How Hong Kong Can Re-Establish Itself As a Global Digital Assets Hub

Cryptocurrency

Summary:

To become a true digital assets hub, Hong Kong needs to effectively regulate these assets, recognise the technological requirements that differentiate digital assets from traditional assets, and it must be inclusive of emerging retail and institutional use cases.

• With the inclusion of retail investors in its new regulatory regime, Hong Kong is becoming known as a digital-asset-friendly jurisdiction.

• To become a true hub, it must continue to regulate effectively, recognise the specific tech requirements and include emerging retail and institutional use cases.

How Hong Kong Can Re-Establish Itself As a Global Digital Assets Hub_1

Note: A Hong Kong Digital Asset Exchange booth is seen during Fintech Week in Hong Kong on October 31, 2022. The new regulatory regime could spur further innovation in Hong Kong and drive the adoption of digital assets.

The recent announcement by the Hong Kong Securities and Futures Commission (SFC) that individual investors can from June 1 buy and sell digital assets – such as bitcoin or ethereum – has shifted the spotlight back on the city. While regulators around the world are clamping down on digital assets, Hong Kong seeks to re-establish its position as a global financial hub for digital asset innovation.

But it is not just digital asset companies that will be supported by this new regulatory regime – financial institutions and corporations are beginning to produce distributed-ledger technology to increase efficiencies, reduce costs and offer new services to clients. This regime might just be the catalyst to spur further innovation in Hong Kong and drive the adoption of digital assets.

With the oversight of the SFC, the Hong Kong Monetary Authority and the new regulatory guidance, financial institutions will have more incentive to explore the incorporation of blockchain technology, including tokenising traditional assets and offering digital asset trading using secure and flexible wallet technology.

Tokenisation – a digital representation of a traditional asset that can be stored, transferred and settled over blockchain – allows for a common platform for traditional and digital assets to interact. This next phase in the evolution of digitisation will drive down transaction processing times, improve end-to-end transparency and attract a larger investor base.

Tokenisation is being used across multiple asset classes, including commodities, debt securities, equity securities and real estate.

In February, the Hong Kong government issued HK$800 million (US$102 million) of tokenised green bonds – the first to be issued by a government globally. In this case, tokenisation creates greater efficiencies in the bond life cycle by digitising coupon payments, settlement of secondary trading and maturity redemption, allowing the government to sell these bonds with ease.

Late last year, Singapore’s Monetary Authority completed its first tokenisation industry pilot under “Project Guardian”, where foreign exchange and government bond transactions were executed against liquidity pools comprising tokenised Singapore government securities bonds, Japanese government bonds, the yen and Singapore dollar.

Two more industry pilot projects are set to be conducted for trade finance and wealth management by some of Singapore’s biggest banks, including Standard Chartered, HSBC and United Overseas Bank, showcasing the government’s belief in the potential of distributed-ledger technology to transform capital markets.

Hong Kong’s multifaceted regulatory licensing structure, led, managed and supervised by the SFC, allows for the safe operation of digital asset exchanges in Hong Kong through principle- or rules-based guidelines. These licensing requirements give institutional and retail investors confidence that they are engaging with mature and regulated operators.

With the virtual-asset trading platform licence, Hong Kong has created regulatory clarity for digital asset exchanges to operate inclusive of retail investors, rather than imposing a blanket ban. The new licensing rules require retail digital asset exchanges to implement enhanced protective measures around their trading and custody operations. This includes onboarding steps that assess users’ risk profiles, strict token due diligence criteria, and robust operational governance controls that mitigate against internal fraud and protect against external attacks.

Furthermore, it is encouraging to see that the SFC recognises the importance of the safe custody of clients’ virtual assets and requires that virtual-asset trading platforms have a direct regulatory handle over the companies exercising control of clients’ virtual assets.

Between July 2021 and July 2022, the digital asset trading volume in Singapore was just over US$100 billion, compared with US$74 billion in Hong Kong. But the tide could turn in favour of Hong Kong, especially as new entrants decide to operate under the new licensing regime and explore new use cases within digital assets.

