HONG KONG: E-COMMERCE FACILITIES

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- HONG KONG E-COMMERCE FACILITIES
- HONG KONG HOSTING AND ISP FACILITIES
- HONG KONG TELECOMMUNICATIONS FACILITIES
- HONG KONG COMMERCIAL INTERNET DEVELOPMENT
- HONG KONG ON-LINE FINANCIAL SERVICES

Hong Kong Hosting and ISP Facilities

The Internet access business in Hong Kong is highly competitive, with more than 100 providers, with at least 10 of them being substantial and well-financed operations. Internet access is available throughout the SAR.

With a sophisticated telecommunications infrastructure, Hong Kong offers access to broadband connectivity to more than 90% of all households. The take up of broadband services got off to a slow start, but a boom in broadband access took off in 2003. By early 2004, there were about 1.5 million broadband subscribers, representing about 35% of the total Internet subscriber base.

PCCW's Cyberport set out to transform Hong Kong's Internet infrastructure. The Cyberport's goal was to provide the office and residential space for high tech ventures and their employees; the government provided one of the last undeveloped parcels of land on the Hong Kong island for the Cyberport in return for a share in the venture. However, the Cyberport was unlucky with its timing, and when the first phase opened in 2002 only 80% of it quickly let, to five tenants including Microsoft.

In December, 2003, website owners in Hong Kong expressed outrage at plans unveiled by the Hong Kong Domain Name Registration Company to launch a .hk domain in 2004. Current domain name designations in Hong Kong include .com.hk, .edu.hk, and .org.hk, and many website and business owners have argued that they are happy with these categories, and resent being forced to pay again to protect their brand.

Jim Morgan, founder and chief technology officer of security firm Datalude, suggested that the move would "create anarchy", as businesses rush to register domain names with the Hong Kong local authority. "The resulting legal disputes and unfairness would go down in folklore. The other outcome would be that a large amount of money would find its way into Hong Kong Domain's coffers," he predicted.

Mr Morgan also observed that: "I see no real need for the .hk namespace. We already have a .com.hk which conforms, more or less, to accepted international standards."

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Hong Kong Telecommunications Facilities

Hong Kong is a leader in telecommunications with a strong market infrastructure. With 56 lines per 100 people, Hong Kong has the highest teledensity in Asia, except for Japan. All exchanges are digital. More than 3.5m people have mobile phones, one of the highest densities in the world.

The Office of the Telecommunications Authority (OFTA), established in 1993, is responsible for regulating the rapidly developing and increasingly competitive telecommunications industry in Hong Kong.

In August, 2005, OFTA issued a consultation paper to solicit public views on the licensing conditions and licence fee structure for the creation of a new Services-Based Operator (SBO) Licence for the provision of Internet Protocol Telephony Services.

The proposed SBO Licence is to implement the regulatory framework for IP telephony services as set out in the Statement by the Telecommunications Authority (TA) issued on June 20, 2005. Under the proposal, the SBO Licence will be a services-based licence operated under a two-class licensing regime.

"Many incumbent carriers have already grasped the business opportunities by providing an array of innovative IP telephony services for consumers' choices under the existing Fixed Telecommunications Network Services (FTNS) Licence/Fixed Carrier Licence. The establishment of the IP telephony regulatory regime will further enhance the market competition by enabling service-based operators to enter into the market. This will not only induce investments but will also benefit consumers as a whole," a spokesman for OFTA said.

The scope of services that the SBO licensees are allowed to operate includes Class 1 services (services that have all the attributes of conventional telephone services) and Class 2 services (services that do not have all the attributes of conventional telephone services), as well as other telecommunications services such as Internet services, international value-added network services, external telecommunications services, etc.

"Because the SBO Licence is a services-based licence, the licensees will not be granted the facilities-based rights that are related to building network infrastructure such as opening roads. As such, in order to ensure that they can roll out services smoothly, IP telephony service providers should make commercial arrangements with fixed-network operators for hosting connections," the spokesman continued.

"Like other services-based licences, the proposed SBO Licence is valid for one year, and is renewable on an annual basis. A licence fee structure comprising fixed and variable fees on the cost-recovery basis is proposed. The SBO licensees are required to pay an annual fixed fee of $90,000 if Class 1 services are provided, or $25,000 if only Class 2 services are provided, and an annual fee of $7 for each number of telephone numbers in the numbering blocks to be assigned by the TA," the spokesman added.

