bonds) issuances. The size of the Islamic finance industry has more than doubled since 2009.

While growth has slowed since the global financial crisis, the industry has plenty of scope to grow further. When it comes to top countries for Islamic banking penetration, the Islamic banking share of total banking assets is 100 percent in both Sudan and Iran, 57 percent in Brunei, 51 percent in Saudi Arabia, 27 percent in Qatar and 24 percent in Malaysia, to quote some examples.

It is also worth noting that the market for Islamic sukuk bonds has become quite strong in several non-Muslim majority states, such as the United Kingdom.

In Asia, Malaysia remains a leader in Islamic finance. However, Singapore (a country whose Muslim population represents roughly 14 percent of its total population) is trying to become an Islamic Finance hub.

It launched a sharia-compliant index which will serve as a benchmark for sharia-compliant funds looking to invest there. Geographically, Singapore has an advantage, given its proximity to the most populous Muslim countries.

A milestone in the continuing development of the Islamic financing industry in Singapore was reached in 2009 when the Monetary Authority of Singapore (MAS) established its S$200 million (US$145 million) Sukuk Al-Ijarah Trust Certificate Issuance Program. The program marked the first issuance in the Islamic Finance market of Sukuk with the highest credit quality.

But what about Hong Kong? Can it become a hub for Islamic Finance? I have no doubt that this is feasible if Hong Kong can cleverly leverage its mature financial market.

Indeed, it should not let this opportunity slip by. While Hong Kong profits from being “the gateway to China”, this role will admittedly diminish as the Chinese mainland keeps opening its economy and financial system to outside players.

Thus, it would be wise for Hong Kong to diversify its economy as much as possible. It must therefore grab hold of any opportunity to do so, and becoming an Islamic finance hub is just such an opportunity.

Hong Kong’s initial attempt to develop Islamic Finance started in 2007 when the then chief executive Donald Tsang Yam-Kuen mentioned in his Policy Address the possibility of developing an Islamic financial market and a sukuk market.

To pave the way for this, the Legislative Council amended the Inland Revenue Ordinance (Cap 112) and the Stamp Duty Ordinance (Cap 117) to provide a taxation framework for sukuk issuances comparable to that for issuances of conventional bonds.

In 2014, the government offered its first sukuk under the Government Bond Programme (a second one was offered in 2015 and a third one in 2017). However, there has been no further sukuk issuance in HK since 2017.

The 2014 sukuk, with an issuance size of US$1 billion and a tenor of 5 years, marked the world’s first US dollar-denominated sukuk originated by an AA-rated government. However, only three sukuk issuances have taken place in Hong Kong, and, none of them has been considered extremely successful yet.

For example, at 3.132 percent, the yield of February 2017’s sukuk is less than that of most other AA-rated 10-year sukuk in the market.

Despite this, Hong Kong should not let up its efforts to become a hub for Islamic Finance, because it has all the ingredients to succeed. Hong Kong has not had traditionally an array of Islamic financial products, so it takes time to create this array.

But it is important to start with the right steps. The development of Islamic Finance in Hong Kong is a natural extension of Hong Kong’s role as an international financial center.

As a financial gateway to China, it is an ideal place to intermediate between Islamic Finance investors and issuers. At the same time, Chinese mainland companies have increasing funding and investment needs (credit is hard to obtain in the Chinese mainland, hence the gradual growth of a shadow banking system there), so mainland issuers may consider the Islamic Finance market as a potential source for funding and investment.

To sum up, the growing Islamic Finance industry offers massive opportunities for Hong Kong as it has all the right conditions to facilitate its growth. It is an ideal place for sharia-compliant institutions to narrow the gap between the Islamic world and China, and other East Asian developing countries, especially now that the COVID-19 pandemic is prompting countries to diversify its economies in order to boost them.

The author works as a FinTech Advisor and Researcher. He holds an MBA and a doctorate in Hong Kong real estate law and economics. He has worked as a business analyst for a Hong Kong publicly listed company and he has given seminars at HKU on Shadow Banking in China and at several universities in Macau on China´s new digital yuan.

OPINION – The future of financial inclusion in China

Oriol Caudevilla — Mon, 08 Feb 2021 10:05:38 +0000

Home to 225 million adults without an account, China has the world’s largest unbanked population, followed by India (190 million), Pakistan (100 million), and Indonesia (95 million). These four economies, together with three others—Nigeria, Mexico, and Bangladesh—are home to nearly half the world’s unbanked population.

For example, if we focus on South East Asia (encompassing, among others, Thailand, Indonesia, Malaysia, Vietnam, Singapore…), we can see that the region is home to an unbanked population of more than 290 million people. In South East Asia, only 18% of the population has access to credit, lower than the proportion of digital-ready population (37%), still based on World Bank Global Findex data. This undoubtedly provides a supportive environment and impetus for consumer lending to catch up as income levels rise.

However, focusing on China, we can see that the situation is not actually that bad, since we have seen an enormous improvement: China’s impressive economic growth has dramatically reduced poverty during these last 30/40 years. In 1981, only 40 years ago, two out of three mainland Chinese lived below $1 a day. By 2010, the country had lifted an astonishing 680 million people out of poverty—more than the entire current population of Latin America. But, at the same time that poverty has been reduced, inequality has been rising. Undoubtedly, an important factor that drives inequality is the significant disparity in the levels of access and usage of financial products and services among people.

There is no doubt that China’s leadership will drive higher levels of financial inclusion in the country to achieve more inclusive growth and reduce inequality. As of today, most of the unbanked population in China lives in rural areas where a large portion of people do not have access to basic financial services like financial accounts, in many cases because there are no bank branches in the remote areas where they live. Not having access to a bank branch, though, does not mean that most of this citizens do not have access to a smartphone: it is common to see rural areas where people have a wide access to smartphones but they have no physical bank branches of any sort.

How can we solve that? As I said, despite the huge improvement, this amount of 290 million unbanked people should be reduced. Even though there is no magic recipe to tackle this issue, I think that both Central Bank Digital Currencies and virtual banking could and should be used as a way to try to, at least partially, solve this problem.

Firstly, as I have mentioned in several of my previous articles, China is working hard on testing and eventually deploying next year its Digital Yuan or DCEP, which is a Central Bank Digital Currency. CBDCs can be an effective tool when promoting financial inclusion.

According to the World Bank, to address financial inclusion, a CBDC would first need to provide the unbanked with access to a transaction account. In other words, CBDCs will allow people who live in remote areas with no bank branches and therefore have no bank accounts, but who own a cell phone, to have access to a transaction account that will allow them to make and receive payments using this digital currency.

In April, after several years of work (the research commenced in 2014), the Chinese Government announced the starting of the tests of the country’s central bank digital currency (CBDC), DCEP (Digital Currency Electronic Payment), in four major cities (Shenzhen, Suzhou, Chengdu and Xiong’an), notwithstanding the COVID-19 crisis. On August 14, China took a step further: its Ministry of Commerce announced that a pilot run of the country’s CBDC would begin in several new areas very soon, the Greater Bay Area (GBA) among them, which includes the two Special Administrative Regions of Hong Kong and Macau.

Secondly, virtual banking may play a key role in this area too. Virtual banks, also called neobanks, primarily deliver retail banking services through the internet or other electronic channels instead of physical branches. It is commonly believed that the development of virtual banks will promote FinTech and innovation and offer a new kind of customer experience by helping to promote financial inclusion, since neobanks normally target the retail segment, including the small and medium-sized enterprises (SMEs).

The Hong Kong Monetary Authority (HKMA), and not without reason, thinks that virtual banks can help promote financial inclusion as they normally target the retail segment, including the small and medium-sized enterprises (SMEs).

On top of that, in line of what I said about CBDCs, virtual banks will allow people who live in remote areas with no bank branches, but who own a cell phone, to open a bank account thus becoming part of the financial system.

As of today, 8 virtual banks exist in Hong Kong after having been approved by the HKMA and after having been officially launched in 2020. These eight virtual banks are a key pillar for the coming smart banking era and are a clear example of how digital transformation has become a top priority.

Regarding Mainland China, the virtual banking scene is starting to flourish as well. In China, major players include WeBank (China’s first privately-held digital bank, backed by Tencent, owner of Chinese super-app WeChat) and MyBank (backed by Ant Group, the world’s largest FinTech by valuation and affiliate of Alibaba, owner of China’s largest e-Commerce platform), and this list will undoubtedly keep growing these coming years.

To sum up, having access to a transaction account is a first step towards financial inclusion since it allows people to store money, and send and receive payments. Even though China’s impressive economic growth has dramatically reduced poverty during these last 30/40 years, there is still a large amount of underbanked people, mostly in the country´s rural and poorer areas. Both the digital yuan and virtual banking may become effective tools when promoting financial inclusion in Mainland China, since will allow people who live in remote areas with no bank branches, but who own a cell phone, to become part of the financial system.

