Hong Kong redux

[00:00:10] Speaker A: Hello and welcome to Hacking Kaizen. I'm Graeme Newman. The past five years have profoundly shaped Hong Kong's political, economic and social landscape, capturing global attention and showcasing the city's dynamic and often tumultuous nature. The massive 2019 protests against the proposed extradition bill marked a pivotal moment, evolving into a broader pro democracy movement, demanding greater autonomy and police accountability. Clashes between protesters and police escalated, drawing international concern over Beijing's growing influence and highlighting fears of eroding freedoms under the one country, two systems framework. In 2020, Beijing imposed a national security law, criminalizing acts of secession, subversion, terrorism and collusion with foreign forces. Widely criticized for undermining autonomy and freedoms. This sweeping legislation led to arrests of prominent activists, politicians and journalists, drastically altering the political climate. International condemnation followed, with critics arguing the law dismantles the legal firewall between Hong Kong and mainland China, casting doubt on the citys future as a global financial hub. Press freedoms were also severely threatened, epitomised by the forced closure of Apple Daily newspaper and the arrest of its founder, Jimmy Lai. These events raised alarms about the erosion of free speech and press independence, with strong concerns voiced by the international community, including Reporters Without Borders and Human Rights Watch. The Covid-19 pandemic further impacted Hong Kong, disrupting its economy and daily life. Strict quarantine and lockdown measures, while initially effective, contributed to economic challenges and social discontent. The uneven recovery saw sectors like tourism and retail struggle excavated by prolonged travel restrictions and a cautious reopening strategy. Political reforms in 2021 transformed the landscape, ensuring that only patriots could govern. This overhaul reduced directly elected seats and increased Beijings influence over the electoral process, marginalising pro democracy voices and reducing political diversity. Record low turnout in subsequent elections reflected public disillusionment and if that wasn't enough, last year Hong Kong experienced its heaviest rainfall in 140 years, causing widespread flooding and highlighting the city's vulnerability to extreme weather and the urgent need for robust infrastructure. These events have led to significant economic shifts, with concerns about a brain drain as professionals, particularly in finance and legal sectors, move to cities like Singapore. This migration was driven by economic opportunities and the political climate in Hong Kong, though recent trends suggest some return migration as conditions stabilise. Despite the challenges, Hong Kong's simple and low taxation system and strategic location continue to attract businesses and talent. As the city navigates these issues, its future remains a topic of global significance and scrutiny. Hong Kong's resilience and adaptability, a testament to its people, continue to drive its reinvention. With me to discuss the future of Hong Kong is Andrew work a proud canadian first, Hong Konger and free market libertarian a close second. [00:04:03] Speaker B: Sometimes you get this question of, you need to get asked to go to your kids school. And they say, oh, talk to the kids about your career. And I'll be like, my what? Excuse me? I've done a whole bunch of different things. Most of them have had communication at their core, whether it's written communication, connecting people, speaking on radio, you know, it's all about communication. So, Andrew, work, I mean, list of titles. Executive director of the Self Storage Association, Asia radio presenter on RTHK radio. Three on two different shows. One called money talk about money and markets, and another one back chat about policy and politics in Hong Kong and beyond Hong Kong's borders. A little bit of political commentary, a little bit of writing, and professional master of ceremonies and auctioneer around the world. So, yeah, all of the above. [00:04:49] Speaker C: So here we are at the Foreign Correspondence club in Hong Kong. Let's start with a big question. Hong Kong post Covid recovery. Are you guys back? [00:05:00] Speaker B: We're getting there. Hong Kong is getting there. But I think it's not what people are expecting. It's been a very strange situation and a big adjustment for the city. And it really depends, industry by industry, what you are getting. I think some of the big headliners where you've seen a big fall off are ipos. But then, on the other hand, the entire world is in a bit of an IPo slump in the post Covid era. I mean, it's especially noticeable here because Hong Kong was at the top of the IPO charts for so many years in a row. So for Hong Kong to fall down the ranks, it's a big deal for Hong Kong. Tourism is another one where Hong Kong has a little bit of a weird story. Prior to Covid, people in Hong Kong weren't all that excited about going to China on a