Additionally, Hong Kong is urging banks to provide critical services to licensed digital asset companies, further easing digital asset business operations and establishing its position as a digital-asset-friendly jurisdiction.

Further progress should be expected with the development of Hong Kong’s central bank digital currency – the e-HKD saw its pilot programme launch earlier this month – stablecoin, asset property rights and non-financial tokenisation in the coming months.

It also needs to think beyond the buying and selling of digital assets, and consider how to manage the risks arising from decentralised finance. For an instructive model, Hong Kong should turn towards the Middle East, specifically the Abu Dhabi Global Market’s Registration Authority, which has proposed a legal framework for distributed-ledger technology, targeting disclosures, liquidation and governance structures.

Finally, the SFC needs to urge Hong Kong’s digital asset operators to use enterprise-grade technology, such as multiparty computation (MPC) custody solutions. MPC mitigates the risk involved with storing private keys and other sensitive data in one location, enabling stronger governance processes within organisations, ensuring the right level of operational oversight and risk mitigation.

Furthermore, infrastructure that guards against operational errors and internal fraud will be critical as these operators scale up their teams and increase their transaction workflows.

It might take a while to achieve harmonisation and a globally coordinated regulatory approach but, for now, Hong Kong has the opportunity to drive regulatory clarity that balances both innovation and consumer protection.

Source: South China Morning Post

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Alex

Commodity

Crude oil imports into Asia this month are expected to rise by 8.6% on the month as refineries in China and India exit maintenance season, Reuters’ Clyde Russell reported today, citing data from Refinitiv.

The rebound follows a decline in Asian crude imports in April when the total dropped to the lowest in seven months. The numbers sparked concern about the outlook for oil demand as Chinese economic indicators also suggested a less smooth than expected post-pandemic recovery.

Yet it seems the biggest reason for the decline was refinery maintenance, based on the strong rebound expected for this month when Refinitiv estimates total Asian imports would hit 27.73 million barrels of oil daily.

For China specifically, the data service provider expects oil inflows at a rate of 11.96 million barrels daily, up by as much as a million barrels daily from April. Imports from Russia are seen hitting 2 million barrels daily, up from 1.74 million bpd last month.

Almost the same amount of Russian crude is seen going to India this month, at 1.97 million bpd. Imports from Saudi Arabia, the subcontinent’s second-largest supplier are seen falling to 570,000 bpd from 690,000 bpd in April, and so are imports from Iraq—India’s number-three supplier.

Meanwhile, Reuters’ Russell notes that India’s future fuel exports may be under threat as EU officials get uncomfortable that the fuels EU countries buy from India are probably produced from Russian crude.

Just how serious this threat is, however, is yet to be seen because there are not a lot of alternative suppliers of the amounts of fuel the EU still consumes despite its green push.

China’s fuel exports are also set for a decline, but for a different reason: the exhaustion of the first batch of export quotas for the year. Russell noted that a further rebound in local demand will also lead to lower exports.

Source: oilprice.com

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Thomas

Energy

With just four years before the Philippines' only gas field is set to run dry, the country has started importing liquefied natural gas (LNG), creating a fresh headache for a government struggling to curb high inflation.

LNG is needed to help replace gas from the Malampaya field, which supplies power plants that meet a fifth of the electricity requirements on the country's main Luzon Island, or 13% of total installed capacity nationwide.

Imported gas costs will be passed straight through to power prices, and as a result power prices could jump sharply, a challenge for a country where inflation hit a worrying 14-year high in January.

While LNG prices have dropped from record highs hit last year amid Europe's scramble for gas, they are expected to rise again as demand climbs for winter, and as Hong Kong, Vietnam and the Philippines all become first-time LNG buyers this year.

"A big challenge is LNG price volatility and how secure is supply," said Irwin Yeo, senior LNG analyst at Poten & Partners.

