Issue 10 Volume 18 October 2022 DRIVING BUSINESS SUCCESS WEATHERING THE STORM Against the backdrop of high inflation, rising interest rates and an imminent global recession, how should CFOs and treasury managers prepare companies for these challenging conditions? MENTAL HEALTH Strategies used by the Big Four to tackle and promote mental wellbeing of staff PROFILE Bonnie Y Chan, Head of Listing at Hong Kong Exchanges and Clearing Limited SECOND OPINIONS What are the opportunities and limitations of ETF Connect? PLUS:
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PRESIDENT’S MESSAGE APLUS October 2022 1 Loretta Fong CPA (practising) President Dear members, “ Now, a new chapter has begun for the Institute as it looks to reach new heights in its redefined role and build upon change.” The Institute’s former regulatory roles in the issuance of practising certificates, registration and inspection of practice units, and regulating the professional conduct of all CPAs and practice units were finally transferred on 1 October to the now renamed Accounting and Financial Reporting Council (AFRC) under the further reform of the regulatory regime of accounting profession. Since the reform was first announced by the Secretary for Financial Services and the Treasury in June last year, the Institute has worked closely with the government and the Financial Reporting Council to address the legislative, operational and transitional implications of the changes. Throughout the process, the Institute has demonstrated professionalism in fulfilling its regulatory functions while facilitating the seamless transfer of regulatory powers to the AFRC. Members were kept abreast of the developments and subsequent changes to the registration process have been provided via a dedicated webpage, standalone emails, as well as multiple members’ forums. Now, a new chapter has begun for the Institute as it looks to reach new heights in its redefined role and build upon change. Despite the transferral of these functions, the Institute will continue to shoulder essential responsibilities of registering CPAs, the training and development of the accounting profession in Hong Kong through the Qualification Programme and continuing professional development programmes, as well as the crucial role of setting professional standards and supporting our members. As I’ve mentioned in my interview in A Plus when I first became President of the Institute, the change spells a critical opportunity for us to focus our efforts on supporting members for the betterment of the industry. Looking forward, we are excited about reaching a major milestone as we enter the 50th year since the Institute’s establishment. Plans are underway for various initiatives to celebrate the profession and our members, and promote their achievements to the public. To kick us off, starting from 30 October, a brand new series of short interviews developed by the Institute in collaboration with local outlet ViuTV will be broadcasted on television once a week to introduce the accounting profession to the broader public. These shorts will take a look at different experiences on the career ladder as well as how accountants are fulfilling their social responsibility. Through this programme, we hope to articulate the lively dynamics of the accounting profession for the general public. Interested members should stay tuned to our social media channels for the latest broadcasting schedules as well as upcoming celebration events. This issue of A Plus will be our last full issue before we return in January 2023 under a brand new quarterly schedule. For the next two months, readers of A Plus may check the Institute’s website for any new updates and continue to have full access to past issues of the magazine through the digital, pdf and flipbook versions. We appreciate the support for A Plus, and are constantly looking to improve our offerings. We hope to continue to serve our community with quality content and timely enhancements to the user experience.
CONTENTS Issue 10 Volume 18 October 2022 NEWS 01 President’s message 04 Institute news 07 Business news FEATURES 08 Through good times and bad As a global recession looms, A Plus looks at the treasury management challenges and opportunities for CFOs 14 Leadership: Bonnie Y Chan The Head of Listing at HKEX, explains what enhancements will ensure the city remains a top capital raising venue 20 Mental health in accounting Accounting firms have set up programmes to help maintain the mental wellbeing of employees working in the demanding profession 26 Second opinions What are the opportunities and limitations of ETF Connect? 28 How to Business coach Bernice Lee on how to be a good manager without burning out 29 Thought leadership: Ricky Cheng FCPA A member of the Institute’s Sustainability Committee explains how CFOs can navigate the evolving climate landscape 30 Q&A with a PAIB James Cheng CPA,Investment Director at China Everbright Limited 31 Q&A with a PAIP Wilson Cheng FCPA, Tax Leader, Hong Kong and Macau, and Greater China Tax Controversy Co-Leader at EY 32 Meet the speaker What to expect from the Annual Accounting Update 2022 on upcoming effective standards and the next chapter for corporate reporting SOURCE 33 Proposed narrow scope amendments 20 With World Mental Health Day this month, the Big Four and experts discuss the mental pressure accountants face in the city today and benefits for companies of introducing mental wellbeing strategies 30 Q&A with a PAIB 31 Q&A with a PAIP Mental health in accounting