regular basis. But since after Covid, something changed. And with the introduction of the high speed rail in Hong Kong, it's now 15 minutes to Shenzhen and then less than 30 minutes, I think, now to Guangzhou. And if you have status in either of the two places, it's very easy to get back and forth, back and forth, get on the train, off the train with very little hassle. And so that, combined with China's, with the economic slowdown in China, means things have gotten really cheap across the border and kind of for the day to day things that people like doing in Hong Kong on the weekend, going to chinese restaurants, going shopping, it's a lot cheaper to do that across the border now. And from what I hear, pretty good quality people really enjoy it. If you're for Hong Kong's more eclectic activities, that's the sort of thing that brings people to Hong Kong. But I wouldn't say dollar value, that it's made up the difference. [00:06:40] Speaker C: You talked about bringing people to Hong Kong, and I guess I'm going to ask a provocative question here. To what extent do you think Hong Kong has suffered the brain drain to Singapore? [00:06:54] Speaker B: In certain industries, it's been massive, especially in finance. A lot of banks moved, entire capital markets, divisions. Wealth management especially was another one where people just moved wholesale down to Singapore. Now, a lot of people didn't like it. A lot of people didn't want to go. Salaries aren't as high in Singapore. Still, in the banking industry, Hong Kong, you get paid a lot more to be in this city. I think there's a 30% to 40% premium if you're working in Hong Kong. After about a year and a bit, what happened was that there were so many people going to Singapore, that rental started going through the roof. I knew people who live in Hong Kong own properties in Singapore and said they could double rents. So imagine you're an HR manager and you said, oh, great. All those people that we moved down here two years ago, they're coming back and saying, we have to double their housing allowance. CFO is not going to like that. So that flood has stopped now, but there's a little bit of those people starting to come back to Hong Kong. I knew people that got transferred. They didn't even pull their kids out of school in Hong Kong. They just said, I'm going to. I'll be on the job with temporary residences in Singapore until I can quit and find another job in Hong Kong. So, I mean, I think that that flood to Singapore has slowed down. They've had pushback in Singapore against such high numbers of immigrants coming in. And so then things have just gotten so expensive. So I think that that wave is done. We're starting to see people coming back to Hong Kong now. [00:08:17] Speaker C: You mentioned banks, financial services, and I guess there's also legal, which is the backbone of the economy here. The elephant in the room is, of course, serious journalists, journalism and media. [00:08:28] Speaker B: Yeah, there's been a shift. I mean, there's been some big announcements recently. I think the Wall Street Journal just announced that they're going to be moving their entire bureau down to Singapore and that a lot of people weren't going to make the move, that they were going to be leaving the paper so that was a big shift. I mean, Singapore is seen as more neutral ground because you can make critiques of the bigger players in Asia without having to worry about it. I mean, if you don't have to criticize, you know, if you're living in Singapore, you don't want to be too critical of the government if you're living there. But, I mean, you can kind of get away with not doing too much of that, you know? But if you want to maintain your reputation as a reputable publication, you got to be able to, you know, call out China when required. And I guess some of these publications don't feel like they can still do that in Hong Kong. [00:09:15] Speaker C: On the upside, in terms of getting talent parachuted in, I think 120,000 people have settled in Hong Kong since 2022. A proportion of that is made mainland Chinese. But there's also talent coming in from Southeast Asia and other places, right. [00:09:30] Speaker B: And all around the world. I was here in the FCC a few nights ago and randomly met a guy who came here two years ago. He's a neurosurgeon specializing in using immunotherapy, specialized tailored t cells to attack brain tumors. Really interesting stuff. And he came here under that scheme, and I was really impressed. I mean, doing really incredible work here. So you are starting to meet more and more of those people that have come here that are doing legitimate, groundbreaking work. [00:10:00] Speaker C: And that leads me on to the next question. As I alluded to before, financial services and legal is the backbone of the economy here. Before that, it was manufacturing. If you're a certain generation age, you grew up with a made in Hong Kong toys and games and cheap products. But we're seeing more R and D. We're seeing more patents, more trademarks being registered in Hong Kong. And on the R and D side, as you mentioned