Feature_cover_710x350.jpg The financial gatekeepers of Hong Hong

If you want to do financial business in Hong Kong, you will cross paths with these men and their agencies. How they work together may determine your future. 

These are important days for Hong Kong’s financial and insurance community. There are far-reaching debates within our city and major global trends under way that will determine the financial future of Hong Kong.  It’s been 20 years since Britain’s lease on Hong Kong ended, and the city’s governance was returned to mainland China, and this has prompted plenty of comparisons between the world of 1997 and the world of 2017. 

Our cover story in this issue of The Peak features the four financial gatekeepers of Hong Kong. Over the past 20 years, our cover personalities have all witnessed enormous changes in their respective areas of interest. Insurance sales are up almost eightfold, prompting the creation of a regulatory agency to deal with it. Stock market capitalisation is up eightfold as well, while banking assets have doubled and Hong Kong has become a world leader in offshore yuan transactions and the IPO business of raising capital. The driving force behind all of this has been the economic growth and development of mainland China. At the time of the handover, Hong Kong's economy made up nearly 20 per cent of the GDP of China. Now, that figure is just under three per cent. 

Set against this 20-year upward trajectory has been some stark financial challenges. Just after the handover itself, there was the Asian Financial Crisis of 1997-1998, and in 2008, the Global Financial Crisis. Hong Kong has not been alone in tapping into the China story; other financial centres have been competing for the same business. Relatively few technology firms have decided to call Hong Kong home, preferring listings in more forgiving US equity markets. There is also the continued requirement of dealing with market malpractice and upgrading market quality. 

Against this backdrop, Hong Kong’s financial gatekeepers have never been subject to any sort of qualifications check or test for their jobs, nor is there such a qualification for any of the jobs at these regulatory agencies. Our four gatekeepers come from different backgrounds – Chief Executive of the Hong Kong Monetary Authority Norman Chan is a career civil servant; Chairman of the Securities and Futures Commission Carlson Tong is a retired accountant; Chairman of the Insurance Authority Moses Cheng is a former lawyer; and Hong Kong Exchanges and Clearing (HKEX) Chairman Chow Chung Kong a former business executive. 

Their diversity means they bring different types of knowledge and experience to the game. The relatively small financial community in Hong Kong means that the gatekeepers can get by with bilateral meetings and communications. 

This kind of chumminess may have sufficed for the previous 20 years, but will it do for the next 20 years? Hong Kong financial firms and markets are tightly linked to the mainland, and the four will need to work more closely with their mainland counterparts on cross border regulation. Nearly 40 per cent of insurance policies are purchased by mainland Chinese, over 60 per cent of our market cap are Chinese companies, and mainland Chinese are now trading 10 per cent of turnover via the two stock connects.

Meanwhile, HKEX is looking for big companies to raise funds through initial public offerings, including the proposed listing by Saudi Aramco, which if it happens, is expected to raise about US$100 billion (HK$780 billion), the biggest ever sum for an IPO. That estimate is based on the expected five per cent equity offering, valuing the company at US$2 trillion. 

Find the full article in the July/August issue of The Peak.

Feature_beltroad_710x350.jpg The road ahead

The much-discussed Belt and Road Initiative has had its name changed, its priorities set vaguely and commentators can’t stop debating it. But what does the expected expenditure of US$1 trillion on Asian infrastructure really mean for the future of Hong Kong’s financial services industry?

The Belt and Road Initiative, the sprawling signature policy of Chinese President Xi Jingping, has been gathering pace and headlines. In May, Beijing hosted the Belt and Road Forum for international cooperation, a two-day summit hosted by President Xi and attended by about 30 world leaders. The number of countries covered by the initiative has grown from about 60 to 70, and the 57 founding members of the Asian Infrastructure Investment Bank (AIIB) – the multilateral development bank that will be a major source of funds – increased to 77 in May, when another group of signatories signed up, including Hong Kong. In June, Deutsche Bank, the biggest European bank, signed a US$3 billion (HK$23.4 billion) agreement with China Development Bank to fund infrastructure in Belt and Road countries, and a few weeks later the AIIB made its first equity investment with a US$150 million commitment to the India Infrastructure Fund. 

The increase in interest resulted in many questions. What will be the key projects? Where are the best investments? What does China hope to gain from the project? Who will pay for it? And what are the opportunities and risks for Hong Kong? 

Many of those questions are still unanswered. But on the last question, a consensus of sorts appears to be emerging among Hong Kong’s business and financial experts: the Belt and Road Initiative will bring a broad spectrum of lucrative opportunities to Hong Kong, and the city is extremely well placed and prepared to take advantage of them. 

Despite the gilded talk, there are some serious risks and challenges as well. Hong Kong will have to compete against some formidable rivals to win those opportunities. It’s also likely that not all of the projects on offer will be deemed profitable after going through rigorous risk assessments. There are political risks, as firms try to curry favour with Beijing and its state-owned enterprises, thus exposing themselves to the prospect of dealing with politically driven white elephant projects. 

And some projects will require decades to bring results and returns. Many of the proposed “Belt and Road” countries are themselves difficult investment locales. Pakistan's Gwadar Port, a key component of the Belt and Road Initiative, recently saw an attack by gunmen, which killed ten construction workers. The attack was committed by the Baloch Liberation Army, which claims that locals have not benefitted from oil and gas wealth, and which advocates for independence from Pakistan. Pakistan has responded to violence by reportedly creating a special army division tasked with protecting Belt and Road related projects that connect Xinjiang with Gwadar. 