The author works as a FinTech Advisor and Researcher. He holds an MBA and a doctorate in Hong Kong real estate law and economics. He has worked as a business analyst for a Hong Kong publicly listed company and he has given seminars at HKU on Shadow Banking in China and at several universities in Macau on China´s new digital yuan.

OPINION – Wealth Management Connect Scheme to bring benefits to HK, Macau

Oriol Caudevilla — Mon, 01 Feb 2021 07:20:13 +0000

*By Oriol Caudevilla

In my recent article “Macau should leverage the Wealth Management Connect Scheme as part of its economic diversification” (Macau Business, December 14, 2020), I mentioned that, as part of the Greater Bay Area (GBA) blueprint, on June 29, 2020, the People’s Bank of China (PBOC), the Hong Kong Monetary Authority (HKMA), and the Monetary Authority of Macau (AMCM) jointly published an announcement on the launch of the cross-boundary wealth management connect pilot scheme.

This plan intends to reduce cross-boundary restrictions for nearly 70 million residents in the Bay Area cities to access wealth products, such as mutual funds, amid an expected increase in the number of millionaires in a region with an estimated US$1.5 trillion in output.

As I said, the Wealth Management Connect Scheme will allow Macau residents to buy onshore wealth management products sold by Chinese banks, while Bay Area residents can invest in products sold by Macau’s banks. This initiative is one more example of the fact that Macau’s future will be on finance

What about Hong Kong, though? What benefits will the Wealth Management Connect Scheme bring to HK, and how can Macau benefit from it?

2019 was certainly a rough time for many of China’s technology companies being victimized by unintended fallout from the US-China trade war. It also proved to be one of Hong Kong’s most traumatic periods, which saw some of the most violent street clashes. The civil unrest was seamlessly followed by the ravages of the COVID-19 pandemic in 2020 and in 2021 so far. The two events seriously dented Hong Kong’s economic growth.

But, Hong Kong, renowned for its resilience, is primed to grasp any opportunities to secure its regional financial dominance. It will come from the proposed Wealth Management Connect scheme — the third mainland-Hong Kong cross-boundary financial arrangement, after the introduction of the Stock Connect scheme in 2014 and the subsequent Bond Connect in 2017.

According to official data from HK, the net outflows of financial non-reserve assets hit HK$255.2 billion (US$32.93 billion) last year, higher than the HK$165.9 billion recorded in 2018, highlighting the need for a Wealth Management Connect scheme more than ever.

The Wealth Management Connect scheme marks another milestone for the mainland’s capital account liberalization and cooperation between Hong Kong and the mainland after the Stock Connect and Bond Connect schemes.

The Stock Connect brings together the Hong Kong, Shanghai and Shenzhen stock exchanges, allowing international, Hong Kong and mainland investors to trade securities across the three markets through the trading and clearing facilities of each exchange.

The Stock Connect scheme was launched in November 2014, and trading began on the Connect platforms first in the Shanghai and Hong Kong exchanges, while Shenzhen joined two years later. In 2017, the Bond Connect was launched. The scheme now covers over 2,000 eligible equities and bonds in Shanghai, Shenzhen and Hong Kong.

After a shaky start, the Stock Connect is now considered a great success, and mainland investors, according to market data, are contributing 5 to 10 per cent of daily stock transactions on Hong Kong’s stock exchange.

Since the two previous connect schemes have been successful, experts expect the proposed Wealth Management Connect scheme to follow the same path, greatly boosting the assets under management in Hong Kong over the next decade, with global private banks and big players likely to tap into the Bay Area opportunities, according to a Bloomberg Intelligence report.

The Hong Kong Monetary Authority and mainland financial regulators are working on the details of the scheme, but no tentative launch date has been announced yet.

About one-third of Hong Kong-based fund managers expect the assets owned by mainland investors under their management to grow by 30 percent between now and 2025, according to a survey by the Hong Kong Investment Funds Association and KPMG.

Given the current tense economic situation, the Wealth Management Connect Scheme comes at a very opportune time. It will not only help Macau’s plans to diversify its economy and shift the focus towards finance, but it will also help Hong Kong increase significantly the assets under management over the next decade.

Macau is in a perfect position to leverage the Wealth Management Connect Scheme but also to benefit from its proximity to Hong Kong to tap into the opportunities provided by the Scheme. At the end of the day, the Scheme opens up a broader market for the financial sector of all the GBA cities.

The author works as a FinTech Advisor and Researcher. He holds an MBA and a doctorate in Hong Kong real estate law and economics. He has worked as a business analyst for a Hong Kong publicly listed company and he has given seminars at HKU on Shadow Banking in China and at several universities in Macau on China´s new digital yuan.

OPINION – The Digital Yuan, where are we now? Latest developments

Oriol Caudevilla — Tue, 26 Jan 2021 06:15:58 +0000

*By Oriol Caudevilla

In my latest articles, I have mentioned quite often the Digital Yuan, which is, in fact, one of my main areas of research. Since I am receiving many requests asking me to explain the latest developments on this area, in this short piece I will focus on summarizing a few relevant ideas on the Digital Yuan as well as the latest news on this topic.

We must bear in mind that the Digital Yuan or DCEP is having and will have tremendous importance, not only for China but globally. For China, because, if successful, the Digital Yuan will become an effective domestic tool not only for facilitating consumers’ retail payments, but also to enhance the yuan as a payments currency in the global financial system.

Globally, because, if DCEP proves to be viable, China will become the first major economy to introduce a Central Bank Digital Currency -CBDC- (the only country doing this so far has been The Bahamas), and many countries will undoubtedly follow next.

A CBDC is a digital form of central bank money that could be used by households and businesses to make payments, hence we are starting to speak about the digital yuan, the future digital euro, and so on. In this sense, the major economy leading the CBDC race in Asia (and in the whole world) is China.

The digital yuan will certainly bring many opportunities and benefits to China: domestically, it will facilitate consumers’ retail payments, among many other advantages, while, non-domestically, a cross-border deployment of the digital yuan will help take some of the USD-denominated exports and convert them into yuan-based exports, thus challenging the global domination of the USD (this is why the upcoming tests in Hong Kong and Macau will be so relevant, to test the feasibility of a cross-border application of the Digital Yuan).

What are the latest developments in this area, though?

One of the things that makes this topic so fascinating, and so complicated at the same time, is the fact that there are constant developments. I will mention the two latest ones here: China´s BSN Blockchain network plans on a multinational CBDC pilot this year and the ATM tests in Shenzhen.

Regarding the first initiative, on January 16, China’s Blockchain-based Service Network (BSN) outlined an audacious plan for a global network that will support future central bank digital currencies (CBDC) from multiple countries.

It aims to build the universal digital payment network (UDPN) in five years, starting with a beta version in the second half of 2021. It does not mention the Digital Yuan, although doubtless, this will be one of the first to be used.

The BSN blog post talks about a “standardized digital currency transfer method and payment procedure”. If the BSN manages to fulfil its aim of having its network adopted at scale, it could have a significant role in setting the standards used by others. And not just in China.

The BSN was initiated by China’s State Information Center (SIC), China Mobile, UnionPay, Smart Government, and Red Date Technology, which is spearheading the international rollout.

The second initiative is related to Shenzhen. Right now, the Agricultural Bank of China is trialing the deposit and withdrawal of DCEP from users’ checking and savings accounts. The service is currently available in several Agricultural Bank automated teller machines in Shenzhen.

The Bank plans to extend the DCEP trial to public utility payments and e-government services. It is a very important test because this is the first DCEP trial involving bank ATMs.

This pilot program allows citizens to exchange cash (fiat) for digital yuan. Zou Hua, manager of the bank’s Digital Yuan Innovation Lab, commented on the ATMs infrastructure’s deployment across Shenzhen: “Agricultural Bank has taken the lead in launching the ATM cash deposit and withdrawal function in the industry to guide Shenzhen residents to adapt to the digitization of cash and explore service transformation.”

Before that, the tests in the Mainland have proven to be very successful. In the latest DCEP trials, Suzhou´s municipal government announced on December 4 that it would give away 100,000 digital “red packets” to residents via a lottery, each containing 200 yuan and totaling 20 million yuan.

In October, a similar trial was run in Shenzhen: the city carried out a lottery to give away a total of 10-million-yuan worth of the country´s new digital currency. Nearly two million people applied, and 50,000 of them won the digital “red packets” with each containing 200 yuan. The winners downloaded the digital yuan app and spent it at 3,389 designated shops in Shenzhen´s Luohu district.

To sum up, the digital yuan will be “the start of a new era” (in payments) because the DCEP tests are driving many other countries to start testing their own CBDCs. If DCEP proves to be viable, China will become the first major economy to introduce a State-run digital currency (the only country doing this so far has been The Bahamas), and many countries will follow next, since, as previously mentioned. China is moving fast, hence we see new developments on a weekly basis, so it is important to keep track of them. Both the Blockchain-based Service Network (BSN) -despite not specifically mentioning the Digital Yuan as one of its use cases, even though it will be one, undoubtedly- and the ATM tests in Shenzhen are two examples of how fast China is progressing with the Digital Yuan.