along the sciences and biosciences, there seems to be a regeneration of professional R and D expertise. [00:10:40] Speaker B: Yeah, well, the government's definitely putting some money into it. I mean, some of the bigger, the older first wave projects like Cyberport didn't work out quite the way they wanted, but the science and technology park's really taken off now. They're going to be going for the third wave with this new northern metropolis project, and they're going to be putting a lot of emphasis on it. So it feels like with each successive wave that each one is bigger. They get more of it right each time. And so, you know, some people are wondering if we're going to have another white elephant on our hands. But I would say you know, Hong Kong does learn from its mistakes. I mean, some of the older projects, you know, that were started literally in the 1990s, we're talking like almost 30 years ago now, didn't work out the way people thought they would. But the later generation projects have been much more successful. So I think they're going to be able to improve on that. [00:11:24] Speaker C: And what would you like to see. [00:11:25] Speaker B: More in Hong Kong? More underground, down in dirty Hong Kong? That's what people come here for. I think there's been maybe at the top official levels, they want to see things that, you know, they kind of have a big picture and they feel a lot of responsibility to make things happen at the government level. But, you know, they're not really designed for it to make things happen bottom up. That's not really how government works. The best thing government can do is get out of the way. So I'd like to see a reduction in red tape, as a, one of my friends mentioned as we were having a lunch and talking about it, he called it a bonfire of red tape, was what was needed. Because where I do see green shoots, for example, in the tourism industry, a lot of it is things that the government, I mean, just could not have predicted, because that's not what they do. Right. It's underground music, it's arthouse cinema. It's really a different flavor of things that bureaucrats are not going to come up with. It's just, you know, not because it's the problem with them. It's just that's not what they do. [00:12:21] Speaker C: The economy side of it done tick. But we need to work on the cultural and societal areas. [00:12:26] Speaker B: I think a lot of people would say that we're still working on the economic side of it as well. I mean, Hong Kong still has some massive advantages over even its closest competitors, like Singapore. Like, for example, taxation is a huge one. I'm still surprised at the things that, you know, that are taxed in Singapore, how they run their taxation. It's perceived as a low tax jurisdiction. But if you come from Hong Kong, not so much. I mean, Hong Kong, there's two things. You've got to keep taxes low, and you've got to keep them simple. It's just as important to keep them simple. So that's something that, where Hong Kong has a big advantage, Hong Kong, I think, does need to focus on its role as an international crossroads, not be too dependent on China. [00:13:05] Speaker C: Well, let's talk about that role in terms of Asia Pacific perspective and a global perspective has that role, and that relationship changed. [00:13:14] Speaker B: Yeah, I mean, there's been this huge focus on, you know, Hong Kong is a gateway to China, and Hong Kong definitely did well off of China's coming out to the world. But let's face it, if you want to do business in China now, you go to China. I mean, a lot of people know that. And, you know, I know some people aren't going to be happy with me for saying this, but this concept of a greater Bay Area, like, we're all going to be Hong Kong is just going to meld in with Guangzhou, Macau, Shenzhen, Dong Guan. It's not going to happen. I remember this even years ago. Entrepreneurs, four expatriate entrepreneurs running successful businesses in Guangzhou and Shenzhen. It was asked, when will you expand to Hong Kong? They were like, why would I do that? The payment systems are different. I can't even sign people up to pay for my product because we use WeChat pay in China, which people don't use in Hong Kong. The language is different, the culture is different. The pricing is, the price structures are different. Much easier for me to expand into the rest of China than it is to cross the border and try to do business in Hong Kong. They were like, I wouldn't even think about it for 30 years. So I think that expectation doesn't really work. I think Hong Kong has got to focus on being an international crossroads. [00:14:23] Speaker C: Yeah, that was one of the questions I wanted to ask you, Andrew, from a southeast asian emerging market position. Let's say we have a company, that startup has got Series A funding, or it's an established family company, looking to expand, looking to go to Northeast Asia, specifically China, and develop products and services in that area. What's the point of coming to Hong Kong? [00:14:45] Speaker B: It's funny, I just had somebody last week ask