The current group of Internet firms in Hong Kong is really Hong Kong’s second wave of companies. The first were web design services and ISPs founded in 1995 or 1996, many of which went under in the Asian crisis of late 1997.

During the Asian crisis Hong Kong experienced its first recession in many years, immediately after handover from Britain to China. The property market slumped and the government had to intervene in the local stock market to support both the currency and the economy.

Rents plummeted, with the effect that new Internet companies were able to afford premium offices with good telecom connections, air conditioning and readily accessible floor and ceiling cable spaces. As the economy recovered in 1999, the Stock Exchange branched out with its GEM (Growth Equity Market) and a rash of start-ups launched IPOs or sourced venture capital funding to take advantage of dotcom mania, which was every bit as marked in Hong Kong as in New York or London. After the party came the hangover, and in 2000 GEM was a sorry sight, with most 1999 listings below their offer price, and a queue of aborted IPOs rapidly running out of cash.

Since then, it has made steady if unspectacular progress. GEM market capitalisation at the end of September 2003 was HK$67,987 million compared with HK$53,398 million on the same date in 2002, an increase of HK$14,589 million or 27 per cent. The total number of listed companies was 179 on 30 September 2003 against 153 on 30 September 2002. Equity capital formation in the first 6 months of 2004 through initial public offering (IPO) and post-IPO fund-raising totalled $3.9 billion on GEM, compared with $972.0 million in the first half of 2003. In 2005 GEM was languishing, with just three listings up to August raising a total of HK$136m, market capitalisation of HK$65bn and average daily turnover running at just HK$70m.

A shot in the arm for GEM came in September, 2005, with the HK$400m listing of Mainland internet service company FibrLink Communications.

FibrLink is a subsidiary of the mainland's largest electricity grid builder, State Grid Corp of China, and calls itself 'an integrated provider of solutions and services that support the internet and other public and private data, voice, and multimedia communications networks, using terrestrial and wireless technologies'.

The two rounds of Internet development have left Hong Kong with a wide range of established Internet firms that run the gamut of B2C, B2B, WAP and infrastructure companies.

The most famous is of course PCCW. Its boss, Richard Li, second son of tycoon Li Ka-shing (Hutchison Whampoa) had access to large amounts of capital and unmatched personal connections, allowing him to build up Star TV, eventually sold to Rupert Murdoch for $950m.

The younger Li has invested much of that profit in Pacific Century CyberWorks, a company which dubs itself "the largest communications provider in Hong Kong ". Already publicly traded in Hong Kong, it led a bid to purchase Hong Kong’s local telecom company from Cable & Wireless, beating off Singapore’s monopoly telecom provider.

PCCW is not Hong Kong's only Internet major. Tom.com, the portal backed by Li Ka-shing, which had its wildly successful IPO in 1999, and expressed equally grandiose ambitions at the time: “The mega-portal holds the mission of being the global leading multilingual China-oriented infotainment portal with the ultimate vision firmly in sight.” Tom.com wants to "Bring China to the world and the world to China."

In October 2001 New T&T, the fixed telecommunications network service (FTNS) operator reached a landmark agreement with the Securities and Futures Commission (SFC) in which New T&T agreed to cater for all the jurisdiction's financial e-commerce and e-trading operations by providing a network to interconnect all financial institutions including securities, derivatives, banking, insurance and other licensed financial entities in Hong Kong.

Andrew Sheng, chairman of the SFC announced at the time that: 'This agreement puts the operation and continued implementation of FinNet in the hands of a globally qualified operator and will enable Hong Kong to upgrade and transform our financial infrastructure into a true e-frastructure, while solidifying Hong Kong's position as a premier international financial centre.'

Mr Sheng also explained that the new platform would give investors access to a wider range of products as well as much faster and higher quality services. 'For example,' he said, 'transactions will now be executed more securely at lower costs and with reduced risks, facilitating the future global applications.'

Banking

There are a number of on-line banking operations directed at the consumer or the HINWI (high net worth individual) markets. In some cases a wide range of services is offered including share trading and investment.

Hong Kong banks were initially slow to equip themselves with Internet payment processing systems. The banks claimed to be uncomfortable about processing payments received from outside Hong Kong via the Internet because of the additional credit risk. Banks in Hong Kong charge about 2.5% for credit card payments but charges for payments received on the Internet shoot up to 4-10%.

The Postmaster General is authorized to be a Recognized Certification Authority under the Electronic Transactions Ordinance 2000. Additionally, the Secretary for Information Technology and Broadcasting may make regulations governing the procedures of certification authorities.