DRIVING BUSINESS SUCCESS About our name A Plus stands for Accounting Plus. It represents a profession that is rich in career options, stays relevant amid rapid changes, and adds value to business. This magazine strives to present the global mindset and varied expertise of Institute members – Accountants Plus. Editor Gerry Ho Email: gerry.ho@mandl.asia Managing Editor Jemelyn Yadao Associate Editor Nicky Burridge Contributor Thomas Lo Registered Office 2/FWang Kee Building, 252 Hennessy Road, Wanchai, Hong Kong Advertising enquiries Advertising Director Derek Tsang Email: derektsang@mandl.asia ISSN 1815-3380 President Loretta Fong Vice Presidents Roy Leung Edward Au Chief Executive and Registrar Margaret W. S. Chan Director of Corporate Communications Dr Wendy Lam Publication Manager Michael Wong Editorial Coordinator Maggie Tam Office Address 37/F, Wu Chung House, 213 Queen’s Road East, Wanchai, Hong Kong Tel: (852) 2287-7228 Fax: (852) 2865-6603 Member and Student Services Counter 27/F, Wu Chung House, 213 Queen’s Road East, Wanchai, Hong Kong Website: www.hkicpa.org.hk Email: hkicpa@hkicpa.org.hk A n overview of the Institute’s response to IAASB exposure draft on the proposed amendments to ISA 700 (Revised) and ISA 260 (Revised) 34 FSIE regime for passive income U pcoming changes to Hong Kong’s foreign source income exemption regime, following the introduction of a related amendment bill 36 Technical news WORK-LIFE BALANCE 40 Pieces of personality A Plus meets Institute members who have built collections that reflect their identity and passions 46 Young member of the month Calvin Tse FCPA, Chairman of the Hong Kong General Chamber of Young Entrepreneurs and member of the Institute’s Council 48 After hours Institute members recommend their favourite ways to unwind 48 46 Young member of the month After hours A Plus is the official magazine of the Hong Kong Institute of Certified Public Accountants. The Institute retains copyright in all material published in the magazine. No part of this magazine may be reproduced without the permission of the Institute. The views expressed in the magazine are not necessarily shared by the Institute or the publisher. The Institute, the publisher and authors accept no responsibilities for loss resulting from any person acting, or refraining from acting, because of views expressed or advertisements appearing in the magazine. ©Hong Kong Institute of Certified Public Accountants October 2022. The digital version is distributed to all 47,478 members, 14,340 students of the Institute and 2,358 business stakeholders every month. 14 Keeping the crown Bonnie Y Chan, Head of Listing at Hong Kong Exchanges and Clearing Limited, on the work of her division to further attract companies to list in the city, and how she views the role of CPAs in the initial public offering journey
As of 1 October 2022, the Institute’s former regulatory roles in the issuance of practising certificates, registration and inspection of practice units and regulating the professional conduct of all CPAs and practice units have been formally transferred to the Accounting and Financial Reporting Council under the further reform of the regulatory regime of accounting profession. The Institute website has been updated to reflect the Institute’s redefined role. Members can read the full “Message from the President” on the website for more details. Members should also visit the updated “Membership” section of the Institute’s website to be aware of any updates to the timeline and requirements with regards to the upcoming 2023 membership renewal. Call for 2023 committee self-nominations The Institute’s Nomination Committee is inviting selfnominations for 2023. Members interested in playing a meaningful role in the development of the Institute and the accounting profession next year can put their names forward to join the committees. Members can learn more about the committees from the Institute’s website and should submit the nomination form online on or before Friday, 18 November for consideration by the Nomination Committee. Revised Practical Experience Framework to be launched The Institute’s revised Practical Experience Framework (PEF) will be launched in December this year, introducing a one-stop online system for registration, updates and renewals for Authorized Employers or Authorized Supervisors (AE/AS), and for reviewing and verifying Qualification Programme (QP) students’ practical experience. The revised PEF will provide AE/AS with flexibility in work arrangements for their QP students and enable transparent communication with the QP students via the brand new online system for reviewing their development progress. With the launch of the revised PEF, a three-year transitional arrangement will be granted to existing QP students who have already started accumulating experience to have sufficient time to continue to attain the practical experience under the current framework. Further information about the revised PEF will be shared via the Institute’s website and various channels. Mandatory CPD requirements Members are required to complete 120 hours of continuing professional development (CPD) in a three-year rolling period, of which 60 hours must be verifiable; and at least 20 hours of relevant professional development activity in each year. More details about CPD requirements and relevant frequently asked questions are available on the Institute’s website. PAIB Conference 2022 The face-to-face PAIB Conference 2022, organized for Professional Accountants in Business (PAIB), will take place on 12 November at the Grand Ballroom, Kowloon Shangri-La. Three panels of respected speakers will discuss and share their insights on the latest trends and developments relating to sustainability, environmental, social and governance, and green finance; digital technologies to help