me about, he's setting up a company, and he's living in Bangkok right now, and he was thinking, I might do it Singapore, I might do it Hong Kong. I was like, hands down, no questions asked, do it in Hong Kong again, simplicity of setting up an organization taxes any income you earned, earned outside of Hong Kong. Hong Kong is not interested in. They're not going to tax it. So if you set up your company in Hong Kong and you're working all around the region, you might never have to pay any taxes. You know, you got to cover for the audit. But other jurisdictions are not so forgiving, and they're usually much more complicated, which makes means that they are more demanding in terms of, you know, how much time you have to spend keeping track of all your expenses and all your accounts and then reporting and then improving. And, I mean, it's just when I look at other jurisdictions and I think about setting up companies in those, I'm like, I don't even want to touch it with a ten foot pole. We've been spoiled living in Hong Kong because they make it so easy. [00:15:40] Speaker C: Well, that's very good news. Again, for our audience who are in Southeast Asia, the go to place would be Singapore, but there seems to be value and benefit that we also have Hong Kong as an option. [00:15:50] Speaker B: Yeah. And, I mean, another thing to consider is that Singapore is a company town with a very clear strategy for where they want Singapore to go. And they like to think about, not only they don't think about that generically, they think about all the little pieces as well. And so if you don't fit into that, you're not going to find you're very welcome in Singapore. You know, you really need to mesh with their plan. Hong Kong doesn't really care so much. You know, they recognize that we just listen. We make it easy to register our company. We have low taxes. We're not interested what you do anywhere outside of Hong Kong. We're just going to make it easy for you and trust that that's going to work. And that does work for Hong Kong. [00:16:33] Speaker C: So how does that work in reality? Let's say we have this series post series. A company that's in Bangkok has established an entity in Hong Kong, but we want to sell in Shenzhen. We want to sell in China. How does that work in reality and. [00:16:49] Speaker B: Get your China visa across the border, go out and try to make a sale. I mean, it's that easy. I mean, I think if you were in Southeast Asia, the reason you might want to establish a country, establish a company where you are living is to get a visa, right? And, I mean, obviously, if you establish a company in Hong Kong, that's not going to help you with your visa status in Thailand or Singapore or Malaysia. So, I mean, sometimes people have immigration factors they have to consider. But, I mean, if you want to establish, a lot of chinese companies will prefer for you to do business with their company in Hong Kong. It's simpler. It's easier. The money flows in and out of Hong Kong, a lot easier, you know, to bank accounts. Even now, even in this day and age, you know, we do something simple where people have to pay us $1,000 worth from a chinese company. They'll be like, I will just bring cash next time I see you because it is still very troublesome to get money out of China, which, of course, still has tight capital controls. [00:17:48] Speaker C: And I guess the other concern, again from an observer's perspective, is the increasing political instability on the Taiwan Straits. What's going on from a us perspective? And there was a story recently that 90% of the semiconductors in the world are actually manufactured in Taiwan, 90% of. [00:18:08] Speaker B: The high end ones, without which civilization as we know it would end. [00:18:13] Speaker A: Yes. [00:18:14] Speaker C: And as we are migrating towards an AI based economy, there is a need for China to be self sufficient in this space as well. So I guess that's a space. There's an opportunity there. [00:18:25] Speaker B: Yeah. Both the chinese and american governments are pouring tons of money trying to make themselves independent of having a supply chain that is absolutely resting upon Taiwan's expertise. I mean, from China's side it makes perfect sense. From the american side, it makes perfect sense. Not so good for Taiwan. So, I mean, there's also, the Japanese are investing in trying to upgrade their chip production capability. So, I mean, everybody's trying to up their game, but nobody has been able to replicate what the Taiwanese can do. [00:18:55] Speaker C: There was a story recently, the big fund three, China's chip fund gets 344 billion yuan boost. [00:19:02] Speaker B: Yeah, well, they're talking about this. The new next generation fabs are going to require up to trillion, like literally a trillion dollars to build the next generation. I mean, some of these bets are incredibly, incredibly long bets. It was the high ultraviolet lithography, I think it was called, that required 25 years. They made a 25 year bet on developing that technology. There were two paths that they could have taken, and the