The country "will face economic and political risks" from the passing through of LNG costs to power prices, he said.

Gas output at the Malampaya field has declined sharply since peaking in 2019, hitting its lowest since 2004 last year, data from the energy department showed.

As Gas Reserves Wane, Philippines Faces Rising Costs in Switch to LNG_1

Initially the country will need around 3 million tonnes per year (tpy) of LNG to replace Malampaya's supply but that will fall to around 2.3 million-2.7 million tpy and possibly less by 2030, depending on how rapidly generation from renewable energy grows, said Kittithat Promthaveepong from consultancy The Lantau Group.

The Philippines aims to have 35% of its power generated by renewables by 2030, up from about 23% currently.

LNG Price Risk

The country's debut LNG cargo with 137,000 billion cubic metres of gas arrived in April for trials at its first import terminal, to supply San Miguel Global Power Holdings.

Next, First Gen, which uses Malampaya gas at four power plants with a combined capacity of 2,000 megawatts, plans to start LNG imports in September when its floating storage and regasification unit (FSRU) in Batangas province is ready.

First Gen President Francis Giles Puno said without LNG the company would face even higher fuel costs as it would have to rely on expensive diesel.

"So the LNG is there to temper the cost of fuel," he told reporters on May 17.

Securing long-term LNG contracts will be challenging for the new market entrant despite current low prices, as supplies globally remain tight at a time when other emerging markets like Vietnam and Bangladesh are also competing for gas, analysts say.

Fortuitously for new buyers, spot LNG prices have fallen to $9.80 per million British thermal units (mmBtu) in May following a mild winter and lower demand, after averaging nearly $40/mmBtu in 2022, propelled by the Russia-Ukraine war.

"But the consensus is that this dip in prices isn't expected to last," said Sam Reynolds, an analyst at the Institute for Energy Economics and Financial Analysis (IEEFA).

LNG is currently about $1-$3/mmBtu costlier than Philippine gas, based on a $70 a barrel oil price, two analysts said, which could lead to a 15%-35% increase in the cost of power generated from imported fuel.

No Subsidies

The government has approved seven LNG import terminal projects with a total capacity of 21.98 million tpy, looking to expand LNG usage into industrial, commercial, residential and transport sectors in addition to power.

As Gas Reserves Wane, Philippines Faces Rising Costs in Switch to LNG_2

The Philippines' department of energy undersecretary Rowena Guevara told Reuters there are no plans to shield consumers from potential higher electricity rates with subsidies and no plans to impose a power price cap.

Distributors such as Manila Electric Company (Meralco) buy power directly from independent producers under supply contracts and from the Wholesale Electricity Spot Market. As Gas Reserves Wane, Philippines Faces Rising Costs in Switch to LNG_3

As Gas Reserves Wane, Philippines Faces Rising Costs in Switch to LNG_3

In March, energy secretary Raphael Lotilla said the government and the Energy Regulatory Commission were looking at ways to prevent price shocks, but gave no details.

"We are looking at measures to protect the people from the volatilities of LNG prices. But the most important consideration is that we should have adequate power supply," Lotilla told reporters on May 16.

Source: Reuters

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Devin

Vietnam's exports in the first five months of this year fell 11.6% from a year earlier to $136.17 billion, government data showed on Monday, as weakened external demand weighs on its manufacturing-led economy.

Its industrial output in the January-May period fell 2% from a year earlier, the General Statistics Office (GSO) said in a report, adding that average consumer prices in the period rose 3.55% from a year earlier.

The latest data underlines a slowdown in economic growth for Vietnam, a key regional manufacturing center, due largely to subdued global demand.

Imports in the first five months of this year fell 17.9% from a year earlier to $126.37 billion, resulting in a trade surplus of $9.8 billion, the GSO said.

The sharp imports decline could indicate a further slowdown ahead in industrial production, as businesses reduce procurement of raw materials and equipment. Vietnam is a key exporter of electronics, garments and textiles, footwear and wooden items, including for top global brands.