evolve business and operating models; and the value of CPAs in the era of digitalization. Annual Accounting Update 2022 With the theme “A New Chapter for Corporate Reporting,” the virtual Annual Accounting Update 2022 on 19 November will focus on the new initiatives in corporate reporting started by the accounting profession to cater to the needs for a more sustainable future. Speakers will cover topics including the standard setting function of the Institute and major standard setting projects in progress; the standards which will be effective in 2023 and 2024; application issues of Hong Kong Financial Reporting Standards 9, 15 and 16, and the latest developments in sustainability reporting. Read Meet the Speaker on page 32 to learn more about the event. NEWS Institute news Business news 4 October 2022 A new era: The Institute redefines its role for the profession
Platinum sponsors: Gold sponsor: DEPLOY SUSTAIN Governance ETHICS AUDIT TRANSFORM Digitalization Finance ANALYTICS REPORTS PAIB CONFERENCE 2022 CPA Here and Now: Sustain, Transform & Deploy For enrolment Date: Saturday, 12 November 2022 I Time: 9:00 a.m. - 1:00 p.m. Venue: The Grand Ballroom, Kowloon Shangri-La, Hong Kong CONFERENCE FACE-TO-FACE
NEWS Business The value of the Hong Kong Co-Investment Fund that Chief Executive John Lee announced in his 2022 Policy Address – part of a plan to attract international businesses to Hong Kong. Financial Secretary Paul Chan FCPA later set out how companies looking to tap into the fund would be evaluated on capital investment, jobs created, potential return on investment and relevancy to Hong Kong’s development goals. Zero The number of G20 nations that cut their 2021 carbon emissions fast enough to limit future global warming to 1.5°C above pre-industrial levels (what is often cited by scientists as the warming limit to maintain a safe climate), according to PwC’s Net Zero Economy Index 2022. The firm stated that a global decarbonization rate of 12.9 percent would be required to avoid passing the limit. According to PwC’s study, the decarbonization rate of G20 countries in 2021 averaged 0.2 percent, worse than the global average of 0.5 percent. Hong Kong’s consumer inflation rate stood at 4.4 percent in September, its highest level since March 2015, according to data from the Census and Statistics Department. The rate was more than double the 1.9 percent measured in August. Hong Kong government officials said that COVID-19 relief measures accounted for some of the increase. It noted that import prices were expected to rise amid high inflation in many major economies, but added that mild domestic cost pressures should keep overall near-term inflation at moderate levels. October 2022 7 The percentage of large companies that are considering relocation or have already left Hong Kong, according to a survey conducted by the Hong Kong General Chamber of Commerce. Meanwhile, 10 percent of those companies surveyed said they had already permanently relocated. The chamber urged the government to further ease COVID-19 related travel restrictions, which are often cited by companies as a reason why they are moving. 58% The percentage of wealthy investors in Hong Kong and Singapore that are invested in digital assets including cryptocurrencies, according to a survey of 30 family offices and highnet-worth individuals conducted by KPMG. Of those respondents that do hold digital assets, 100 percent held bitcoin, while 60 percent had NFTs and other metaverse tokens. Fair Value Hong Kong’s Hang Seng Index fell below 15,000 points on 25 October, its lowest level since April 2009. The stocks of Chinese Internet giants Alibaba, JD.com, Baidu and Tencent all fell by more than 10 percent on the day, with some analysts citing Mainland China’s continued strict COVID-19 related policies. Mainland property and insurance companies also experienced double-digit percentage falls. HK$30 billion 30% How companies in the U.S. could potentially measure their cryptocurrency holdings in the future, after a tentative recommendation by the Financial Accounting Standards Board. While not yet official guidance, it signals a significant step for companies that have been pushing for their digital assets to be reflected on their balance sheets at fair value according to market prices, rather than as intangible assets at their lowest value during a reporting period. Earlier in April, the International Accounting Standards Board had voted against starting a similar project, stating that cryptocurrencies are not being commonly used by most of the 140 jurisdictions that use International Financial Reporting Standards. The two EY affiliates that have so far, as of 25 October, rejected the plan of the firm’s global leadership to separate its auditing and consulting businesses across the world. EY Israel’s managing partner said the split of the units would not create benefits for his firm. Earlier, EY China had cited differences in market and regulatory environment as its reason. EY said that splitting off its global advisory businesses would free its consultants from potential conflicts of interest, which currently prevent them from consulting for audit clients. Israel + China The amount that the Securities and Exchange Commission (SEC) in the United States fined Deloitte’s Chinese affiliate for issues related to the 2018 audits of 12 U.S.-listedMainland companies. The SEC said that the firm “fell woefully short of professional auditing requirements” by asking clients to select their own audit samples and prepare their own workpapers. The firm self-reported the issue to regulators and agreed to remedial measures. US$20 million 13-year low APLUS
