Hong Kong has strong advantages and enough infrastructure to develop its internet finance industry.
The high savings rate and low interest rate have resulted in huge investment demand among local residents. The per capita GDP in Hong Kong is six times that on the mainland, and the city’s savings rate also ranks among the highest worldwide.
Local investors have abundant capital and strong incentive to invest. Also, the interest rate on deposits is very low. Investors have very limited options to get stable and high returns.
Therefore, if one platform could offer fixed-income wealth management products through online distribution and other easily accessible channels, investors would definitely be interested.
Meanwhile, the city has a mature regulatory framework and developed credit record system, which are two key elements in developing an internet finance industry.
Very limited regulatory oversight over internet finance is one of the key issues on the mainland. However, in Hong Kong, the financial regulatory framework is quite competent.
According to the Banking Ordinance, the regulatory framework covers three categories of authorized organizations, including licensed banks, restricted licensed banks and deposit-taking business.
In case of a default, the procedures for the withdrawal, treatment and auction of collaterals are fairly open and transparent. That has considerably protected the legal benefits of the creditors.
Hong Kong is also at the forefront of the credit system. TransUnion, the most respectable credit information provider in the city, has credit records of 4.7 million consumers. The credit rating of different borrowers will facilitate financial institutions’ credit analysis and risk pricing.
The city has a number of excellent financial institutions with outstanding risk pricing capability. As a global financial hub, it has been home to a large number of large and reliable financial institutions. The financial products in the city are more competitive than those on the mainland in terms of regulation and quality.
The core of internet finance should be finance, which is all about risk management and risk pricing capability. Internet only serves as a platform. To succeed, internet finance companies have to offer reasonably-priced quality products to investors.
There are no firewalls in the city’s internet space, allowing anyone to connect to other parts of the world freely. As a city with a relatively small population, Hong Kong offers free access to internet as well as free capital flows.
It has already turned itself into a key global financial city; it could also become an internet finance hub.
Looking around, Hong Kong has lagged far behind its rivals in the sector. The United States has LendingClub, Prosper, ZestFinance, and there are Yuebao, Lufax and WeBank. It’s quite an embarrassment for the city, which is known as one of the world’s freest economies.
There are three main reasons behind this slow progress. The city lacks innovation in finance regulation. The rigid regulations aimed at protecting retail investors have restricted the scope for these investors. And many financial institutions are quite happy with the status quo and lacks motivation to innovate.
Hong Kong has provided internet services as early as in 1990s, and it’s one of the first cities in Asia to offer such services. The developed telecom market also paves the way for expanding the internet finance industry.
In terms of manpower, the city has the advantage of having a huge pool of high-caliber financial talents. It also has a hands-off government as well as mature market system and rule of law. All these factors will contribute to a promising future for those venturing into internet finance.
This article appeared in the Hong Kong Economic Journal on March 11.
Translation by Julie Zhu
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