The author works as a FinTech Advisor and Researcher. He holds an MBA and a doctorate in Hong Kong real estate law and economics. He has worked as a business analyst for a Hong Kong publicly listed company and he has given seminars at HKU on Shadow Banking in China and at several universities in Macau on China´s new digital yuan.

OPINION – Macau should create a strong start-up ecosystem

Oriol Caudevilla — Mon, 18 Jan 2021 04:30:58 +0000

*By Oriol Caudevilla

In my recent article “Opportunities for Macau for 2021”, I explained that Macau’s focus is on finance now, and I listed out a few opportunities in that area, mentioning that the Special Administrative Region can also leverage opportunities such as the new stock exchange, the digital yuan tests in the region, the Wealth Management Connect Scheme and the development of enclave economies, most notably Hengqin.

Indeed, Macau is trying to diversify its economy by creating a new stock exchange (a NASDAQ-like market denominated in yuan, facilitating fundraising by technology companies from the Bay Area economic hub), by developing “enclave economies” through exploiting the infrastructure of several bases built in the Guangdong Province.

It can also do so by performing the digital yuan or DCEP tests in the region (DCEP is going to bring a myriad of opportunities to Macau, which is in a perfect position to be leveraged on this initiative) and also by leveraging the Wealth Management Connect Scheme, which will allow Macau residents to buy onshore wealth management products sold by Chinese banks, while Bay Area residents can invest in products sold by Macau´s banks.

However, even though all these initiatives are very relevant and will certainly bring many benefits to Macau and will help it move its shift toward finance, in order for the Special Administrative Region to become a FinTech stronghold in the Greater Bay Area (GBA), it needs to develop a much stronger start-up ecosystem.

Macau´s shift towards finance will not be complete until the moment the region manages to create and maintain a strong start-up ecosystem. This ecosystem cannot certainly be, at least for the time being, as strong as those of Hong Kong and Shenzhen, but it can be strong, nonetheless.

Building a strong start-up ecosystem requires a framework enabling the public and private sectors to work together and it also requires connecting entrepreneurs, universities, incubators, mentors, investors…

Macau already excels in some of these areas: the region, for example, already has strong universities, and there is no doubt that both the Macau SAR Government and the Chinese Central Government are very committed to making Macau become a financial hub within the GBA blueprint and not just a gaming hub anymore, hence all these initiatives I listed above, such as the possible new stock exchange.

So, if Macau has all these things, what does it lack? It lacks a flagship for its financial and technological industry, the equivalent to Hong Kong´s Cyberport or the Hong Kong Science and Technology Park (HKSTP).

Hong Kong, for example, is fast developing into a leading fintech hub, one key part of the government’s fintech strategy being Cyberport. Cyberport is managed by Hong Kong Cyberport Management Co Ltd, which is wholly owned by the Hong Kong SAR government, and it is the flagship of Hong Kong’s digital tech industry.

It houses about 600 tech companies, of which 200 are non-local. According to the data provided by InvestHK, Cyberport’s publicly funded incubation program has admitted 108 new startups in 2018-19. It has achieved an impressive survival rate of 72 per cent.

Despite Shenzhen being presumed to be the leading technology contributor to the Bay Area project, there is still room for Cyberport, and therefore Hong Kong, to make significant contributions.

Is there room for Macau, though? Definitely. Macau has something that Shenzhen does not have: its “one country, two systems” governance concept, which avails it the unique advantage of enjoying the Chinese mainland’s support yet not tied to its legal structure.

Despite the mainland having passed the new foreign investment law that, among other things, protects foreign IP and prohibits forced technology transfers, many American companies — especially tech-related companies — are still reluctant to enter into the mainland market.

Macau could take advantage of that by offering a platform to all those companies from the Portuguese speaking world willing to enter the market of Mainland China. We must bear in mind that China´s idea for Macau as part of the GBA is for the Special Administrative Region to leverage its current strengths to link Mainland China with the Portuguese-speaking countries, the EU and the Association of South-East Asian Nations (ASEAN).

This will firmly establish Macau as a platform for international exchange while leveraging its current world-class tourism and leisure strengths, while its economy is diversified via the potential new stock exchange and similar initiatives that I mentioned before.

In this sense, and to sum up, in order for Macau to complete its current shift toward finance, it needs to create a much stronger start-up ecosystem, and also its own Cyberport so all the opportunities that arise from Macau´s belonging to the GBA and the Portuguese speaking world are properly grasped. It needs to produce a strong ecosystem involving both the Government and private sector and encompassing local universities, incubators, mentors and, of course, investors.

The author works as a FinTech Advisor and Researcher. He holds an MBA and a doctorate in Hong Kong real estate law and economics. He has worked as a business analyst for a Hong Kong publicly listed company and he has given seminars at HKU on Shadow Banking in China and at several universities in Macau on China´s new digital yuan.

OPINION – Blockchain-based trade finance platforms offer many opportunities to Mainland China and HK

Oriol Caudevilla — Mon, 11 Jan 2021 07:17:21 +0000

*By Oriol Caudevilla

Practically unfalsifiable and impossible to change once a record has been added, blockchain is a distributed database stored on multiple computers as a massive number of identical copies. Even though it is best known for underpinning the operation of cryptocurrencies such as Bitcoin, blockchain can be used in many other areas, such as smart contracts, financial services, supply chain management, insurance, IoT, video games…

Considered for long a new technology, blockchain is developing fast, and is quickly becoming a key player in the finance industry.

Even though many people think that China has adopted a tough stance towards blockchain technology, this is not actually accurate. The Chinese Government is encouraging Chinese companies to seize the opportunity offered by blockchain technology, while it is adopting a tough approach on cryptocurrencies and virtual-currency trading platforms.

These virtual-currency platforms use blockchain technology, but, as I said, blockchain can have many different applications other than cryptos.

A few examples of China´s friendly approach to blockchain are the fact that China Central Television (CCTV) defined blockchain´s economic value in 2018 as “10 times more valuable than the internet”, and also the fact that President Xi, speaking as part of the 18th collective study of the Political Bureau of the Central Committee in Beijing in October 2019, said that the country needs to “seize the opportunity afforded by blockchain technology.” President Xi´s statements on blockchain were believed to be his first in-depth remarks on the technology.

One of the current most relevant applications of blockchain within China is that of China´s new Central Bank Digital Currency (CBDC), the Digital Yuan or DCEP. However, it must be noted that CBDCs in general do not need blockchain necessarily, but it might be compatible and useful to use this technology.

It is considered that blockchain could be useful for wholesale CBDC. In contrast to retail CBDC, wholesale CBDC is limited to commercial banks, clearing institutions or other entities that have traditionally had access to central bank reserve.

When it comes to China´s digital yuan, it will be operating through a two-tier structure, in which the PBOC issues the digital currency to commercial banks and institutions without the employment of blockchain technology, but the financial institutions could give out the digital yuan to the public through blockchain.

Nevertheless, in this article, I want to focus on a very interesting application of blockchain that is taking place all over the world and in a very relevant way in Hong Kong: trade finance.

Trade finance refers to financial transactions -domestic and international- where financial institutions provide credit to guarantee an exchange of goods. Applying blockchain technology to trade finance will help to reduce many inefficiencies, since traditional trade finance processes (e.g., Letter of Credit) are still a resource-intensive operation due to the physical exchange of documents, for this industry has not seen many changes these last centuries despite the world´s quick evolution.

As I mentioned in my article “Hong Kong is moving towards a new era of Fintech” (Macau Business, November 9), in his Hong Kong FinTech Week´s opening keynote, Hong Kong Monetary Authority (HKMA) Chief Executive Eddie Yue announced that Hong Kong has embraced a new era for smart banking, and one of the four main initiatives that Mr. Yue mentioned the city was undergoing to prepare its financial sector for the future was precisely related to blockchain in trade finance.

In this sense, the operators of eTradeConnect (Hong Kong´s Blockchain-based trade finance platform) and the People’s Bank of China Trade Finance Platform announced in November 2019 that a Proof of Concept (POC) would be conducted to explore connecting the two platforms. The HKMA announced in early November that Phase 1 of the PoC was completed successfully. The second phase will begin soon in early 2021 with a focus on expanding the range of trade activities and financing products.

The blockchain-based trade finance eTradeConnect platform is considered to be a leading platform in the Asia Pacific Region. Following the success of the 2016 Proof of Concept, this new blockchain-based platform was developed to replace the paper-based trade finance system.

It is owned and operated by the Hong Kong Trade Finance Platform Company Limited (HKTFPCL). Through eTradeConnect, customers and their trading partners can conduct trades and trade financing through sharing of information in an effective and cost-efficient way. Participants of the platform benefit from enhanced transparency and potential access to multiple banks for trade loans with the use of eTradeConnect.

Furthermore, eTradeConnect was developed in collaboration with 12 banks in Hong Kong: Australia and New Zealand Banking Group, Bank of China, BEA, Hang Seng Bank, HSBC, Standard Chartered, Agricultural Bank of China, Bank of Communications, BNP Paribas and Shanghai Commercial Bank.