Deputy Prime Minister Le Minh Khai earlier in May said the economy would face unfavorable external conditions during 2023.

Vietnam is targeting growth of 6.5% this year, slower than the expansion of 8.02% in 2022. Vietnam's gross domestic product growth slowed to 3.3% in the first quarter from an expansion of 5.9% in the fourth quarter of last year.

Oxford Economics on Monday said it had cut its forecast for Vietnam's 2023 GDP growth to 3.0% from 4.2%.

"We think that easing global growth, including a fading recovery momentum in China, mean that the depressing outlook for Vietnam's exports has further to run, casting clouds over the prospect of any rebound in GDP growth," it said in a note.

Exports in smartphones, Vietnam's largest export earner, fell 16% in the January-May period to $21.17 billion, the GSO said.

In May, its total exports fell 5.9% from a year earlier, while imports were down 18.4%, the GSO added.

Source: Reuters

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Owen Li

Economic

The ongoing global economic uncertainty has exposed many vulnerabilities with global supply chains. The recent events have even raised doubts over globalisation, with many economies now understanding the fragility of the global supply chains and mulling shifting to a model that is more regionally based.

Keeping this situation at the centre, a World Economic Forum (WEF)’s report, Chief Economists Outlook, outlines the emerging contours of the current economic conditions and pinpoints priorities for further action by policymakers and businesses globally. The report states that the regions most likely to benefit from the global supply chain changes are South Asia, East Asia and the Pacific, Latin America and the Caribbean, and the US.

The report specifically states that economies that are likely to benefit from these changes are India, Vietnam, Thailand, Indonesia, Mexico, Turkey, and Poland. These assertions are backed by the fact that many of these countries have managed to attract substantial foreign direct investment (FDI) in the last few years. For instance, the financial year 2021-22 recorded the highest FDI into India at $83.6 billion. Similarly, in 2021, Vietnam attracted more than $31.15 billion in FDI pledges, 9% higher than the previous year.

China’s prospects to take a hit

The WEF outlook also notes that amid this shift in supply chains, China is expected to be particularly affected. Most of the chief economists surveyed by the WEF say they expect supply-chain restructuring to have a negative impact on China’s economic prospects.

Global Supply Chain Relocation: China's Loss Is India, Vietnam's Gain_1

A classic example is the American tech firm Apple, which has plans to diversify its supply chains to other countries with an aim to reduce its heavy dependence on China. The iPhone-maker has been assembling its products in both India and Vietnam for a few years and aims to leverage its presence in these countries and increase its volume of production.

A 2022 forecast by JP Morgan states that the percentage of Apple products made in China will fall to 75% from 95% by 2025. Apple may manufacture one out of four iPhones in India by 2025.

The WEF survey states, “The twin pressures of deepening geopolitical tensions and intensifying industrial policy mean that further adjustments in the global supply chain are almost inevitable in the coming years.”

Arun Singh, Chief Economist, Dun & Bradsheet, says that the geopolitical and economic uncertainties have highlighted that a large part of the global economy was relying on just a few suppliers.

“We have seen China getting impacted with issues such as slowdown and closures in the recent past. It disrupted the global supply chain and hit the pricing and whatever demand we had at that time. We failed to meet even small demands at that time. Soon we realised the mistake of relying on just one supplier. Now you have the Russia-Ukraine crisis. There have been several regional developments in the near past which exposed countries to the supply chain risks. Now, companies are looking at diversification so that their supply chains are not impacted in such scenarios. In this new setting, we will see a supply chain approach shift,” says Singh.

Many companies are shifting from China towards safer locations or nearshoring or even moving towards their local markets. “What’s worse for China is that its domestic market is also saturating, implying it will only have majorly relied on the exports market – which itself is subdued due to the global slowdown,” he says.

Global Supply Chain Relocation: China's Loss Is India, Vietnam's Gain_2

Singh dismisses the idea that China may re-emerge strongly and get back the full mojo once it completely beats Covid-19. “China was practically never shut. Even when the entire world was seeing a shutdown, Chinese factories were operational. Saying now that China’s performance would get back to its pre-pandemic days is too far-fetched. We should understand that Covid-19 is history now.”