Family offices WEALTH MANAGEMENT This month, the World Bank warned that the world is in for one of the worst periods for economic growth fueled by uncertainty and high inflation. Amid the gloom, Nicky Burridge finds out the steps chief financial officers and treasury managers are taking to manage the risks and whether the current economic outlook creates opportunities for treasury management Illustrations by Gianfranco Bonadies 8 October 2022
The World Bank recently warned that a global recession could be on the cards in 2023, as central banks across the globe increased interest rates in a bid to combat high inflation. It pointed out that central banks were raising interest rates with a degree of synchronicity that had not been seen for the past five decades, but these rises and other policy actions may still not be enough to bring inflation down. “Global growth is slowing sharply, with further slowing likely as more countries fall into recession. My deep concern is that these trends will persist, with long-lasting consequences that are devastating for people in emerging market and developing economies,” David Malpass, World Bank Group President, said. The situation creates significant challenges for treasury managers as they position their companies to withstand the economic volatility that lies ahead. Chief financial officers and treasury managers currently face a highly challenging combination of high inflation, rising interest rates, foreign exchange volatility and slowing economic growth. Anna Cheng CPA, former treasury manager of a multinational corporation, explains that rising interest rates are driving up the operating and finance costs of companies. “A global recession would also suppress demand and economic activities, which further squeezes the working capital of companies,” she says. Dennis Ip FCPA, CFO at Impro Precision, says many companies have already seen a fall in customer demand, leading to lower sales and profitability, which not only creates lower cash flow and liquidity, but also results in higher working capital requirements, due to increasing inventories and a possible rise in overdue receivables. Meanwhile, Keith Ng FCPA, Deputy Chairman of the Hong Kong Institute of CPAs’ Corporate Finance Committee and Managing Director - Finance at Link REIT, points out that as interest rates rise, property and other asset prices are likely to decline, increasing companies’ gearing ratios. This, in turn, increases debt servicing costs, and companies are likely to have pressure on their net profit and cash flow. “For weaker companies, banks may be getting nervous because of asset price declines and gearing ratio increases, making them less willing to lend. The market for high-yield bonds has dried up, so for some companies it is no longer easy to raise money on the bond market,” he says. Cyrus Wong CPA, Finance Director of Pizza Express Hong Kong, says one of the biggest challenges created by high inflation for the food and beverage (F&B) sector is increased raw material costs. “We order quite a lot of food from Europe. Both food and logistic costs have increased significantly, managing costs and margin is one of the key challenges to our business,” he says. Weathering the storm For many treasury managers, preparations for these challenging conditions began some time ago. “When the tide goes out, you learn who has been swimming naked. It is a cliché, but it is very true for treasury management. Preparation must be done when the market is good. It could be very costly if you want to rectify it during a volatile market,” Ng says. In the current environment, he says THROUGH GOOD TIMES AND BAD APLUS October 2022 9
Global recession TREASURY MANAGEMENT treasury professionals must stick to the fundamentals and avoid the temptation of short-term profits or cost savings. For example, he points out that for bank financing, while uncommitted funding may be cheaper, companies should not rely on it too much, as banks may withdraw it at short notice. At the same time, Ng says companies should diversify their funding as much as possible. “In Hong Kong, bank loans are typically cheaper, so some companies rely on those, and are reluctant to issue bonds because they are more expensive. But bank loans are typically only for three to five years, and if they don’t diversify their debt maturity it could become lumpy, with a lot of loans maturing in a particular year.” He points out that treasury managers can use bonds or swaps to fix the interest rates for some of their debt, while they should also conduct a cost-benefit analysis on how much of their foreign exchange risk they want to hedge. “If you short sell a high-yielding currency, you pay a premium, but if it is a low-yielding currency you won’t. With the renminbi (RMB), people very rarely do a 100 percent hedge because if they do, all of their investment returns will be gone because it is very expensive. Obviously, hedging costs have recently reduced as the U.S. dollar interest rate went up. But, the U.S. dollar has strengthened a lot already,” he says. Ip thinks CFOs and treasurers should ensure their company has ample liquidity, regardless of the market conditions, pointing out that when COVID-19 first hit in 2020, many companies ran into problems due to having inadequate liquidity. “We always maintain around HK$1 billion in undrawn banking facilities to ensure ample liquidity, even in extreme circumstances like in the past couple of years,” he says. Ip adds that Impro Precision, a global casting and machined components manufacturer, has also diversified its sources of finance, increasing the number of Hong Kong principal bankers it has from four in 2016 to more than 10. “We do this to