Related to this, the People’s Bank of China, alongside the China Banking Regulatory Commission, the China Securities Regulatory Commission and the Foreign Exchange Bureau, proposed in May 2020 a blockchain-based trade finance platform to cover the whole Greater Bay Area.

To sum up, now that China has concluded in principle the negotiations for a Comprehensive Agreement on Investment (CAI) with the European Union, and now that China signed last November 15 one of the world´s largest free-trade deals in history, the Regional Comprehensive Economic Partnership (RCEP), after eight years of negotiations, it seems the perfect time for Mainland China and Hong Kong to keep encouraging innovation in the area of blockchain in trade finance. There is no doubt that both Mainland China and Hong Kong are very committed to innovation in general and to blockchain technology as well as to improve its commercial ties with the rest of the world, hence the importance of keeping the development of blockchain-based trade finance platforms.

The author works as a FinTech Advisor and Researcher. He holds an MBA and a doctorate in Hong Kong real estate law and economics. He has worked as a business analyst for a Hong Kong publicly listed company and he has given seminars at HKU on Shadow Banking in China and at several universities in Macau on China´s new digital yuan.

OPINION – A Pan-Asian Digital Currency would bring many opportunities to China

Oriol Caudevilla — Mon, 04 Jan 2021 04:47:21 +0000

*By Oriol Caudevilla

In mid-October, three Japanese scholars and advisors (Taiji Inui, Wataru Takahashi and Mamoru Ishida) published an article in VoxEU (a publication set up by the Centre for Economic Policy and Research, CEPR) in which they advocated the introduction of an Asian digital common currency covering the whole of the East Asia region as a multilateral synthetic currency comparable to the euro.

According to the authors, the benefits it would bring (deepening cooperation within multilateral frameworks and the protection of the rights of small and medium-sized countries, among others) would be greater than the disadvantages of inefficiencies in multilateral frameworks. The background for this research was the rise of Central Bank Digital Currencies (CBDCs) throughout the world, and more notably in Asia.

Even though this is just a suggestion made by the authors, which we do not know whether it will be put in practice or not, it is interesting to see that so much research is being conducted in Asia in the area of CBDCs. This is an area which offers indeed countless possibilities to China, as we are already seeing through the digital yuan tests in the Mainland (and soon in HK and Macau) and through the many possibilities, the RCEP trade agreement will offer to the cross-border deployment of the digital yuan.

In my latest articles, I have been writing quite often about China´s new Digital Yuan and its tests in the Greater Bay Area (GBA), most notably in Hong Kong and Macau. The Digital Yuan, which is China´s Central Bank Digital Currency (CBDC) and is also known as DCEP (Digital Currency Electronic Payment), offers indeed a myriad of opportunities to the whole of China and to the Greater Bay Area.

As I said, a Central Bank Digital Currency (CBDC) is a new form of Central Bank money accessible to the general public, accepted as a means of payment, legal tender, safe store of value by all citizens, businesses and government agencies.

China´s rationale behind its DCEP is multiple: monetary and social policy, technology and innovation, global geopolitics, financial crime prevention… Besides, we must not forget that CBDCs can be an effective tool when promoting financial inclusion, since they can address the needs of unbanked and underbanked people.

I also mentioned that Hong Kong, as the largest offshore yuan trading center and a crucial part of the Guangdong-Hong Kong-Macau Greater Bay Area, will be a good case study for the use of the Digital Yuan for cross-border transactions, and Macau will be so as well. It is in China´s interest not only to make the Digital Yuan become an effective domestic tool for facilitating consumers´ retail payments, but also to enhance the yuan as a payments currency in the global financial system.

In this regard, aside from its domestic use cases for its DCEP, the free trade area created by the Regional Comprehensive Economic Partnership (RCEP), alongside the Belt and Road Initiative, will undoubtedly be a big market for the cross-border adoption of China´s digital yuan.

However, there is a related topic about which I have not written much yet, and this topic may become very relevant in the near future as well: China´s plans to create a pan-Asian digital currency.

At a meeting of the Chinese People’s Political Consultative Conference, a political advisory body, at the Great Hall of the People in Beijing last May 21, 10 members proposed a plan to create a digital currency consisting of the Chinese yuan, Japanese yen, South Korean won and Hong Kong dollar.

These 10 members included influential figures such as Neil Shen, co-founder of Ctrip, as well as founding and managing partner of Sequoia China and a member of China’s upper house; Henry Tang, a Hong Kong politician who served as the Chief Secretary of Hong Kong (the Special Administrative Region’s second-highest position) from 2007 to 2011, among others.

It was in line with the proposal made by former Hong Kong Monetary Authority chief executive Norman Chan Tak-lam, who, a few weeks before, in mid-April, had already suggested the creation of a new regional digital currency based on a basket consisting of these four currencies.

The proposal described the currency as a “stablecoin”, a term for cryptocurrencies designed to hold their value and backed by a reserve currency. According to the proponents, the stablecoin would help facilitate trade among the four countries, which is key to economic recovery in the region after coronavirus. The plan also suggested creating a regulatory sandbox and scaling up the system in Hong Kong over time to improve cross-border payment services between the four countries.

There has not been much news regarding this proposal since last June, but, if eventually deployed, this would undoubtedly bring many opportunities to China.

To sum up, even though I have mentioned in my article several initiatives related to CBDCs, the fact is that all these ideas and initiatives are intertwined: since it is in China´s interest not only to make the Digital Yuan become an effective domestic tool for facilitating consumers’ retail payments, but also to enhance the yuan as a payments currency in the global financial system, RCEP will allow China to be able to leverage the agreement to facilitate the cross-border adoption of its digital yuan and to start slowly challenging the global dominance of the US dollar.

Aside from that, the proposed stablecoin consisting of the yuan, yen, won and HK dollar, if eventually deployed, would also be of big help when taking some of the USD-denominated exports and convert them into yuan-based exports, thus challenging the global domination of the USD.

The author works as a FinTech Advisor and Researcher. He holds an MBA and a doctorate in Hong Kong real estate law and economics. He has worked as a business analyst for a Hong Kong publicly listed company and he has given seminars at HKU on Shadow Banking in China and at several universities in Macau on China´s new digital yuan.

OPINION – Opportunities for Macau for 2021

Oriol Caudevilla — Mon, 28 Dec 2020 02:50:26 +0000

*By Oriol Caudevilla

Now that 2020 is about to end, it seems the perfect time to analyze what opportunities 2021 may bring to Macau. This year 2020 has been, undoubtedly, one of the most challenging years in the last decades. We have seen things that none of us could have expected last January 1.

The COVID-19 pandemic (which hopefully will, if not end, at least be much more controlled by the end of this coming year) has affected the whole world, some countries to a greater extent than others, but no country has been free from the pandemic nonetheless.

One of the many consequences of COVID-19 is the fact that consumer behaviour is changing, thus turbocharging a financial technology revolution all over the world. Hong Kong, Macau (to a lesser but relevant extent) and the rest of the Greater Bay Area (GBA) are indeed becoming FinTech hubs, but that is also the case of other places in Asia.

The interest for digital transformation is not new, and, even without the pandemic, we would have gradually seen our world becoming much more virtual, but COVID-19 has undoubtedly sped this whole process up a few years.

What opportunities will 2021 bring to Macau, though? Luckily, thanks to the quick, stringent and scientifically sound measures implemented by the Government of Macau (and also thanks to the remarkably good behaviour of the citizens of Macau), the Special Administrative Region is not suffering the consequences of the pandemic to the same extent that many other regions and countries.

At the time of writing this piece, there have been 46 infections and 0 coronavirus-related deaths reported since the pandemic began, being the last case on June 25. The figures are really remarkable, much better not only than those of any European country or region, but also much better, for example, than those of China´s other Special Administrative Region, Hong Kong, which, despite having controlled the pandemic very well, is currently struggling with its fourth wave.

It does not mean, though, that Macau is immune to the consequences of the pandemic: tourist arrivals in Macau have dramatically dropped in 2020, as well as the gambling revenues, which plunged 70.5 per cent in November YoY.

However, the decline was not as severe as in recent months as the Special Administrative Region saw an increase in visitors from its key market, Mainland China: revenue plunged 72.5 per cent in October and 90 per cent in September.

Consequently, the first priority for Macau (and, to some extent, opportunity) is to mitigate the economic effects of the pandemic and to try to increase the number of tourist arrivals and gambling revenues, especially those from Mainland China.

Nevertheless, falling revenues from gaming and tourism amid slowing growth on the mainland have prompted Macau to lessen its dependence on gambling. This trend had already started even before COVID-19, but the current pandemic is undoubtedly accelerating it.

Aside from that, and as I mentioned in my article “Macau should leverage the Wealth Management Connect Scheme as part of its economic diversification” (Macau Business, December 14), Macau´s future focus will be on finance. A series of financial initiatives may bring many opportunities to Macau in 2021.