Supply chain diversification is here to stay

The chief economists in the WEF report are unanimous in anticipating further changes in the structure of global supply chains. The business strategies they expect to contribute to this reconfiguration include adaptation to geopolitical fault lines, the prioritisation of resilience over efficiency, diversification of suppliers and an increased focus on environmental sustainability.

On a sectoral basis, the WEF outlook highlights a range of industries where they expect supply chain changes to be most pronounced, including semiconductors, green energy, automotive, pharmaceuticals, food, energy and the broad technology category.

Potential for India

India may have huge potential but Vietnam has done relatively well in attracting big names in the past few years. Other than Apple, Samsung has also opted for Vietnam. The country has also attracted Google for producing Pixel phones, as well as Nike and Adidas.

“We expect Vietnam to remain a key beneficiary for re-location or co-location of production, supported by its already well-known and favourable factors. These include competitive costs for a relatively skilled workforce, extensive free trade agreements (FTA), and proximity to China, beyond its bright medium-term growth prospects of 6%-7%. Vietnam’s growing electronics ecosystem will also be another advantage,” says DBS in its report released in April 2023.

So, convincing big firms for relocation would not be a cake walk for India.

Singh says India is working to attract FDI but a lot still needs to be done. “But I think there is a constant nudge from the government asking global manufacturers to settle their facilities in the country. We should not forget that India is equivalent to China and the US both from the market and cost-effectiveness perspective. Big efforts are still required and that is why we see the government pitching up with schemes such as PLI. Every country now is trying to get the benefit of this supply chain relocation. This is going to have an impact,” he adds.

Source: economictimes.indiatimes.com

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Cohen

Economic

Profits at industrial firms in China kept falling in the first four months of 2023, underlining cooling demand and deepening factory-gate deflation in the world’s second-largest economy.

Industrial profits fell 20.6 per cent in the January-to-April period from the same timeframe in 2022, data published on Saturday by the National Bureau of Statistics (NBS) showed. The drop was slower than a decline of 21.4 per cent logged in the first quarter.

Profits for the single month of April were down 18.2 per cent from a year earlier, according to NBS figures, compared with March’s decline of 19.2 per cent.

The weak recovery of effective demand “has continued to weigh on the capacity utilisation rate, which, coupled with the difficulty to bring down costs, means more patience is needed” for the rebound in industrial profit, said Mr Bruce Pang, chief economist for Greater China at Jones Lang LaSalle. “The cumulative year-on-year growth may not return to the positive territory until the fourth quarter.”

More policy support and stimulus are needed for a full-year gain in industrial profit, he added.

China’s post-Covid-19 recovery is faltering, recent data has shown, with export growth weakening and industrial deflation worsening in April. Falling profits bode ill for the economy’s outlook and are set to weigh on already weak sentiment among businesses – thus holding them back from investing.

Industrial enterprises in China have been struggling to rebound from last year’s pandemic-induced slump, even though factory activity has picked up somewhat.

Still, demand for goods remains sluggish, with the economic rebound led mainly by consumer spending in services. Foreign purchases of Chinese products are slowing as the United States and other developed economies seek to “de-risk” from China.

Deteriorating producer deflation has also undercut factories’ ability to boost prices, hurting profits. The producer price index fell 3.6 per cent year on year in April, the biggest decline since May 2020.

Foreign firms registered a 16.2 per cent drop in profits in the January-to-April period compared with a 24.9 per cent decline in the first quarter. Profits at private firms fell 22.5 per cent in the first four months, while those at state-owned enterprises slipped 17.9 per cent, according to NBS data.

Source: BLOOMBERG

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Devin

Forex

Rivalry with China, fallout from Russia's war in Ukraine and wrangling once again in Washington over the U.S. debt ceiling have put the dollar's status as the world's dominant currency under fresh scrutiny.

