HK, Shenzhen ideal cities for cross-border fintech supervisory sandbox
As financial integration and innovation continue in the GuangdongHong Kong-Macao Greater Bay Area, the risks associated with financial technology are also becoming more complex, intricate and deceiving. Thus, it is urgently necessary to examine a cross-border regulatory mechanism that can be adapted to the attributes of the Greater Bay Area.
A fintech regulatory sandbox can help effectively strike a balance between risk prevention and control and financial system innovation. At the same time, it will explore new financial supervision measures as China further opens up its financial markets and deepens reforms.
A regulatory sandbox conducts pilot trials of a fintech initiative involving a limited number of real customers or users within a certain time frame. When the initiative passes the trials, the sandbox managers will make a detailed assessment complete with their recommendation to the relevant authorities on whether it can be formally launched in the financial market.
Since the United Kingdom’s Financial Conduct Authority launched the first regulatory sandbox in the world in May 2016, regulatory authorities in many countries or regions, including Singapore, Hong Kong and the United States, have launched their own versions of supervisory sandboxes to explore and develop a pilot mechanism suited to their market conditions. At the end of 2019, the Chinese mainland launched its own version of a regulatory sandbox called the Fintech Innovation Regulatory Trial, which included, as of the end of February 2020, a total of 83 innovation projects in nine cities.
However, there remain many obstacles in piloting a cross-border regulatory sandbox system in the Greater Bay Area. Different from the other three major bay areas overseas, as well as the Beijing-Tianjin-Hebei and the Yangtze River Delta city clusters, the Greater Bay Area spans three administrative regions, each having its own separate legislative power, currency, exchange rate system and capital flow management. There is no precedent for such a setup at home or abroad.
Because of different fintech regulatory concepts, rules and procedures adopted by the regulatory authorities in the two special administrative regions and Guangdong province, a seamless communication and collaboration mechanism is particularly crucial when it comes to piloting a cross-border regulatory sandbox in the Greater Bay Area.
I believe that Shenzhen and Hong Kong are well-positioned to take the lead in piloting a cross-border regulatory sandbox. The reasons are as follows:
Firstly, Shenzhen and Hong Kong are neighboring cities. Since Shenzhen became home to many Hong Kong-invested laborintensive manufacturing enterprises in the late 1970s, it has maintained close ties with Hong Kong in the areas of cross-border personnel, business and trade exchanges, together with financial cooperation. In 2020, the scale of cross-border revenue and expenditures between Shenzhen and Hong Kong were projected to exceed $500 billion, accounting for 65 percent of the total cross-border revenue and expenditures for Shenzhen, which leverages on the whole country and is closely connected with Hong Kong as an international financial center. Therefore, if the two cities are to carry out cross-border supervisory sandbox trials, develop cross-border finances and align their onshore and offshore finances, they have a unique advantage that other cities in the Greater Bay Area do not have.
Secondly, the supervisory authorities of Shenzhen and Hong Kong have reached a consensus on and developed a foundation for a supervisory sandbox. During their meetings, financial regulatory authorities from Shenzhen and Hong Kong expressed their willingness to form and operate a joint cross-border supervisory sandbox system. The Hong Kong Monetary Authority, the Hong Kong Securities and Futures Commission, and the Insurance Authority have all launched their own pilot supervisory sandboxes, with the HKMA being one of the core members of the Global Financial Innovation Network. As for Shenzhen, it is also at the forefront of supervisory sandbox research and pilot projects on the mainland. These conditions lay a good foundation for piloting cross-border supervisory sandboxes between the two cities. In addition, Shenzhen’s privately led economic structure is conducive to the implementation of the pilot program.
How should we implement the cross-border supervisory sandbox? I suggest it focus on systemic, integrated and platform-based cross-border financial innovation. It will be a platform that promotes intrinsic and integrated financial development between Hong Kong and Shenzhen. There are in particular two areas in which the two cities can work together.
One is a one-off cross-border supervisory sandbox pilot program, and the other is to use digital renminbi in the pilot program for converting capital accounts. The authorities can, under the investor suitability management framework, explore the use of digital renminbi to carry out the pilot program for converting capital accounts between Shenzhen and Hong Kong for entities with strong demand for cross-border financial services and risk control. On the one hand, the authorities can, by leveraging the convenience of digital renminbi payments, promote capital account convertibility and the internationalization of the renminbi; and on the other hand, the digitalized contract of renminbi and real-time transaction data monitoring can help effectively prevent and control risks.