For starters, the Special Administrative Region is trying to diversify its economy by creating a new stock exchange (a NASDAQ-like market denominated in yuan, facilitating fundraising by technology companies from the Bay Area economic hub) and embracing both the Belt and Road Initiative (which offers many opportunities to Macau given its belonging to the Portuguese-speaking world) as well as the Greater Bay Area (GBA) project.

The timing of this stock exchange is not clear yet, but the creation of a local stock exchange is, without any doubt, a key element for the development of a large and efficient financial infrastructure and the fostering of economic diversification.

Also, the fact that China will start its Digital Yuan tests soon in Macau is a clear sign of the importance of the former Portuguese colony in the present and future of China. As of today, we do not know yet when the tests will start in Macau, even though it should be very soon. In any case, the DCEP is going to bring a myriad of opportunities to Macau, which is in a perfect position to be leveraged on this initiative.

Committed to being the trade and commercial services platform between China and the Portuguese-speaking countries, as well as being part of the Guangdong-Hong Kong-Macau Greater Bay Area and the ‘Belt and Road’ initiative. Macau, for example, could serve as a point of connection between Mainland China and some Portuguese-speaking countries in Africa for the usage of the DCEP.

At last, another interesting initiative is the development of ‘enclave economies´: Macau could exploit the infrastructure of several bases built in the Guangdong Province, such as the cooperation demonstration zone located in Zhongshan, or the Traditional Chinese Medicine Science and Technology Industrial Park in Hengqin.

To sum up, given the fact that Macau has managed to control the COVID-19 pandemic remarkably well, the Special Administrative Region is in a perfect position to grasp the opportunities offered by 2021, such as seeing an increase of the number of tourist arrivals and gambling revenues, especially those from Mainland China, but Macau can also leverage other finance related opportunities such as the new stock exchange, the digital yuan tests in the region and the development of enclave economies, most notably Hengqin.

The author works as a FinTech Advisor and Researcher. He holds an MBA and a doctorate in Hong Kong real estate law and economics. He has worked as a business analyst for a Hong Kong publicly listed company and he has given seminars at HKU on Shadow Banking in China and at several universities in Macau on China´s new digital yuan.

OPINION – The Digital Yuan tests in HK and Macau, a good case study for cross-border transactions

Oriol Caudevilla — Mon, 21 Dec 2020 02:56:52 +0000

*By Oriol Caudevilla

A Central Bank Digital Currency (CBDC) is a new form of Central Bank money accessible to the general public, accepted as a means of payment, legal tender, safe store of value by all citizens, businesses and government agencies.

Theoretically, a CBDC should enable cheap, secure and real-time transfer of value, be accessible without a bank account and be built on an open infrastructure to foster competition and innovation

The major economy leading the CBDC race in Asia (and in the whole world) is China. On August 14, China´s Ministry of Commerce announced that a pilot run of the country’s CBDC, the DCEP (Digital Currency Electronic Payment) or Digital Yuan, would begin in several new areas soon, the Greater Bay Area (GBA) among them, including the two Special Administrative Regions of Hong Kong and Macau. However, it was not specified when these tests would start.

This second phase of testing comes just a few months after the initial phase, which started in April, when, after several years of work (the research commenced in 2014), the Chinese Government announced that the digital yuan tests would start in four major cities (Shenzhen, Suzhou, Chengdu and Xiong’an), notwithstanding the COVID-19 crisis.

When will these tests actually start in Hong Kong, though?

Recently, some light has been shed on this matter: last December 4, Hong Kong’s Monetary Authority (HKMA) Chief Executive Eddie Yue announced that the HKMA and the Digital Currency Institute of the People’s Bank of China are discussing the technical pilot testing of using the Digital Yuan for making cross-border payments, and are making the corresponding technical preparations.

According to Mr. Yue´s statement, “As the renminbi is already in use in Hong Kong and the status of e-CNY is the same as cash in circulation, it will bring even greater convenience to Hong Kong and Mainland tourists. While there is not yet a timetable for the launch of e-CNY, it will certainly offer an additional payment option to those in Hong Kong and the Mainland who need to make cross-border consumption.”

This is not, though, the only CBDC-related project in which Hong Kong´s central bank is currently working. Last year, the HKMA launched a joint research project with the Bank of Thailand to address the various cross-border payment issues by using central bank digital currencies (CBDC) and a blockchain platform. Other parties involved include the Hong Kong Exchanges and Clearing (HKEX), 19 banks and a few other companies, like ConsenSys, which had been awarded a cross-border payment network study project by the HKMA as part of Phase 2 of the project.

These tests in Hong Kong are very important for China, since, thus far, China has been mostly focused on domestic use cases for its DCEP, facilitating consumers´ retail payments, but the testing and subsequent adoption of the Digital Yuan in Hong Kong, which is and will remain one of the major financial hubs in the world, could be a great first step to enhance renminbi as a payments currency in the global financial system.

During a legislative council meeting in October, Hong Kong Treasury Secretary Mr. Christopher Hui said the city is most interested in wholesale and cross-border digital currency use cases, a contrast to DCEP’s initial retail-facing use cases that are being developed by the PBOC.

As I mentioned in “The RCEP, a boost for trade and Central Bank Digital Currencies in Asia” (Macau Business, November 23), China´s rationale behind its DCEP is multiple: monetary and social policy, technology and innovation, global geopolitics, financial crime prevention…, but, undoubtedly, one of the major reasons behind it is to facilitate the cross-border adoption of its new digital currency and thus challenge the global dominance of the US dollar, since, at the end of the day, one of China´s main objectives is to take some of the USD-denominated exports and convert them into yuan-based exports.

The free trade area created by RCEP, alongside the Belt and Road Initiative, will undoubtedly be a big market for China´s digital yuan, but this cross-border adoption needs to be tested first, and, in this sense, Hong Kong seems the perfect platform to do so.

And, what about Macau? Will Macau play a role in this process?

As of today, we do not know yet when the tests will start in Macau, even though it should be very soon. In any case, the DCEP is going to bring a myriad of opportunities to Macau, which is in a perfect position to be leveraged on this initiative.

To sum up, Hong Kong, as the largest offshore yuan trading center and a crucial part of the Guangdong-Hong Kong-Macau Greater Bay Area, will be a good case study for the use of the Digital Yuan for cross-border transactions, and Macau will be so as well. It is in China´s interest not only to make the Digital Yuan become an effective domestic tool for facilitating consumers´ retail payments, but also to enhance the yuan as a payments currency in the global financial system.

*The author works as a FinTech Advisor and Researcher. He holds an MBA and a doctorate in Hong Kong real estate law and economics. He has worked as a business analyst for a Hong Kong publicly listed company and he has given seminars at HKU on Shadow Banking in China and at several universities in Macau on China´s new digital yuan.

OPINION – Macau should leverage the Wealth Management Connect Scheme as part of its economic diversification

Oriol Caudevilla — Mon, 14 Dec 2020 14:29:15 +0000

*By Oriol Caudevilla

Macau’s future focus will be on finance.

The Special Administrative Region is trying to diversify its economy by creating a new stock exchange (a NASDAQ-like market denominated in yuan, facilitating fundraising by technology companies from the Bay Area economic hub) and embracing both the Belt and Road Initiative (which offers many opportunities to Macau given its belonging to the Portuguese-speaking world) as well as the Greater Bay Area (GBA) project.

Furthermore, the fact that China will start its Digital Yuan tests soon in Macau is a clear sign of the importance of the former Portuguese colony in the present and future of China. Another interesting initiative is the development of ‘enclave economies´: Macau could exploit the infrastructure of several bases built in the Guangdong Province, such as the cooperation demonstration zone located in Zhongshan, or the Traditional Chinese Medicine Science and Technology Industrial Park in Hengqin.

Falling revenues from gaming and tourism amid slowing growth on the mainland have prompted Macau to lessen its dependence on gambling. This trend had already started even before COVID-19, but the current pandemic is undoubtedly accelerating it.

One of the opportunities that Macau should grasp is the Wealth Management Connect Scheme, an initiative that is part of the GBA blueprint.

The GBA, which has a combined population of over 69 million people and a GDP of around US$1.5 trillion, offers a myriad of diverse opportunities for Macau.

As per the 11 chapters of this project, each of the cities will play an important role based on its respective strength. For example, Hong Kong will play a key part as a financial center, while Shenzhen will leverage its technological prowess, where cutting-edge technology companies like Huawei and Tencent are domiciled.

Regarding Macau, the idea is to leverage its current strengths to link Mainland China with the Portuguese-speaking countries, the EU and the Association of South-East Asian Nations (ASEAN). This will firmly establish Macau as a platform for international exchange, while leveraging its current world-class tourism and leisure strengths, while its economy is diversified via the potential new stock exchange and similar initiatives that I mentioned before.

On June 29, 2020, the People’s Bank of China (PBOC), the Hong Kong Monetary Authority (HKMA), and the Monetary Authority of Macau (AMCM) jointly published an announcement on the launch of the cross-boundary wealth management connect pilot scheme.