high spectrum ultraviolet turned out to be the right one. But for 25 years, they didn't know if that bet was going to pay off as they poured billions of billions of dollars into it every year. Not a couple of billion over 25 years, billions every year. And it finally paid off. So, I mean, you can spend the money, but it's no guarantee you're going to get the results. [00:19:48] Speaker C: Speaking of spending money, a lot of people are very interested in your insights about e renminbi, China's new central bank digital currency. Can we unpack that? [00:19:59] Speaker B: So the concept of a central bank digital currency merged with crypto. Crypto was evolving outside of governments, and governments looked at that and said, we want to get in on it. Now, there's a couple of different types of central bank digital currency, CBDC. You can think of them as either a retail version that would be used by people in their everyday life or what they call a wholesale central bank digital currency. And that would be used for transactions between big banks when they were moving billions of dollars back and forth. Most of the world has decided that it's mostly just useful for the big transactions, what they call the wholesale central bank digital currencies between the central bank and big banks when they're moving billions of dollars overnight to make transactions move faster and more efficient. Retail central bank digital currencies. There's a few examples of them around the world, and China is in the process of developing theirs because they have different objectives of what they want to do with it. [00:21:01] Speaker C: Is this the same as WeChat pay? [00:21:03] Speaker B: No. So the difference between something like your WeChat pay, your google pay, that is what we call a digital cash. Normal money, when you move it around, if you move money through your bank accounts, you transfer money to your friend, you're not really moving anything, right? There's an imaginary ledger that goes up on one side and down on the other, depending on who's giving and who's taking the money. And at the end of the day, the bank's got to reconcile it for reconciling all those ups and downs of all those little transactions. Nothing really moves but a central bank digital currency. Each unit of currency has a unique marker, like cash has a serial number on it. Right? The difference, though, is that with the central bank digital currency, the government that issued the central bank digital currency can see each of those pieces of cash as they move around the system. They know where they've been, they know where they are, and they can trace its track almost like as if you had a $100 bill and it had a little radio tracer on it and it identified. It said, oh, I'm sitting in Graham's pocket now. Then he gives it to me, oh, now I'm sitting in Andrew's pocket for 43 days until he goes and puts it somewhere else. Right? That's the difference. It's an actual individual piece of software with a marker on it that is constantly talking to the central bank that issued it. [00:22:21] Speaker C: So are we seeing the kind of surrogate of blockchain actually crossing over the law of innovation? [00:22:27] Speaker B: I mean, when you describe it at the top level, it seems similar, but it's not. Right? Blockchain is a way of keeping track of things. But this is different in that each, like I said, each individual unit of currency has its own marker and is kind of speaking to the central bank all the time. It's kind of pinging the central bank, as it were, to say, here I am. Here I am. So a little bit different. The China central bank digital currency will not be using blockchain technology, and this is what distinguishes it from a lot of crypto. [00:22:56] Speaker C: So I'm guessing this is a cheaper and more practical solution to international transactions outside of US led global financial systems. [00:23:07] Speaker B: I don't know if it's easier or cheaper. I mean, China already has an excellent digital cash program through WeChat pay. And these things, I mean, they're perfectly fine. They work. This is why it's been said that there will be some problems in getting the chinese public to take up the central bank digital currency because they already have a perfectly workable solution. That's really good. But if China wants to go international, that's a whole other question. Right now. The system of international bank transfers goes through Swift, which is dominated by the United States and their european partners and countries that, you know, when sanctions are imposed against a country like Iran or North Korea or Venezuela, it's the ability to move money through swift, how that control is exercised, how sanctions are enforced. China's building its own platform, CIPs. Right now, it interfaces with SWIFT, but banks and other financial institutions around the world, and not just chinese connected ones. Bank Paribas Z Bank. Right. They're also adopting the system, and it will become an alternative to SWift, and it will diminish the ability of the western powers to impose their financial will on other