Russia's sanctions-imposed exile from global financial systems last year also fuelled speculation that non-U.S. allies would diversify away from dollars.

Below are some arguments why de-dollarisation will happen - or possibly why it won't.

Slipping Reserve Status

The dollar share of official FX reserves fell to a 20-year low of 58% in the fourth quarter of 2022, according to International Monetary Fund data.

Stephen Jen, CEO of Eurizon SLJ Capital Limited, said that shift was more pronounced when adjusted for exchange rate.

"What happened in 2022 was a very sharp plummeting in the dollar share in real-terms," Jen said, adding this was a reaction to the freezing of half of Russia's $640 billion in gold and FX reserves following its 2022 invasion of Ukraine. This had sparked a re-think in countries such as Saudi Arabia, China, India and Turkey about diversifying to other currencies.

Taking The Longer View

The dollar share of central banks' foreign reserves in the final quarter of 2022 did hit a two-decade low, but the move has been gradual and it is now at almost a similar level as 1995.

Central banks put rainy day funds in dollars in case they need to prop up exchange rates during economic crises. If a currency weakens too far against the dollar, oil and other commodities traded in the U.S. currency become expensive, raising living costs and fuelling inflation.

Many currencies, from the Hong Kong dollar to the Panama balboa, are pegged against the dollar for similar reasons.

Waning Grip on Commodities

The almighty dollar has had a lock on commodity trading, allowing Washington to hinder market access for producer nations from Russia to Venezuela and Iran.

But trade is shifting. India is purchasing Russian oil in UAE dirham and roubles. China switched to the yuan to buy some $88 billion worth of Russian oil, coal and metals. Chinese national oil company CNOOC and France's TotalEnergies completed their first yuan-settled LNG trade in March.

After Russia, nations are questioning "what if you fall on the wrong side of sanctions?" said BNY Mellon strategist Geoffrey Yu.

The yuan's share of global over-the-counter forex transactions rose from almost nothing 15 years ago to 7%, according to the Bank for International Settlements (BIS).

But Too Complex a System

De-dollarisation would require a vast and complex network of exporters, importers, currency traders, debt issuers and lenders to independently decide to use other currencies. Unlikely.

The dollar is on one side of almost 90% of global forex transactions, representing about $6.6 trillion in 2022, according to BIS data.

About half of all offshore debt is in dollars, the BIS said, and half of all global trade is invoiced in dollars.

The dollar's functions "all reinforce each other", said Berkeley economics and political science professor Barry Eichengreen.

"There just isn't a mechanism for getting banks and firms and governments all to change their behaviours at the same time."

A Fragmented Future

While there may not be a single dollar successor, mushrooming alternatives could create a multipolar world.

BNY Mellon's Yu said nations were realizing that one or two dominant reserve asset blocks was "just not diversified enough."

Global central banks are looking at a wider variety of assets, including corporate debt, tangible assets such as real estate, and other currencies.

"This is the process that is underway," said Mark Tinker, managing director of Toscafund Hong Kong. "The dollar is going to be used less in the global system."

An Unshakeable Basis

Because large bank deposits are not always insured, businesses use government bonds as a cash alternative. The dollar's status is therefore underpinned by the $23 trillion U.S. Treasury market - viewed as a safe haven for money.

"The depth, liquidity and safety of the Treasury market is a big reason why the dollar is a leading reserve currency," said Brad Setser, a Council on Foreign Relations fellow who tracks cross-border currency flows.

International holdings of Treasuries are vast and there's no credible alternative yet. Germany's bond market is relatively small, at just over $2 trillion.

Commodities producers may agree to trade with China in yuan, but recycling cash into Chinese government bonds remains tricky due to difficulties opening accounts and regulatory uncertainty.

"But you can hop on an app and trade Treasuries from anywhere," Natwest Markets emerging markets strategist Galvin Chia said. The End of King Dollar? The Forces at Play in De-Dollarisation_5