The introduction of Wealth Management Connect is another important measure to facilitate cross-boundary investment by individual residents in the GBA, and strengthen the financial corporation between mainland China, Hong Kong and Macau, which will promote the opening-up of the financial markets in Mainland China.

To sum up, given the current tense economic situation, the new Wealth Management Connect plan could not have come at a more opportune time, as it is destined to enrich the Bay Area before long, and will definitely help Macau´s plans to diversify its economy and shift the focus towards finance.

OPINION – Singapore’s and Hong Kong’s FinTech scenes: complementary rather than excluding

Oriol Caudevilla — Mon, 07 Dec 2020 13:14:48 +0000

*By Oriol Caudevilla

Consumer behaviour is changing due to the COVID-19 pandemic, thus turbocharging a financial technology revolution all over the world. Hong Kong, Macau (to a lesser but relevant extent) and the rest of the Greater Bay Area (GBA) are indeed becoming FinTech hubs, but that is also the case of other places in Asia, such as Singapore.

While, in early November, the Hong Kong FinTech Week showed us that Hong Kong has taken it a step further, by becoming ready to move towards a fascinating new era of FinTech, the Singapore FinTech Festival, which starts today, will undoubtedly provide us with many interesting headlines and insights as well.

Even before the COVID-19 pandemic, in just two years (2017-2019), the rate of Fintech adoption among Singapore consumers almost tripled, according to the EY Global FinTech Adoption Index 2019: Singapore’s adoption rate jumped from 23% to 67% between 2017 to 2019.

Actually, Singapore´s move towards FinTech is not new either. In 2014, Prime Minister Lee Hsien Loong announced plans to make the city-state the world’s first ‘Smart Nation’ by 2030, using technology to improve the economy and enhance the standard of living. In this sense, one of the three pillars of the Singapore Smart Nation Initiative is the digital economy. As part of the country’s drive to efficiency and productivity, the Ministry for Communications and Information announced plans in May 2018 to digitize every business and every industry.

Undoubtedly, there is a tendency among many Hong Kong people to compare Singapore with Hong Kong in every possible way. The apparent reason for this tendency is that Hong Kong and Singapore bear many similarities in economic structure, reliance on finance and trade, as well as size of its territory and population.

Singapore and Hong Kong have both been trying to become Asia´s FinTech center. Even though, according to industry participants and analysts, Singapore seems to be ahead as of today, having become one of the world’s leading centers for technological innovation, Hong Kong seems to be catching up remarkably well.

In some areas, Singapore is clearly winning: Singapore is one of the most important Asian countries for the crypto sector due to its regulatory-friendly environment. However, when it comes to digital banking, Hong Kong seems to be ahead right now.

I could write countless pages comparing the FinTech scene of Singapore with that of Hong Kong, but I will just focus here on one area: virtual banking. As I mentioned in “The rise of virtual banking in Hong Kong: Will Macau come next?” (Macau Business, November issue), as of today, 8 virtual banks exist in Hong Kong after having been approved by the Hong Kong Monetary Authority (HKMA), even though not all of them are already operational. These eight virtual banks are a key pillar for the coming smart banking era and are a clear example of how digital transformation has become a top priority.

Mr. Benjamin Quinlan, Chairman of the FinTech Association of Hong Kong, said that “the launch of Hong Kong’s virtual banks (VBs) is an important milestone for FinTech in the city and has set the tone for the rest of the region, who are now playing catch up.

With lightning fast onboarding times, competitively priced products, and a streamlined end-to-end customer journey on offer, the overriding response from the public has been extremely positive. Moreover, given the various challenges posed by COVID-19 with respect to more traditional in-person / branch-enabled customer servicing, the timing of their launch could not have been better. The successful arrival of the VBs will only serve to strengthen Hong Kong’s position as one of the world’s leading global financial centres”.

What about Singapore, though? As part of the first digital banking symposium held in Singapore in early November, the Singapore Fintech Association (SFA), Boston Consulting Group and Finastra unveiled their report “Southeast Asia: Coming of the Digital Challenger Banks”, in which the current status and future opportunities of neobanks and challenger banks in South East Asia is analyzed.

Furthermore, the Monetary Authority of Singapore (MAS) announced that up to 5 licenses would be awarded by the end of 2020. Related to this, last Friday, December 4, the Monetary Authority of Singapore announced four successful digital bank applicants in the end: two DFBs and two DWBs, being one of these two DWBs an entity wholly owned by Ant Group.

Out of the 21 applications filed, 14 of which were initially shortlisted, and 4 successful applicants were just announced by the MAS.

The idea behind these digital banking licenses is to open up the market for the benefit of lower customers’ costs and to allow underserved segments to be targeted by the new entrants.

It is also worth noting that three Chinese tech giants were initially competing for these digital wholesale bank licenses (DWB) in Singapore: Ant Group, but also Xiaomi and ByteDance. Ant Group applied for the license alone, while Xiaomi (with AMTD) and ByteDance lead respective consortia, showing us that these digital bank licenses in Singapore are also of interest to Mainland China companies.

To sum up, even though it is considered by some analysts that Singapore´s Fintech scene is right now more advanced than that of Hong Kong, it depends on what area we analyze. When it comes to virtual banks, Hong Kong seems to have made it a step further thus far.

Nevertheless, these 5 digital banking licenses issued by the MAS are great news indeed and will strengthen Singapore´s position as a hub also for virtual banks. That being said, I have always considered that, despite Hong Kong and Singapore being compared all the time and despite being considered eternal business rivals, both financial centers are actually complementary rather than excluding, since Hong Kong is and will remain the gateway to China (as well as part of the GBA), while Singapore is mostly the gate to South East Asia.

In this sense, Mr.Chia Hock Lai, President of the Singapore Fintech Association (SFA), considers that “the FinTech sector is more complementary than competitive between Singapore and Hong Kong. Due to geographical proximity, ASEAN is the natural economic hinterland for Singapore FinTech firms, especially for B2C fintechs in payments and lending.

For certain sub sectors like WealthTech and InsurTech, which both markets project similar profiles, FinTech firms are likely to set up in both Singapore and Hong Kong, depending on their commercial priorities.”

OPINION – Hong Kong’s 2020 Policy Address: a step forward towards developing Hong Kong into an international innovation and technology hub

Oriol Caudevilla — Mon, 30 Nov 2020 02:37:05 +0000

*By Oriol Caudevilla

Hong Kong Chief Executive Carrie Lam Yuet-ngor unveiled last Wednesday, November 25, the much-awaited 2020 Policy Address, in which several initiatives to revitalize Hong Kong´s economy were listed while pledging to uphold the One Country, Two Systems principle.

Undoubtedly, 2019 and 2020 have been thus far two very difficult years for Hong Kong. However, after each major crisis, Hong Kong has always emerged stronger, and this time it will be no different, since it is ready to grasp any opportunity that promises to secure its regional financial dominance and its inhabitants’ wellbeing. We can take assurance from the fact that Hong Kong went through the Asian financial crisis, the SARS outbreak, the global financial crisis and the current pandemic without any significant outflow of capital.

There are two aspects of the Policy Address that I would like to focus on in my article, the two of them related to the economic measures: first of all, those policy initiatives laid out to consolidate and enhance the status of Hong Kong as an international financial center and, secondly, those policy initiatives established to develop Hong Kong into an international innovation and technology hub.

As to consolidating Hong Kong´s status as an International Financial Center, the Policy Address makes reference to maintaining financial stability, expediting the implementation of the GBA cross-boundary wealth management connect scheme, promoting real estate investment trusts (REIT) in Hong Kong, launching the FinTech Proof-of-Concept Subsidy Scheme to encourage traditional financial institutions to partner with start-ups to conduct Proof-of-Concept projects, conducting public consultation on the establishment of a licensing regime to monitor virtual asset service providers, among others.

In regard to developing Hong Kong into an international innovation and technology hub, the Policy Address lays out the next policies: jointly developing the Shenzhen-Hong Kong Innovation and Technology Co-operation Zone with Shenzhen, launching a five-year Global STEM Professorship Scheme to attract outstanding R&D talent from overseas to engage in R&D work in Hong Kong, releasing the Smart City Blueprint for Hong Kong 2.0 in December 2020 as well as launching the iAM Smart one-stop service platform in the same month for the delivery of a number of government and public utility electronic services.

All these measures laid out by the Policy Address must be welcomed and are undoubtedly a relevant step forward. As I mentioned in my article “Policy Address should focus on jobs, retailers, innovation” (China Daily HK Edition, November 13), Hong Kong has a strong R&D capability through its world-class universities and research centers, but its overall R&D expenditure still accounts for a relatively small proportion of GDP. According to the Census and Statistics Department, Hong Kong’s R&D expenditure as a ratio to GDP was at 0.86 percent in 2018, while the Mainland’s hit a record high at 2.23 percent of its GDP in 2019.

Nevertheless, even though Hong Kong still has room to improve, the 2020 Policy Address seems consistent with the objective of keeping Hong Kong´s preeminent role as one of the world´s most important financial centers while fostering the development of technology and innovation.