maintain healthy competition between the banks so that we don’t rely on one particular bank, in case it is hit by bad credit and reduces its lending.” Ip adds that the company also maintains banking facilities outside of Hong Kong, in Mainland China and Turkey, so that it can tap additional financing if it needs to. Cheng says: “Treasury management needs to strike a balance between the days sales outstanding and the credit term to optimize working capital. Other sorts of funding from financing or investing activities are also necessary to stabilize the liquidity of companies.” She adds that for short-term purposes, trade discount and factoring are commonly used for the early collection of receivables, although this involves additional financing costs. Wong says he has worked closely with the financial planning and analysis function of the business during the challenges of the past three years to take steps to manage cash and optimize operational costs. “Every time new anti-pandemic measures are announced by the government, we need to assess the potential impact and look at different scenarios, such as a 50 percent drop in sales, to make sure we are prepared,” he says. “We need to project our cash position for the upcoming 12 weeks on a weekly basis based on difference scenarios to make sure the business is self-sufficient in term of cash, whereas this process was done on a monthly basis when the market was stable.” He adds that the frequency and accuracy of forecasting is particularly important during difficult times. Like many businesses in the F&B sector in Hong Kong, Pizza Express’ main costs are labour, food and rent. “In the face of rising food costs, we are constantly adjusting our menu or offering to maintain the balance between food quality and margin. We also need to be more flexible with the cost structure of labour, to enable us to react if sales are expected to drop significantly. Recruiting and retaining our parttime staff pool is the key to building a flexible labour structure. We need to reduce fixed costs and convert some of them to variable costs to manage our cash flow for both the short and long run,” he says. Dr William Chen FCPA, CFO at Quasar Engineering, a medical device manufacturer, points out that high inflation has led to increased raw material prices. At the same time, following the recovery from the COVID-19 pandemic, some materials are in high demand globally, meaning there are longer lead times for delivery. As a result, Quasar Engineering is ordering higher quantities to ensure sufficient material for production and to make purchases before prices increase further. “From a financial perspective, it ties up more cash in terms of both unit cost and quantity before we can transfer the cost to our customers. The finance function plays an important partner role by working more closely with purchasing, operations and sales teams to analyse and identify the right balance of material inventory levels, unit material costs and cash flow,” he says. The strong U.S. dollar is another challenge. “We all learn that FX “ When the tide goes out, you learn who has been swimming naked. It is a cliché, but it is very true for treasury management.” 10 October 2022
APLUS hedging is like buying insurance, but sometime the hedging cost is high. We do a matching/natural hedge, such as making material purchases in same currencies as sales,” Chen says. Managing risk An important part of the role of treasury management is identifying and managing risk. Cheng says foreign exchange volatility is one of the key risks multinational corporations currently face, due to the diversity of their businesses across different countries. “This can be minimized by keeping transactions in local currencies to mitigate the foreign exchange risk, but it cannot be avoided altogether due to the different denominated currencies in different countries within the same group. Therefore, appropriate hedging strategies need to be in place to minimize exposure to foreign exchange f luctuations,” she says. Cheng adds that in an inf lationary environment, rising interest rates, and by extension increased financing costs, is another risk. “Executing fixed-term instruments or arranging hedging, such as interest rate swaps, can help to stabilize financing cost arising out of short-term increases in interest rates,” she says. For Wong and the F&B industry, the biggest risk is uncertainty in the market. “For treasury management purposes, we need very accurate forecasts for cash inflows and costs. But it is currently difficult to predict sales accurately, as they are highly dependent on the government’s anti-pandemic measures. We expected the end of hotel quarantine to benefit the market and the business but it turns out the impact is not as good as we expected. We still need to keep managing the uncertainty and build different scenarios to make sure we are not over-optimistic in our forecasts.” Ip points out that as a precision manufacturer, the biggest risk his company currently faces is reduced demand for automotive and certain industrial goods during the economic downturn. Other risks include higher working capital requirements, high interest rates and volatile exchange rates. To ensure it has adequate working capital, the company reviews its inventory and receivables on a weekly basis. It has also included working capital in its key performance indicators, and built foreign exchange movement adjustment mechanisms into its customer contracts. “Whenever there is a significant change, such as a 3 to 5 percent movement in the U.S. dollar and RMB exchange rate, we have an adjustment mechanism under which we can move the sale price up or down,” Ip says. He adds that the company also has access to financing in different countries to help manage interest rate risk. “In China, the interest rate is currently dropping, so we are borrowing more from there to replace higher cost borrowing in Hong Kong.” To increase cash f low, Chen suggests working closely with the “ For treasury management purposes, we need very accurate forecasts for cash inflow and costs. But it is currently difficult to predict sales accurately.” October 2022 11