"It is expected the first SBO Licence will be issued in early 2006 after the confirmation of the licence conditions," the spokesman said.

In regard to the special characteristics of the IP telephony services, the new regulatory framework also covers measures for consumer protection. They include requiring SBO licensees to provide back-up power supply to the IP telephony equipment for use by "life-line" users if the service is to be sold to these users, and free access to emergency services if the IP telephony services use Hong Kong telephone numbers.

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Hong Kong Commercial Internet Development

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, with 110 listings by early 2002. 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. At the end of 2008, there were 174 listed companies on GEM compared to 193 in 2007. The total market capitalisation of GEM was $45.2 billion, down 72 per cent from $161.1 billion in 2007. In 2008, there were 2 newly listed companies on GEM with $0.2 billion of capital raised. The total turnover value on GEM in 2008 was $52.1 billion, a 67% decrease from the previous year.

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

The FibrLink float was the largest since Tom Online raised HK$1.5bn in March, 2004. Other listings in 2005 were Finet Group Ltd (financial information), Sungreen International Holdings Ltd (Chemicals) and Shanghai Donghua Petrochemical Co Ltd (Petrochemicals).

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'.

Parent company State Grid is engaged in linking up the six provincial grids managed by itself and by and China Southern Grid. FibrLink uses the power lines to transmit broadband Internet; currently it provides service in Beijing, Shandong, Jiangsu, Sichuan and Guangdong.

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 whose aim is to build the world’s largest broadband Internet business. 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, has equally grandiose ambitions: “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." If there is content relating to China or the Chinese diaspora, Tom.com wants to provide it.

One of the most important comparative advantages of Hong Kong is knowledge of the Chinese market, but as China opens up it has to reckon with competition from Shanghai and other Chinese cities. Hong Kong's other ace may be its sophisticated financial sector, which will surely continue to attract international companies planning an entry into the emerging Chinese market.

In November 2007, the Hong Kong Commerce and Economic Development Bureau announced that it would conduct a study on developing Hong Kong into a regional data centre.

Due for completion in mid-2008, the study looked into market demand for different types of data centres, analysed whether changing the industrial premises policy can cater to the needs of developing data centres, and examined regional measures.

Secretary for Financial Services and the Treasury, Professor KC Chan told legislators that a preliminary analysis of the different requirements for building facilities for different types of data centre has been conducted.

He emphasized that Invest Hong Kong actively promotes Hong Kong's advantages to existing and potential end users and data centre operators globally, by conducting overseas visits to potential clients and helping them develop business plans in Hong Kong.

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Hong Kong On-Line Financial Services

In October 2001 New T&T, Hong Kong's fastest-growing fixed telecommunications network service (FTNS) operator at the time, reached a landmark agreement with the Securities and Futures Commission (SFC) in which New T&T will 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 said: "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 will 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."

Stephen Ng, New T&T chairman and CEO, announced: "This is also an extension of our earlier agreement with Hong Kong Exchanges and Clearing Ltd (HKEx) to ensure maximum availability and reliability of the local financial infrastructure. Ultimately it will facilitate the transformation toward a globally oriented Internet and e-commerce financial and securities industry."

Singaporean-based Fundsupermart.com has recently expanded its operations with the launch in Hong Kong of the online unit trust trading platform of iFAST Financial (HK) Limited. It is the company’s first investment in Greater China.

iFAST (HK) has been issued with Type 1 and Type 4 licenses for dealing and advisory services by the Hong Kong Securities and Futures Commission (SFC).

Speaking at the launch, Fundsupermart.com’s Managing Director in Hong Kong, Patrick Ho said he was confident that the new service would offer Hong Kong-based investors an easy and cost-effective way to research and build a unit trust investment portfolio.

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.

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 (at the time of writing).

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.

More than 100 Stock Exchange Participants have so far connected to ORS, and are able to offer their clients Internet trading. All Stock Exchange Participants, including those who have connected to the HKEx channel, offer their clients electronic trading services, including Internet and mobile trading, through Proprietary Network System (PNS) channels provided by vendors.

CCASS provides settlement services under which securities are credited or debited to participants' CCASS stock accounts and funds are recorded in the participants' money ledgers on settlement day.

Details of all Exchange trades, including trade data and trade amendments, are electronically and automatically transmitted to CCASS by the Stock Exchange on each trading (T) day. There is no need for broker participants to input or further confirm their trade details in CCASS. Broker participants receive Provisional Clearing Statements of their stock and money positions through their CCASS terminals shortly after 1800 hours on each T day for reconciliation. Final Clearing Statements are available to broker participants shortly after 1400 hours on T+1 day for confirmation purposes.

