Cautious approach to innovation benefits HK
Critics say the city is ‘falling behind’ but a measured advance has spared us the fallout from such excesses as bicycle sharing and P2P lending, Peter Liang argues
Many people have lamented the failure of Hong Kong to catch up with the technology trends on the Chinese mainland and elsewhere. Critics correctly point out that sharing economy, which touched the lives of countless millions of people in other economies, has yet to find a home in Hong Kong. That’s not necessarily a bad thing. Hong Kong, at least, was spared the headache some other major cities — including Shanghai, Wuhan and Guangzhou — had in trying to find “graveyards” large enough to contain hundreds of thousands of bicycles discarded after the bicycle-sharing boom-bust.
Not too long ago, many financial gurus scolded the government for its reluctance to promote the so-called “P2P” (peer to peer) lending platforms in Hong Kong. They have kept their complaints largely to themselves since the collapse of the P2P market on the mainland, resulting in considerable losses to “lenders” using the now-defunct platforms.
It is a debacle Hong Kong can ill afford because of the predictable damage it can cause to its reputation as an international financial center. A former financial official once said he and his colleagues were vindicated for erring on the side of caution.
Indeed, the Hong Kong government and Hong Kong Monetary Authority have often been criticized for their overly conservative approach to financial innovation. This emphasis on the regulatory framework and institutional integrity is exactly Hong Kong’s strength in fulfilling its expected role in the Guangdong-Hong Kong-Macao Greater Bay Area and other initiatives.
To be sure, Hong Kong enjoys other advantages, including excellent infrastructure, an efficient civil service and free access to information. But the greatest value it can bring to the table is expertise and experience to ensure orderly development which will not create new and bigger problems.
In the United States, for instance, big tech companies such as Apple, Amazon and Facebook can usually have their own way. Their monopolistic power and disruptive impact on various industries is largely seen as beneficial, or at least tolerated, because they are seen to have brought greater convenience and lower prices to many millions of consumers.
But when it comes to financial business, these technology behemoths will have to forge partnerships with established banks in offering their “innovative” services. That’s because they don’t see the benefit of going it alone, considering the high cost and complexity in complying with banking regulations.
Take electronic payment for example. Customers using that service usually have to put some money first into accounts with the service provider, who is, in effect, a deposit-taking company that is not regulated or supervised like those regular deposit-taking companies, mostly banks, by the regulator.
As such, customers of these electronic payment service providers are exposed to the risk that their money may not be managed with the level of prudence required of banks and regulated deposit-taking companies. It can be argued that such a risk is minimal when the service providers are the industry leaders sitting on big piles of cash. But it is important to note also that even some large banks required government bailouts to stay afloat after the outbreak of the credit crisis in 2008.
It can be expected that finance will be a major area of innovation in coming years. Fintech has the potential of letting the Chinese mainland quickly catch up with developed economies in the advancing financial services and markets.
The technological infrastructure and business know-how for fintech development are readily available. The hard part is drafting a regulatory framework and establishing enforcement capability to ensure things don’t spin out of control, requiring corrective measures that are usually cumbersome, retroactive and counterproductive.
Hong Kong has vast experience in regulating complex financial systems and capital markets which withstood the onslaught of the Asian financial crisis in 1997 and, again, in the global credit crunch in 2008. The strength and resilience of its financial institutions in those testing times are testimony to the integrity of its regulatory environment.
That will be the key contribution Hong Kong can make to the mainland’s drive for innovation in financial development.