Global recession TREASURY MANAGEMENT 12 October 2022
APLUS Recent consensus forecasts suggest that the global economy will experience its steepest decline in growth over the next two years following a post-recession recovery since 1970. Growth forecasts for the United States, Euro area, and China have also been lowered significantly, according to a report released by theWorld Bank last month. commercial team to increase the frequency and accuracy of sales order forecasts, and with the supply chain and operations team to closely analyse material and finished goods turnover, as well as unit costs. “Treasury professionals should also regularly review with the supply chain team the payment terms of the top 20 vendors to identify opportunities, as well as increase the review frequency of receivable aging for faster collections, and challenge the necessity and timing of capital expenditure,” he says. Identifying opportunities While the current economic environment presents challenges for treasury managers, it also creates opportunities. Ip points out that as a company that has the majority of its production in China, the RMB’s current weakness has resulted in a HK$26 million exchange gain in the first half of 2022. “We have also taken advantage of the Hong Kong Interbank Offered Rate being lower than the London Interbank Offered Rate and the Secured Overnight Financing Rate to divert some of our U.S. dollar financing into Hong Kong dollar financing in order to leverage the lower borrowing costs of the Hong Kong dollar,” he says. Ng says: “As interest rates went up quickly, previous swaps’ fair-value gain could be pretty good. I know some companies are considering closing out some of those swaps and taking profits. However, that should only be done within the risk appetite of the corporation.” He adds that a high interest rate environment is also good for new investments. “Investment-grade bonds are easily yielding more than 6 percent nowadays. It is the right time to deleverage but also a good time to invest in solid businesses and bottom fish,” Ng says, referring to a short-term price action strategy where investors buy assets that have experienced a decline. Wong points out that the current environment also makes it a good time for restaurants to invest in new premises. “Though many restaurants in Hong Kong have closed, we see that the market rent is lower and the cost of building a new restaurant cheaper than a few years ago. But we need to bet on the recovery of the economy,” he says. Meanwhile, Cheng thinks the current challenges offer treasury professionals an opportunity to shine. “Previously, companies may have used accounting and finance staff to cover the treasury function, regarding it as a cashier function. As the complexity and diversity of a business grows, we are witnessing an increase in awareness of the need for more sophisticated treasury management, particularly in an environment in which the economic outlook is volatile.” Being prepared As treasury professionals navigate the current volatile environment, Ip stresses the importance of staying up to date with macroeconomic developments, and fine tuning the company’s strategy to take account of these changes. “We have to maintain good liquidity, and have good control of working capital. It is also important to have a strong team in place to report the numbers quickly and continuously update financial forecasts,” he says. Ng suggests treasury professionals should prepare for the challenges ahead by arranging surplus financing and committed revolving facilities and ensuring that debt maturities are scattered. “Formulate your interest rate and foreign exchange strategies and seek approval from your board to ensure alignment.” He adds they should also keep abreast of the market developments and ensure they have the professional knowledge to understand any products they are offered thoroughly. “Both accounting and finance knowledge is essential for treasury professionals. A lot of treasurers have both CPA and chartered financial analyst qualifications. For every transaction a treasurer does, they need to know exactly what the accounting treatment will be and what the accounting implications are before they act,” Ng says. Chen advises treasury professionals to be heavily involved in business discussions at both strategic and operational levels, and discuss the implications for cash flowwith top management before any decision is made. He adds: “They should also consider increasing the facility line headroomwhen the business performance and cash flow is still positive.” Wong suggests treasury professionals to closely monitor their business, not just in terms of cash flow, but also the accuracy of the information they receive across the business, such as figures on projected sales and costs. “Any variant could cause very serious consequences. If we miss 10 percent of the sales forecast then the result could be very different, especially when the fixed costs still account for a significant portion in the business model.” Ip adds: “Overall, treasury managers should always be prepared, no matter whether times are good or bad.” Ip adds: “Overall, treasury managers should always be prepared, no matter whether times are good or bad.” “ We are witnessing an increase in awareness of the need for more sophisticated treasury management, particularly in an environment in which the economic outlook is volatile.” October 2022 13