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. "We have two partners with deep pockets who want to build the largest player in the Asian market," Chief Executive Officer Ian Struther explained at a news conference. "We are a long term player, and we feel we have the best business model."

Mr Struthers explained that the skill, experience, and knowledge of the retail brokerage market held by TD Waterhouse would help the new HK-based venture build a large customer base, and succeed where others have failed.

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 that year since entering the local market in 1998. Schwab trades with its Asian customers only in US stocks, after being forced to abandon trading in local stocks in 2001, but says it has more than 300 Asian staff on its team. In 2002 Schwab recorded a 24% year-on-year increase in net new client assets and 12% growth in new account numbers. The firm said that Hong Kong investors are more active than those in the US, although only 10% of its Hong Kong customers could be classified as 'active traders' - those making more than 48 trades a year.

By mid-2004, however, on-line broking had grown to such an extent that the Hong Kong Association of Online Brokers, with 14 members, 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 has proposed that all online brokerages must register under the internet domain name of sec.hk, making Hong Kong the first jurisdiction to adopt such a measure. The growth in the number of incidents of fraudsters attempting to trick investors by setting up fake websites threatened to undermine the Hong Kong public's confidence in online broking, the association warned.

The Hong Kong Internet Registration Corporation was reportedly working on a similar idea with the Hong Kong Monetary Authority. According to stock exchange data, the online trading of securities by retail investors had risen from 1.9% of retail trading volume to 8.5% in the previous four years.

Portware LLC, a leading independent provider of global, broker-neutral, multi-asset trading and strategy systems, announced in August 2007, the opening of its Hong Kong office to support its growing client base in the Asia-Pacific region.

Damian Bierman, formerly head of FIX Product Services at trading solutions provider NYFIX, in Hong Kong, was appointed to head up the Portware Hong Kong office and oversee day-to-day operations. The office focuses on implementation management and support, and is staffed by regional specialists and experienced project managers from Portware’s US headquarters.

Portware has seen a rapid growth in demand from buy- and sell-side firms for its easily deployed multi-asset trading and strategy systems. Portware’s flexible framework offers a full range of components from ready-to-trade systems through to customizable enterprise solutions, enabling financial institutions to quickly integrate execution management tools and manage complex trading strategies and risk in one place. Through a combination of Portware’s open Application Programming Interface (API), plug-and-play architecture and regional development support, Portware’s Asia-Pacific customers are able to achieve a high degree of localization, tailored specifically to the varied needs of the Asia-Pacific markets.

The Hong Kong Monetary Authority (HKMA) has announced the launch of the electronic trading platform (ETP) for Exchange Fund Bills and Notes (EFBNs), which commenced operation on December 11, 2007.

The ETP is designed to enhance price transparency among the market players, and streamlines the trading process. With the launch of the ETP, market players can identify their trade counterparties and conclude deals more efficiently. The ETP is designed to be flexible enough to allow it to be set up according to the specific requirements of individual market players.

"The launch of the ETP is an endeavour by the HKMA and the Treasury Markets Association (TMA) to encourage electronic bond trading, a practice which has increasingly been adopted by more advanced bond markets in the world," commented Eddie Yue, Deputy Chief Executive of the HKMA, and Chairman of the Executive Board of the TMA.

The launch of the ETP was one of the recommendations arising from the Review of Debt Market Development completed by the HKMA in late 2006. The ETP provides the necessary infrastructure to support electronic trading of other bonds in addition to EFBNs, and can be extended to cover other financial instruments available in the market. Besides market players in Hong Kong, overseas market players are also encouraged to use this platform when trading bonds and other financial instruments issued in Hong Kong.

The ETP was developed and is operated by Bloomberg LP, with advice on functional design and testing provided by a User Group established by the Treasury Markets Association (TMA).

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 will grow in Hong Kong as it will 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) has had a difficult birth; but at least it exists, and may yet develop into a regional focal point for high-tech issues and funds.

Finally, Hong Kong needs 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. Critical regulatory issues will include price competition, off-exchange transaction matching, and integration of securities markets with the banking sector. Among Hong Kong's competitors for regional Internet hegemony it seems that Singapore may be moving more quickly towards a transparent and unified financial structure.

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.

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