Those economies that will thrive and prosper the most in these coming years are those which will fully embrace innovation. If Hong Kong embraces it (based on the latest developments and based on the Policy Address, HK seems to be moving in the right direction indeed), its future will be much brighter.

It seems impossible for me to think of any major financial center these years to come which will only focus on traditional finance, leaving aside innovation. Technology and innovation are key, the present and the future.

In this sense, as mentioned in my article “Hong Kong is moving towards a new era of Fintech” (Macau Business, November 9), the recent Hong Kong FinTech Week showed us that Hong Kong has taken it a step further, by becoming ready to move towards a new era of FinTech. In his opening keynote, Hong Kong Monetary Authority (HKMA) Chief Executive Eddie Yue announced that Hong Kong has embraced a new era for smart banking, and shared four main initiatives that the city was undergoing to prepare its financial sector for the future: a new data strategy, trade finance, CBDCs and RegTech.

What does a country or region need to thrive and innovate? Bright people and new ideas, of course, but also adequate government support. And Hong Kong has it all: there is no doubt that Hong Kong has bright people, and, as stated by the Policy Address, it is clear that it has the adequate government support as well.

In this sense, Hong Kong has already been for decades one of the world´s most important financial centers and will remain so, but it is wise to keep improving and embracing technologies in order to keep its leading position and never being left behind.

*The author holds an MBA and a doctorate in Hong Kong real estate law and economics. He has worked as a business analyst for a Hong Kong publicly listed company and he has given seminars at HKU on Shadow Banking in China and at several universities in Macau on China´s new digital yuan. He is currently a member of the Blockchain, Digital Banking and Greater Bay Area Committees at the Fintech Association of Hong Kong (FTAHK).

OPINION-The RCEP, a boost for trade and Central Bank Digital Currencies in Asia

Oriol Caudevilla — Mon, 23 Nov 2020 02:55:10 +0000

*By Oriol Caudevilla

One of the world´s largest free-trade deals in history, theRegional Comprehensive Economic Partnership (RCEP),was signed last November 15, after eight years of negotiations.

It is composedof fifteen countries (all ten members of ASEAN -Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam-, plus China, Japan, South Korea, Australia and New Zealand), that will create a free trade area encompassing 28% of the global economy, 30% of the global population and reaching 2.2 billion consumers.

Leaving aside the economic size ofthe deal, it marks the first time China, Japan and South Korea have been in a single free trade agreement, and it also marks the first time China enters a nonbilateral free trade agreement of this scale.

Moreover, RCEP aligns with China´s “dual circulation” vision, refocusing on domestic demand while taking advantage of trade and foreign investment. It must also be noted that ASEAN has become China’s largest trading partner followed by the EU and the United States.

The RCEP is indeed a big victory for China, since it will extend its influence in the region, to the detriment of the US. In this sense, even though the negotiations to establish the RCEP started in 2012, much before President Donald Trump, it is undeniable that Trump´s protectionism has encouraged this agreement. In this regard, President Trump pulled the US out of the Trans-Pacific Partnership (TPP) shortly after taking office, and started in 2018 a counterproductive trade war with China that did not only affect the two countries, but also the economies of many countries tightly integrated into the global value chain.

As stated by Premier Li Keqiang, the RCEP is “a victory of multilateralism and free-trade”. In my article “US-China trade war: Have the costs been counted?” (China Daily HK Edition, July 9, 2018), I already warned that it was the US bet on free trade and multilateralism (as opposed to protectionism and bilateralism) which brought great prosperity to America.

The timing of the pact could not be better. On the one hand, the proposals for formulating the 14th Five-Year Plan (2021-2025) for National Economic and Social Development, released on November 3, emphasize that that China will participate in multilateral and bilateral regional investment and trade cooperation mechanisms, being the RCEP consistent with this goal.

On the other hand, the ongoing COVID-19 pandemic has undoubtedly confronted the whole world with an unprecedented challenge. The signing of the RCEP agreement is a good step towards supporting economic recovery in Asia, inclusive development, job creation and strengthening regional supply chains.

However, I would like to focus here on how the RCEP will impact Central Bank Digital Currencies (CBDCs).Even though, according to a report published by the Bank of International Settlements (BIS) in early 2020, 80% of Central Banks in the world are currently working on CBDCs (some are just at an initial research stage, though), Asia seems to be the place where CBDCs arouse more interest.

To me, the RCEP will pave the way for the expansion of CBDCs throughout Asia, including (but not limited to) China´s new Central Bank Digital Currency (CBDC), the digital yuan.

China´s rationale behind its DCEP is multiple: monetary and social policy, technology and innovation, global geopolitics, financial crime prevention…

Aside from China, many other Asian countries have shown their interest in developing and potentially deploying their own CBDCs. This list includes Thailand, Cambodia, Vietnam, Philippines… as well as Korea and Japan (both the Bank of Korea and the Bank of Japan announced that tests of their own CBDCs will be conducted in 2021). Should these other countries finally deploy their own CBDCs, it will mean more market for them as well.

OPINION – Hong Kong should keep reopening its borders for non-essential travel

Oriol Caudevilla — Tue, 17 Nov 2020 10:26:11 +0000

*By Oriol Caudevilla

There is no doubt that Hong Kong has handled COVID-19 remarkably well thus far since it has succeeded in keeping the number of infections well under control and the mortality rate among the lowest in the world.

Obviously, it is way too early to claim victory, since we do not know yet what will happen once winter arrives, and this virus is, by its very nature, very unpredictable.

This partial victory cannot be credited to a single party, but mainly to the collaborative effort of the Hong Kong community. On the one hand, the Government has wisely adopted very stringent but scientifically sound measures that, despite never including a full lockdown, have substantially reduced the chances of cross infection among the people.

On the other hand, the citizens of Hong Kong must be praised as well, since they have complied with all the restrictions and recommendations admirably well, showing that the SARS experience from 2003 has not been forgotten, and showing that the system of social values established by Confucianism proves to be very valuable in times of crisis.

Now that COVID-19 seems to be under control here and other cities nearby, it is time for Hong Kong to reopen its borders and introduce safe “travel bubbles” to facilitate travel between safe cities and rejuvenate the economy in the region. In this sense, Macau is showing Hong Kong the right path to follow to reopen its borders: after containing the virus, Macau managed to welcome 156,000 visitors over the National Golden Week holiday in early October, following the reopening of its borders to Mainland visitors.

Accordingly, Hong Kong has just taken a first (albeit very important) step forward: Singapore and Hong Kong have reached an agreement to establish a two-way Air Travel Bubble, which will begin this week, on November 22. This will allow travelling between both cities without quarantine, and there are no restrictions on the purpose of travel. As expected, there are certain health guidelines that travellers would have to abide by, including testing negative for Covid-19.

Hong Kong’s Commerce Secretary, Edward Yau, and Singapore’s Transport Minister, Ong Ye Kung, said the scheme would begin with one flight a day into each city, with a quota of 200 travellers per flight. This would be increased to two flights a day into each city from December 7, as long as the COVID-19 situation does not deteriorate in any of the two cities (if that happened, the bubble would be suspended).

COVID-19 has proven to be enormously economically disruptive, causing unprecedented job losses and business closures. According to the Hong Kong Tourism Board (HKTB), visitor arrivals from all points for the period of January-July 2020, was down by 91.2 per cent, compared with the same period in 2019, resulting in the reduction of visitors from more than 40 million to just 3.5 million.

In other words, Hong Kong’s tourism industry was nearly wiped out overnight, putting hundreds of thousands of employees out of work. And the only cure is to facilitate the return of tourists.

Restoring air travel to normalcy is key to reinvigorating Hong Kong´s (and the world’s) economic growth. Christian Nielsen, Chief Legal Officer of AirHelp, a Berlin-based passenger rights company, considers that “China has managed to cope with Covid-19 better than most of the other significant economies in the world.

Their domestic flight volumes are now at the same levels as before Covid-19, and although their international flight volume for passengers is still far below 2019 numbers, international cargo is at par. It gives China a mobility edge over competing economies.

For Hong Kong, with its unique close ties to China, this provides an opportunity for an early chance to rebuild its economy and source international talent and interest before the US and EU come back up to speed.”

Undoubtedly, Hong Kong has a huge growth potential in many areas, such as FinTech. But it will make no sense to focus on developing its FinTech potential or schemes like the Wealth Management Connect if its borders remain closed.

As a first step, the Hong Kong-Singapore travel bubble is a very good start, but it should quickly be followed by reopening its borders with Macau and Shenzhen, continuing with other cities in China, and as soon as possible, with other safe places in Asia aside from Singapore.

While it is too risky to reopen all its borders simultaneously, it must keep taking cautious little steps forward while monitoring the COVID-19 developments and be prepared to reverse course immediately as the changing situation demands.

The author holds an MBA and a doctorate in Hong Kong real estate law and economics. He has worked as a business analyst for a Hong Kong publicly listed company and he has given seminars at HKU on Shadow Banking in China and at several universities in Macau on China´s new digital yuan.