Since 1997, the Hong Kong Monetary Authority (HKMA) has been issuing a series of circulars to set out its regulatory approach on e-banking services and to provide authorised institutions with recommendations on the risk management for these activities. While institutions do not need to seek formal approval from the HKMA to offer their e-banking services, they should discuss their plans and risk management measures with the HKMA in advance.

In May 2000, the HKMA issued a Guideline on the Authorisation of Virtual Banks under section 16(10) of the Banking Ordinance. The Guideline set out the principles that the HKMA takes into account in deciding whether to authorise virtual banks. The main principle is that the HKMA will not object to the establishment of virtual banks in Hong Kong provided that they can satisfy the same prudential criteria that apply to conventional banks. In summary, virtual bank applicants must satisfy the following requirements:

In line with existing authorisation policies for conventional banks, a locally incorporated virtual bank cannot be newly established other than through the conversion of an existing locally incorporated authorised institution. Furthermore, local virtual banks should be at least 50% owned by a well-established bank or other supervised financial institutions. For applicants incorporated overseas, they must come from countries with an established regulatory framework for electronic banking. In addition, they must have total assets of more than US$16 billion and will be subject to the "three-building" condition in respect of its physical offices, but not in respect of its cyber network.

 

Securities Markets

Apart from share dealing services provided through banks' web-sites, there are a number of financial portals in Hong Kong offering share-dealing and investment services. Some global ecn's (electronic brokerages) also offer Hong Kong share trading, in one case from a Hong Kong-based operation.

Hong Kong Exchanges and Clearing (HKEx) introduced AMS/3, a third generation automatic order matching and execution system, in late 2000. In February 2001 it added an Order Routing System (ORS). ORS is an open system that enables investors to place stock market orders through the Internet, mobile phones and other electronic channels, which may be developed by HKEx or vendors. After an order is placed through an electronic channel connected to ORS, the system automatically sends the order to a Stock Exchange Participant for approval and submission to the market for matching and execution.

Generally, online securities trading in Hong Kong was an early casualty of the dot-com meltdown and the international equity slump, with a number of major US brokerages retreating from the SAR in 2001 almost as quickly as they had arrived in 1999 and 2000.

One exception was DBS TD Waterhouse, which in January, 2002, announced that it had launched an online brokerage operation in Hong Kong.

By 2003 it seemed that on-line trading would finally have its day in Hong Kong, as a combination of better technology, burgeoning interest from mainland visitors and the impact of SARS pushed on-line trading volumes to historic highs.

Christina Hui Siu-wing, regional general manager for Asia at Charles Schwab Hong Kong, said that the company recorded its biggest trading volume in June of that year, since entering the local market in 1998.

By mid-2004, on-line broking had grown to such an extent that the Hong Kong Association of Online Brokers was urging the city's financial regulator, the Securities and Futures Commission, to strengthen internet registration procedures in an attempt to thwart fraudulent websites. The Association proposed that all online brokerages register under the internet domain name of sec.hk. They argued that the growth in the number of incidents of fraudsters attempting to trick investors by setting up fake websites was threatening to undermine the Hong Kong public's confidence in online broking.

Hong Kong As A Financial Internet Hub

Whatever Hong Kong does, major global ecn's (brokerages) will offer on-line trading in all important types of global security to Asian investors. They will offer both very low cost transactional services and also relationship-based services to HINWIs. The large retail financial services groups view Hong Kong as a high-potential market with local competition weakened and distracted by the region's recent economic and financial problems. The perception of global players at present is that Hong Kong is a market rather than a source of advanced Internet facilities, and it is not clear that the SAR is undertaking initiatives that might change this, bar the Cyberport.

Access to on-line services, which are continuing to grow in Hong Kong as in other advanced regions, will also facilitate a shift to foreign issues, composites, and derivatives, meaning that Hong Kong exchanges stand to lose significant volume to foreign markets unless local products fill these needs. Here again, a clear, local vision is needed that Hong Kong must compete in global terms by developing state-of-the-art products. It is unfortunate that the Growth Enterprise Market (GEM) had a difficult birth; but at least it exists.

Finally, Hong Kong needs to maintain a sound legal and regulatory foundation for on-line banking and investment services. Its common-law inheritance is helpful, but the structure of markets and regulatory oversight needs rapid modernisation.

Hong Kong's laissez-faire attitude towards commercial and financial development has stood it in good stead in the past, but it may be that Singapore's contrasting style, of top-down implementation of a grand vision, may be more appropriate at a time when models need to be changed very quickly.