Fintech Prospects in China’s Greater Bay Area

Context

In 2016, China published its 13th Five-Year Plan. This document communicates Beijing’s vision and policies for the social and economic development of China, and, amidst a period of uncharacteristic stagnation, this edition’s authors needed to outline new ideas to bring the country back to up to speed.

Ultimately, the communique addressed this issue with policy frameworks to promote innovation and economic openness. The state has accordingly taken a forward-thinking approach to maintaining its competitive edge and announced ambitious plans such as the One Belt One Road Initiative (BRI), a plan to promote China’s global trade standing through partnerships with several other nations throughout the EMEA.

To this end, China has already put its money where its mouth is. Beijing has lent vast sums of cash to partnering states for infrastructure development, but it also needs to develop its own robust contact-point along the BRI trading route. This is where the Greater Bay Area and fintech come into play.

Source: CGTN America

GBA: A Diversified, Disconnected Powerhouse

Although the GBA has only surfaced in recent major policy meetings, it has already proven itself to be one of China’s top performers. The region consists of nine Mainland Chinese cities and two Special Administrative Regions (SAR), but the three key players are Shenzhen, Hong Kong, and Macao. Despite accounting for 1 percent of the country’s landmass, the collection of cities produces 12 percent of its GDP [AA1] and exports. That translates to being the 15th largest economy and 4th largest exporter worldwide. In a similar vein, it has enjoyed an average 15 percent growth for the past 25 years. But what really makes this area special is its sheer variety.

Each major city possesses a specialty: Macao as a tourism hotspot, Hong Kong as a financial hub, and Shenzhen as a tech capital. Additionally, Hong Kong and Shenzhen host a strong array of fintech startups, such as WeLab and WeBank respectively. Yet Chinese officials believe they can unlock higher potential by connecting the cities — a task with unique obstacles.

The main issue lies within the “One Country, Two Systems” model, a policy that grants Hong Kong and Macau a degree of autonomy from Mainland China. As such, they operate in entirely different administrative zones from Shenzhen. If China wants to harness the full capacity of the GBA, then it needs to break down these barriers.

It has already taken the first steps, including physical groundwork like the Hong Kong-Zhuhai-Macao bridge (currently ranking as the longest sea-bridge in the world). More importantly, the officials highlighted the need to supplement the physical flow of goods and people with advanced information flows and have made this aim clear in the 2019 GBA Outline Development Plan. This necessitates the development of integrated systems with fintech solutions.

Cross-border Trade
Clearly, the whole operation would be in shambles if inter-city transactions still faced significant friction, so the Chinese government has decided to experiment with blockchain as a solution. In October 2019, Guangfa Bank, one of the largest commercial banks in China, began piloting a blockchain-based payment settlement system to facilitate trade financing amongst the municipalities.

Not only did it successfully process nearly 3000 loans for almost $8 billion, but it also demonstrated blockchain’s capability to refine customs procedures and reduce fraud — developments that have substantial implications for smaller businesses.

In trade financing, there is always risk for fraudulent activity. A typical example can be seen in duplicate financing, in which a supplier submits an invoice to multiple financiers to receive a larger revenue advance than what is truly owed. This in turn causes financiers to withhold credit from SMEs who already struggle with inconsistent cash flows.

Due to its immutable nature, distributed ledger technology can prevent some types of trade financing fraud. It provides data integrity and transparency in customs verification procedures between the regions, and it digitalizes the entire process to maximize efficiency. Large-scale projects like eTrade Connect, HKEX Blockchain Trade Settlement, and Tencent Digital Invoice Solution have begun development. However, serious legal barriers still stand between the administrative zones.

Legal Barriers
To attain full cooperation in the Pearl River Delta, physical flows must match information flows powered by fintech.

Tangible projects like the sea-bridge may accelerate cross-border movements, but intangible forces bring them to a halt. A Financial Times article puts it quite well:

“An animated advertisement produced by the Hong Kong government promises that it will be ‘simple and convenient’ to drive across the bridge to Macau. But first, it explains, drivers must obtain three separate permits from the Hong Kong, Macau and mainland Chinese governments, buy special car insurance for the mainland and Macau, and register their documents with the government of the mainland city of Zhuhai — a process that will take at least 12 working days.”