PROFILE Bonnie Y Chan Bonnie Y Chan, Head of Listing at Hong Kong Exchanges and Clearing Limited, tells Jemelyn Yadao how the city can remain a top global listing venue, and about the further enhancements of its IPO regime During a speech last month, China Securities Regulatory Commission Vice Chairman Fang Xinghai announced new measures signifying the broadening mutual access scheme between the Mainland and Hong Kong financial markets. One of them is the inclusion of Hong Kong-listed international companies in Southbound Stock Connect, an initiative that will give investors in the Mainland the opportunity to access the securities of international companies through the trading channel. Bonnie Y Chan, Head of Listing at Hong Kong Exchanges and Clearing Limited (HKEX), says this is game-changing for the city as a listing hub. “For international companies that want to capture the potential of Mainland’s huge investment pool, they only really have two choices – try to go onshore to get listed, which at the moment there’s no easy way of doing, or get listed in Hong Kong and tap the Mainland investor base through the Stock Connect programme. We are the only international capital market which is able to offer that possibility.” This should come as welcomed news, particularly after the slowdown in initial public offering (IPO) activity globally during the first six months of the year, reflecting global market sentiment and the continuing impact of the pandemic. “With the new initiative, we hope we’ll build on our high-quality capital raising hub for companies around the world,” says Chan. As head of HKEX’s listing division, Chan is constantly looking at ways to further elevate the quality of Hong Kong’s market. Her listing team acts as frontline regulators of Hong Kong’s listing market, reviewing and approving IPO applications, and supervising the ongoing compliance by listed issuers with their obligations under the listing rules. Another key role of the division, she says, is to continue enhancing the rules that govern the eligibility of listing in Hong Kong. “When people talk about the listing division, they usually think about how we monitor listed companies for their compliance, which obviously is a very important part of what we do. But the more impactful part is creating new opportunities through new chapters [of the Main Board Listing Rules]. That to me is very rewarding,” she says. But creating listing policies is also the most challenging part of her team’s work, Chan adds. “As a regulator, we need to map out the wishes and the demands of all our stakeholders, which includes a very broad spectrum of buy-side, sell-side professionals and intermediaries, regulators and government. There’s never perfect alignment, but what we do is create a solution that most of these stakeholders will find acceptable and satisfactory.” Photography by Jocelyn Tam KEEPING THE CROWN 14 October 2022
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PROFILE Bonnie Y Chan Transforming the framework Over recent years, numerous adjustments to HKEX’s listing rules have been made, including the creation of three new chapters in 2018: Chapter 8A, which accepts companies with weighted voting rights structures; Chapter 18A, which deals with the listing of prerevenue biotech companies; and Chapter 19C, which creates an easier path for Greater China companies to come to Hong Kong for a secondary listing. “We were targeting new economy companies back then, and it’s translated into positive results. With our listing pipeline, these days we are increasingly seeing the centre of gravity migrating to new economies rather than traditional companies. So that was very successful,” says Chan. From 2018 when the new listing rules took effect until September this year, 227 new economy companies listed in Hong Kong, raising a total of HK$893.3 billion and which accounted for 63.8 percent of IPO funds raised in the city during the period. To facilitate the listing of innovative companies, HKEX launched a market consultation on new listing rules for specialist technology companies in October. The proposed rules will enable eligible pre-revenue and revenue making companies in five frontier specialist technology sectors to list in Hong Kong, including next generation IT, advanced hardware, advanced materials, new energy and environmental protection, and new food and agriculture technologies. “The initiative takes into account the Bonnie Y Chan was appointed Head of Listing at HKEX in January 2020. As part of her role, she oversees the development of listing policies. 16 October 2022
APLUS uniqueness of the role technology plays in these businesses and their early stage of development relative to other listing applicants, supporting their fundraising needs,” says Chan. HKEX has also made it easier for international companies to list in Hong Kong through its overseas issuers listing regime, which took effect in January. Doing this exercise was important for improving Hong Kong’s competitiveness as an international financial centre, says Chan. “If we want to live up to that claim, we need to make sure that we attract not only the best Mainland companies, but also the best international companies,” she explains, noting that over the past decade companies such as Prada, L’Occitane, Samsonite and Budweiser APAC have listed in Hong Kong. “But we also heard from these companies about areas where we could improve. Therefore, one aspect of last