OPINION – The rise of virtual banking in Hong Kong: Will Macau come next?

Oriol Caudevilla — Sat, 14 Nov 2020 05:53:58 +0000

After each major crisis, Hong Kong has always emerged stronger, and this time it will be no different, since Hong Kong is ready to grasp any opportunity that promises to secure its regional financial dominance.

*By Oriol Caudevilla

Over these last few years, Hong Kong has been developing itself into a leading FinTech hub. EY reported that Hong Kong enjoyed a 67 percent consumer fintech adoption rate as of 2019, a figure which climbed rapidly from 32 percent just two years prior. Hong Kong’s fintech industry has the potential to develop much faster now by leveraging its involvement with the Greater Bay Area (same as Macau), and also now that COVID-19 is changing consumer behavior and turbocharging Hong Kong´s FinTech revolution, forcing Hong Kong’s banking and financial services industry urgently to adapt.

One of the areas boosting the pace of digital transformation is that of virtual banking. In March 2019, the Hong Kong Monetary Authority (HKMA), Hong Kong´s de facto central bank, announced the issuance of the very first virtual banking licenses. This came after the publication by the HKMA of the “Guideline on Authorization of Virtual Banks” in May 2018.

Virtual banks, also called neobanks, primarily deliver retail banking services through the internet or other electronic channels instead of physical branches. The HKMA believes that the development of virtual banks will promote FinTech and innovation in the region and offer a new kind of customer experience by helping to promote financial inclusion, since neobanks normally target the retail segment, including the small and medium-sized enterprises (SMEs).

As of today, 8 virtual banks exist in Hong Kong after having been approved by the HKMA, even though not all of them are already operational: Airstar Bank (its services were launched in June to the public), Ant Bank (which operates also in Macau and is seeking a license to do so in Singapore), Fusion Bank (currently conducting internal testing), livi Bank (which opened its virtual doors in August), Mox Bank (launched just a few weeks ago, in late September), Ping An OneConnect Bank Limited (it started its pilot trial in June under the Fintech Supervisory Sandbox -FSS- of the HKMA), WeLab Bank (launched in late July), and ZA Bank (which officially opened in March, thus becoming the first virtual bank in the region).

(Xinhua/Wu Xiaochu)

Hong Kong´s eight virtual banks are a key pillar for the coming smart banking era and are a clear example of how digital transformation has become a top priority.

Will these virtual banks extend to Macau? Macau, more than ever, is in a perfect position to take the opportunities offered by virtual banking. Even though many people still (wrongly) think of Macau as just a gaming hub, the truth is that the former Portuguese colony is attempting to diversity its economy and become competitive in many more areas.

Same as Hong Kong, Macau is part of the Greater Bay Area project, which has a combined population of over 69 million people and a GDP of around US$1.5 trillion (comparable to that of the Tokyo Bay Area and the New York Metropolitan Area), offering opportunities like the Wealth Management Connect Scheme.

On top of that, Macau’s inhabitants have showed zero interest in challenging the status quo. When Ho Iat-Seng was sworn in by President Xi as the new Chief Executive, he vowed that his government will continue to fully and accurately implement “one country, two systems” by strictly following the PRC Constitution and Macau’s Basic Law and safeguarding national sovereignty.

Furthermore, Macau will try to diversify its economy by creating a new Nasdaq-like stock exchange denominated in yuan facilitating fundraising by technology companies from the Bay Area, and by embracing the Belt and Road Initiative too, which offers many opportunities to Macau due to its belonging to the Portuguese-speaking world.

This need to diversify Macau´s economy has become clearer now in early October during the Golden Week, when less people visited the SAR than expected (the number of visitors arriving in Macau over the first three days of the October Golden Week holiday period fell 87.2% year-on-year, with just 58,345 people crossing the border between Thursday and Saturday), therefore Macau should follow Hong Kong´s path in embracing Fintech.

Will virtual banks be part of this FinTech transformation in Macau? Indeed. So far, only 2 virtual banks operate in the region: Ant Bank Macau, launched last year, and the Macau Development Bank. The Financial System Act, passed in the 1990s, does not specifically set out rules for virtual banking business, but lenders are allowed to conduct online business.

To sum up, given the current tense economic situation worldwide, it is in both Hong Kong’s and Macau´s best interest to grasp every opportunity, and FinTech offers undoubtedly many opportunities, being virtual banks a key pillar of digital transformation. Nevertheless, when compared to Hong Kong, Macau faces significant challenges in any future transformation into an international financial center, but it is on the right track to get there. Embracing virtual banking would be a good stepping-stone.

OPINION-Hong Kong is moving towards a new era of FinTech

Oriol Caudevilla — Mon, 09 Nov 2020 08:42:37 +0000

As I mentioned in my latest article, “China´s FinTech scene is on the rise” (Macau Business, November 2), consumer behavior is changing due to the COVID-19 pandemic, thus turbocharging a financial technology revolution all over the world.

I also concluded by saying that Hong Kong (and Macau, to a lesser but very relevant extent) can undoubtedly play a vital role in China´s FinTech scene, given Hong Kong´s current position as one of the most important financial centres in the world and also given the fact that its FinTech industry has the potential to develop much faster now that it can leverage its involvement in the Greater Bay Area (GBA) blueprint.

However, the recent Hong Kong FinTech Week showed us that Hong Kong has taken it a step further, by becoming ready to move towards a new era of FinTech. The Hong Kong FinTech week is a three-day event (this year, virtual) in which topics like digital banking, crypto assets, big data application and artificial intelligence were discussed, being one of the largest conferences on the calendar.

This year´s event has given us many headlines, such as Ashley Alder´s, the CEO of the Securities and Futures Commission (SFC), announcement of a proposed new licensing regime for virtual assets trading in Hong Kong, with the launch of public consultation (due on January 31, 2021) on legislative proposals designed to enhance anti-money laundering and counter-terrorist funding (AML and CTF) in Hong Kong. In this sense, Ms. Irene Wong, Founder and CEO of ixFintech, considers that “this new regulation will put everyone in a level playing field and will give investors a safety net, which I personally think should help the digital asset market to grow in the long run by giving investors more confidence of this new asset class.”

However, I want to focus now on this “new era” concept. In his opening keynote, Hong Kong Monetary Authority (HKMA) Chief Executive Eddie Yue announced that Hong Kong has embraced a new era for smart banking.

Mr. Yue shared four main initiativesthat the city was undergoing to prepare its financial sector for the future: the HKMA (Hong Kong´s de factocentral bank) is exploring a new data strategy,consisting of building a financial infrastructure called Commercial Data Interchange (CDI) to enable more efficient financial intermediation in the banking system. According to the HKMA, this could solve a «long-standing pain point» of small and medium-sized enterprises (SME) seeking to enhance financial access using their own data. The HKMA is conducting a proof-of-concept study in collaboration with banks. The current phase will focus on using trade-related data to facilitate the trade finance application process and the next phase will cover other data sources for alternative credit scoring.

On top of that, there were some news regarding trade finance as well (trade finance refers to financial transactions -domestic and international- where financial institutions provide credit to guarantee an exchange of goods). Applying blockchaintechnology to trade finance will help to reduce many existing inefficiencies.

In this sense, the operators of eTradeConnect (Hong Kong´s trade finance platform) and the People’s Bank of China Trade Finance Platform announced in November 2019 that a proof of concept (PoC) would be conducted to explore connecting the two platforms. The HKMA announced on Tuesday that Phase 1 of the PoC was completed successfully. The second phase will begin in early 2021 with a focus on expanding the range of trade activities and financing products.

The third initiative is related to Central Bank Digital Currencies (CBDCs):the HKMA is exploring its own opportunities in a joint research study (Project Inthanon-LionRock) with the Bank of Thailand (BoT). The two central banks aim to explore cross-border trade settlement and capital market transactions via CBDCs. Other parties involved include the Hong Kong Exchanges and Clearing (HKEX), 19 banks and a few other companies, like ConsenSys, which had been awarded a cross-border payment network study project by the HKMA as part of the Phase 2 of the project. The two authorities also intend to enhance the cross-border corridor network prototype to support CBDCs of other central banks in the region. Findings from the joint study will be are expected to be shared in the first quarter of 2021.

Lastly, the HKMA has developed a two-year roadmap to promote regulatory technology (RegTech) adoption in Hong Kong’s banking sector.

To sum up, not only Hong Kong has already become a FinTech hub, but it is already preparing itself for the next era of FinTech and smart banking through the four main initiatives disclosed by the HKMA during the Hong Kong FinTech Week. Hong Kong has already been for decades one of the world´s most important financial centers and will remain so, but it is wise to keep improving and embracing technologies in order to keep its leading position and never being left behind.

*[The author holds an MBA and a doctorate in Hong Kong real estate law and economics. He has worked as a business analyst for a Hong Kong publicly listed company and he has given seminars at HKU on Shadow Banking in China and at several universities in Macau on China´s new digital yuan.