countries. And that it's coming. It's coming. And then you marry that with the new central bank digital currency, China will have the ability to see where the currency is going, see where the flow is, and control it through an international monetary exchange system outside of the american dominated SWift. That's a game changer. [00:24:37] Speaker C: It's a game changer, and it's certainly something that I think we want to see in this part of the world. Clearly, America's economic and political footprint here is reducing and there's more of an autonomy as emerging markets, again in Southeast Asia are looking for funding and government bonds with China, Korea and Japan rather than looking towards the US. There is a great degree of autonomy, and as are neighbors, that's becoming more embedded, I think. [00:25:04] Speaker B: Yes, I mean it. So, for example, I mean, so let's say we have an adoption of a system that the Americans and everybody doesn't control. That means that weakens the global system of anti money laundering. It weakens the systems of tracking money for terrorism, but it also gives people back some of their financial privacy. You know, and there's. There's a. There's an idea that the Americans are going to regret giving so many people a strong incentive to get off their system and to join China's system, because it means that the Americans will not be able to control those things that are important to them. Now, of course, China also has an interest in fighting terrorism, in fighting anti money laundering, especially because they have capital controls. But if, you know, right now they're getting the best of both worlds, they're developing their own system, but they can still get the benefits of AML and anti terrorism controls through swift. But if the parties all become too antagonistic, then they stop cooperating with each other. And then if I'm plotting against China, I move through the western system. If I'm plotting against the West, I move to the chinese system, and then everybody loses on that front. And then, of course, the third, the spoiler and all that is crypto. And crypto is moving through the Internet and not necessarily going through either one of those systems as much as regulators try to control it. [00:26:18] Speaker C: So, taking a leaf from the CCP's book, it's the only country in the world that actually publishes what it's going to do every five years. And I think. I think that's quite admirable. I can't think of any other government that actually prints what it's going to be doing and intends to be doing every five years. What I want to know is, what's the Andrew work? Five years in Hong Kong. Where would you like Hong Kong to be? [00:26:41] Speaker B: Geez, I've never really thought in five year terms. I think North Korea does it. I know the Soviets used to do, and so maybe I don't. Those aren't precedents that I would want to follow, necessarily. Five years. I'm married to a very strong willed cantonese woman. She probably has a five year plan that she does not publish and does not tell me about. And I'll probably get carried along by that plan to see where I am in the next five years. I mean, and as for where Hong Kong is going to be five years from now, again, I think that those. If the government can figure out how to get out of the way, the next generation of entrepreneurs will prosper, and they will. They will make the action happen. We're already seeing it where they're off the radar. It's like, to the point where I don't even necessarily want it to be spoken about in public, because then some bureaucrat might decide they have to come along and try to control it or take credit for it and ruin the whole thing. But tourism is a big one, and I mean, where there's underground music is happening in Hong Kong, totally not part of the government plan. And you go in and there are japanese and there are korean and western tourists, and you're like, oh, there's a whole bunch of korean guys. You'll be like, hey, where'd you guys come from? And they're like, oh, we're here from Seoul. We came and we're planning to see these six bands play in Hong Kong this weekend. All little small underground clubs. I'm like, how did you guys find out about this? And they're like, oh, yeah, no, people know. You know, people who like this kind of music know that you go to Hong Kong now for it. They're like, ah, okay, cool, cool. Never bet against Hong kongers. I mean, the city, the people have a way of finding through things. It has to do with the genesis of the modern Hong Kong in the 1950s, you know, post world War two, the 1950s, sixties, seventies and eighties. And there is a. There's really a spirit of can do in the city. And even if, you know, the political situation is a little messy, Hong Kongers will find a way. [00:28:34] Speaker A: My thanks to our guest, Andrew Werk. There on our website, you can find the program notes and a reading list for this episode. Hacking Kaizen is produced by DSA. James engineered the show. We'll be back at the same time next week. But until then, from me, Graeme Newman. Many thanks for listening.