Other countries and regions that are investment targets, such as the Central Asian nations, are rated as highly corrupt, according to Transparency International.

Find the full article in the July/August issue of The Peak.

Feature_dual_710x350.jpg A Dual Discussion

Hong Kong is re-joining a global debate about dual-class shareholding structures. But the pressure to allow these structures at the behest of tech companies where owners wish to retain control of their companies masks structural problems, particularly as global institutional investors are fighting back.

In the modern era of finance, the notion of “one share, one vote” lies at the heart of corporate governance. The idea that shareholders should have voting rights of the companies they are invested in, at a level proportional to their ownership is, in many ways, a basic tenet of capitalism. 

Shareholder meetings, annual events where shareholders come together (online or in person) to vote on corporate strategy or boards of directors, have become capitalist carnivals in some cases. The most legendary are the annual shareholder meetings of Walmart and Berkshire Hathaway (Class A shareholders only). These events can feature day-long parties, music and dance performances, Q&A periods, speeches, and of course, voting. 

In 2015, Hewlett-Packard (HP) began holding online-only shareholder meetings, in a bid to encourage participation and cut costs. The previous year, the HP shareholders meeting saw reverend Jackson push HP chief executive Meg Whitman to encourage more diversity in Silicon Valley at the highest levels. More recently, shareholder activists in Switzerland’s private banking and asset management industry have voiced concern over high pay packages for underperforming top executives. Such are the benefits of one share, one vote systems of shareholding and corporate governance. They allow shareholders to weigh in on the fate of their investments. 

But in recent years, investors have come under increasing pressure, by technology companies in particular, to accept dual-class shares; that is, shares with reduced voting rights, or even no votes at all. Such share structures give company owners or founders access to capital market financing, but without ceding much, or any, control of their company. 

Despite their recent prominence, these forms of dual-class shareholding structures, specifically where one class of share holds more voting rights than others, have actually been around for nearly a century. As far back as 1925, the Michigan-based car marker Dodge Brothers, which ultimately sold to Chrysler, was listed on the New York Stock Exchange (NYSE) with a dual-class shareholding structure that allowed for the owners of just 1.7 per cent of the equity to control 100 per cent of the voting power.

It wasn’t until 1940 that the NYSE prohibited listed companies from issuing any non-voting equity, and furthermore limited the aggregate voting power of any superior-voting stock to exceed 18.5 per cent of all outstanding votes. While this wasn’t an outright ban on dual-class (or multi-class) shares, it limited multi-class listings to the extent that in 1985 there were just ten such listings on the NYSE. 
For decades, the “one share, one vote” rule guided US securities markets.

But in the late 80s and early 90s, increasing competition among US exchanges for listings business saw a change in policy. The major US exchanges began to allow multi-class structures with no restrictions on voting rights whatsoever for initial public offerings (IPO). The U.S. Securities and Exchange Commission (SEC) attempted to ban the practice in 1988 in an apparent effort to level the playing field between exchanges, but a court subsequently ruled against the equity market regulator.

But it was Google’s (now Alphabet Inc.) IPO in 2004 that triggered what was to become a wave of technology IPO’s with multi-class shares. In Google’s IPO, new investors would receive Class A common stock carrying one vote per share, while the founders would retain Class B common stock with ten times the number of votes per share. In 2012, Facebook similarly issued Class A and B stock with one and ten votes per share. Between 2012 and 2016, some 15 per cent of technology companies that went public in the US used dual or multi-class shares; up from eight per cent between 2007 and 2011, according to University of Florida finance professor Jay Ritter.

While the likes of Facebook and Alphabet offered shares at IPO with at least some voting power, Snap Inc., the company behind social media platform Snapchat, took things a lot further when they went public earlier this year, offering shares that carried no voting rights whatsoever. It was the first incidence of an IPO of non-voting stock on a US exchange. The Class C stock, held exclusively by co-founders Evan Spiegel and Bobby Murphy, ensure that the 27 and 28-year old CEO and CTO, controls nearly 90 per cent of the company’s voting power.

Proponents of such dual or multi-class structures that offer limited voting rights to shareholders argue that they give the founders, typically those with the original vision behind the company itself, the ability to focus on the long-term growth of the company rather than short-term decisions that might help bump quarterly reporting metrics at the cost of longer-term value creation. In the so-called “fast growth period” of a firm’s life cycle, company leaders may also need to focus their full attention on advancing the firm’s growth, and therefore providing some protection from outside takeover threats would be a good idea. 

Find the full article in the July/August issue of The Peak.

Feature_property_710x350.jpg Dublin’s draw

Long reputed as a small city with big city charm, will Dublin’s low corporation tax, connections with Europe, youthful population and abundant personality see it become a new creative and tech hub alternative to London?

Dublin is known for being a small but cosmopolitan metropolis, bursting with history dating back to the ninth century. Famous for its lively pubs serving pints of Guinness, a look beyond the clichés reveals a city rich in culture, packed full of museums, galleries, medieval castles and breathtaking cathedrals; all made the more charming by an outgoing and friendly local population.

The Irish capital is neatly divided by the River Liffey and beautifully set near the seaside – perhaps a source of inspiration for Samuel Beckett, William Yeats and Oscar Wilde, to name a few literary greats who have called Dublin home.

While the southern parts of the city have traditionally entertained the more exclusive end of the property market, exemplified by attractive Georgian townhouses, the northern reaches of Dublin, traditionally viewed as more working class, are now coming up roses for both buyers and investors alike.

Find the full article in the July/August issue of The Peak.

August 2017 Issue