Source: Associated Press

If the simple act of driving across a bridge prompts this much bureaucracy, then one can only imagine the complexities that arise in the procedures necessary for a citizen of one zone to live, work, or conduct business in the remaining two. The underlying issue stems from inconsistent legal structures of the three administrative zones.

Hong Kong derives its system from British common law, Macau from Portuguese civil law, and the Mainland from its unique socialist legal system. Consequently, any kind of transaction, be it business or personal, requires all parties to surmount unnecessary regulatory hurdles.

Insurance Issues
For example, an “Insurance Connect” scheme for GBA was announced earlier this year. This initiative allows HK insurers to open service centers in the Mainland, establishing a stronger presence in the GBA and increasing cross-border business opportunities. On the other hand, issues emerge when these insurers begin to process relevant data for analyzing risk.

Source: https://www2.colliers.com/en-hk/news/insurance-connect-a-win-win-initiative-for-insurance-in-the-gba

Due to data privacy and protection laws (which do not exist in Mainland China), insurers face an uphill battle in processing claims for Mainland customers. Operating these service desks requires the firm to transfer data from HK to Mainland China and back again to HK, which comes with legal consequences. Legal firm Kennedy’s Law explains how HK data regulations require that the insurer must “seek consent from all data subjects to the transfer of their personal data to a GBA service desk.” Some practical problems that ensue:

To qualify as legal consent, the insurer must present the client with viable options to process data either in or outside HK, which then holds the firm responsible of arranging costly alternative processing centers. Moreover, in the case of insurance claims, the insurer must go through the consent procedure with every individual involved — counterparties, witnesses, doctors, investigators, and more — effectively rendering the costs of doing business unproductively high.

Integrated Distributed Ledger Technology (DLT)
According to a Deloitte report, this problem and others call for a fintech behemoth, encompassing several future technologies like blockchain, AI, and Big Data.

Deloitte’s graphic visualizing a Smart City DLT for personal information storage, granting institutions access to relevant identification data and individuals data protection and privacy. It is also projected that on top of the base value offered by blockchain, developers can build predictive analytical services for servicers that account for risk, such as Banks and Insurers. Source: https://www2.deloitte.com/cn/en/pages/financial-services/articles/fintech-strategy-for-the-greater-bay-area-in-china.html

Fintech offers key value here by hosting an integrated system for several financial services that demand personal information. Much of this lies in distributed ledger technology, which enables the cross-border flow of sensitive customer data by masking identities and thus protecting the privacy of individuals and businesses. In doing so, this would effectively comply with data protection regulations and create a sophisticated digital identification system, the latter of which having already enjoyed success in some locales.

Last year, Shenzhen implemented a digital identity verification system built on blockchain called “iShenzhen.” Citizens can utilize it for anything from proof of criminal record to business identification purposes.

The Deloitte team hypothesizes that this digital identity framework can apply to an array of cross-border information-sharing, such as KYC data, credit ratings, proof of supply chain compliance, legal and medical records, and pensions. Banks, courts, hospitals, and provincial governments could quickly retrieve necessary information for individuals traveling, working, and living in other GBA cities. Moreover, developers could tap into this collection of data to build predictive software and hedge illicit and risky cross-border behavior.

By affording firms and organizations a streamlined identity database, the Chinese bay area can minimize regulatory complications and promote a freer cross-border marketplace.

Conclusion
When and how such networks materialize is still undefined, and they will undoubtedly encounter roadblocks along the way. However, one thing is certain: China has grand designs for the future and sees fintech as a decisive factor.

The development of GBA is important because it links financial and legal talent from Hong Kong with the engineering expertise of Shenzhen, all in a region of 70 million within a country that boasts the highest fintech adoption rate in the world.

If the proper steps are taken, the future prospects of the GBA could place it as one of the most competitive fintech hubs worldwide.

Bocconi Students Fintech Society

Author:

References:

1. Bates, Richard. “Insurance Connect: Data Privacy Challenges for Hong Kong Insurers Setting up Greater Bay Area Service Desks.” Kennedys Law, 2020, www.kennedyslaw.com/pt/thought-leadership/article/insurance-connect-data-privacy-challenges-for-hong-kong-insurers-setting-up-greater-bay-area-service-desks/.

2. Bland, Ben. “Greater Bay Area: Xi Jinping’s Other Grand Plan .” Financial Times, 2 Sept. 2018, www.ft.com/content/fe5976d8-ab81-11e8-94bd-cba20d67390c.

3. CBNEditor. “Beijing Unveils Bold Plans for Financial Integration of Guangdong, Hong Kong and Macau ‘Greater Bay Area.’” China Banking News, 4 June 2020, www.chinabankingnews.com/2020/05/15/beijing-flags-financial-and-trade-integration-of-guangdong-hong-kong-and-macau-greater-bay-area/.

4. Chen, Janette. “GBA Aims to Become Global Fintech Centre.” Financial Magazine for Asia’s Decision Makers, 2020, www.theasset.com/treasury/41853/gba-aims-to-become-global-fintech-centre.

5. “China’s 13th Five Year Plan: the Land of Opportunity.” King & Wood Malleson’s, 2016, www.kwm.com/en/it/knowledge/insights/china-13th-5-year-plan-key-points-summary-new-normal-innovation-20160414.

6. “Fintech and the Greater Bay Area: Breaking Down the Barriers.” PwC, 2018, www.pwccn.com/en/research-and-insights/Fintech/fintech-greater-bay-area-breaking-down-barriers.pdf.

7. “FinTech Strategy For the Greater Bay Area in China: Deloitte China: Financial Services.” Deloitte China, 9 Sept. 2019,
https://www2.deloitte.com/cn/en/pages/financial-services/articles/fintech-strategy-for-the-greater-bay-area-in-china.html#

8. “For the First Time, Banks in the Guangdong-Hong Kong-Macao Greater Bay Area Realize Direct Connection to Cross-Border Financial Blockchain Service Platforms.” Securities Regulatory Commission, 2020, news.cnstock.com/news,bwkx-202006–4548467.htm.

9. “Global Fintech Adoption Index.” Ernst & Young, 2019, assets.ey.com/content/dam/ey-sites/ey-com/en_gl/topics/banking-and-capital-markets/ey-global-fintech-adoption-index.pdf.

10. “Greater Bay Area Outline Development Plan.” Guangdong Hong Kong Macau Greater Bay Area, 2019, www.bayarea.gov.hk/en/outline/plan.html.

11. “Greater Bay Area: What Does It Mean for Hong Kong .” The Hong Kong General Chamber of Commerce, 2018, www.chamber.org.hk/en/information/the-bulletin_detail.aspx?id=101.

12. “How China’s Wealth Management Scheme Could Work.” South China Morning Post, 9 July 2020, www.scmp.com/business/banking-finance/article/3092326/how-chinas-greater-bay-area-wealth-management-connect.

13. Lindsay, James. “The GBA Fintech Report.” Fintech Association of Hong Kong, 2019, https://ftahk.org/system/files/2019-07/The%20Hong%20Kong%20-Macau%20-%20Guangdong%20GBA%20Fintech%20Report%202019%20-%20FTAHK%20-%20Final%20May_2019.pdf

14. PricewaterhouseCoopers. “Talent Policy Defines Future Success of the Guangdong-Hong Kong-Macao Greater Bay Area: Executive Summary.” PwC, 2018, www.pwccn.com/en/research-and-insights/greater-bay-area/publications/talent-policy-wins-the-future-of-guangdong-hk-and-macau.html.

15. “Shenzhen Adopts Blockchain-Based IDs.” Greater Bay Insight, 10 Dec. 2019, greaterbayinsight.com/shenzhen-adopts-blockchain-based-ids/.

16. “Tencent CEO Proposes ‘Greater Bay Area’ ID.” South China Morning Post, 8 Mar. 2018, www.scmp.com/tech/article/2135568/tencent-ceo-proposes-electronic-id-greater-bay-area-residents-facilitate.

Fintech is the future of finance, are you ready to join the revolution?