year’s enhancement of our rules is to make sure that the regime includes measures that would enhance our market’s accessibility for international companies. “It used to be the case that before companies come to Hong Kong, they first needed to qualify their jurisdiction as an acceptable jurisdiction, and that involves a complicated exercise of comparing the shareholders protection features. We levelled the playing field so that regardless of where you come from, all you need to demonstrate is that you have fulfilled one set of Core Shareholder Protection Standards. With the new listing rules, we think we are very well-positioned to support this new pipeline of international companies.” Chan says that the second aspect of the regime is to support a vast pipeline of homecoming IPOs or listings, by which overseas-listed Mainland companies come to Hong Kong by means of a secondary or dual primary listing. Under the new listing regime for overseas issuers, for example, a United Stateslisted Chinese company without a weighted voting rights structure may seek a secondary listing on HKEXwithout demonstrating it is a company from emerging and innovative sectors, and with a lower market capitalization requirement. “We’re seeing an increased number of homecoming listings – nowwe have around 30. Interestingly, many of these companies have opted to come back by way of a dual primary listing as opposed to a secondary listing. I think the reason for that is because if you are dual primary listed, you may be eligible for Stock Connect and that’s a big attraction. In fact, a lot of the companies which were secondary listed on our exchange have now applied to become dual primary listed,” says Chan. She expects the new listing rules will continue to facilitate this ongoing trend. Maintaining market quality Most recently, HKEX also introduced a listing framework for special purpose acquisition companies (SPACs). Chan recalls how fast the process was from consultation to launch, with the consultation initiating in midSeptember 2021 and the first SPAC being listed in March 2022. “That is six months, which is the fastest time we’ve completed an exercise,” she says. Speed is necessary, she points out, as there are growing market expectations. “We need to get these new chapters ready so that when the market improves, companies can immediately get listed. But at the same time, we make sure we have a high-quality SPAC regime that strikes the right balance between business considerations and investor protection.” She calls it fortuitous that HKEX was able to study existing models in the SPAC space, such as the U.S. regime. “From the get-go, I think we had the benefit of learning from other people’s lessons. And we had a few general principles. First of all, we decided that we are not going to create our SPAC regime to enable ineligible assets to get listed. We “ If we want to live up to that claim, we need to make sure that we attract not only the best Mainland companies, but also the best international companies.” October 2022 17
PROFILE Bonnie Y Chan knowwe have to hold the line very firm to maintain our market quality,” says Chan. “Number two is we want to make sure that we introduce elements of independence in the whole valuation process. And to do that we introduced this element of minimum independent private investment in public equity, or PIPE investors, so that when a SPAC eventually de-SPACs, you introduce another participant at the bargaining table. They have an interest to negotiate with the SPAC promotor and the business owner, and you end up with a sustainable level of valuation. “The third thing is that the SPAC regime is designed to be a professionals-only product before the de-SPACing process,” says Chan. She points out the reason for this is based on a SPAC entity being a “cash company,” meaning that any volatility in the stock price would likely be a result of speculation. “We found it too risky placing it in the hands of retail investors,” she says. Chan points out that this is an innovative aspect of the regime. “It’s the first time Hong Kong is able to design new listing rules that allow or disallow participation of certain pockets of investors, commensurate with the risk of the product. And that’s useful because that would give us even more latitude to design products of different risk levels.” In the process of developing the SPAC regime, HKEXwas in close dialogue with the accounting profession. “A fewmembers on our Listing Committee are accountants by training, and they gave us very good advice in terms of howwe should design rules,” says Chan. “I thought that was a very good collaboration.” She says that accountants, particularly those who specialize in IPOs, have long played a key role in the listing process. “So far as IPOs are concerned, they will continue to be very critical. They are the gatekeepers. They are there to kick the tyres on the financials and I think they will continue to bring huge value in that regard.” Evolving ESG journey HKEX’s environmental, social and governance (ESG) journey started in 2013, when it introduced its ESG Reporting Guide and has since continued to upgrade the disclosure obligations of listed issuers. It is now keeping a close eye on international developments in relation to climate reporting. “Without good reporting or data disclosure, funds would not be able to employ their capital. There’s a clear commercial rationale,” says Chan. She says that while the International Sustainability Standards Board (ISSB) is working to launch its sustainabilityrelated financial reporting standards, which are expected to be announced early next year, HKEX, alongside the Securities and Futures Commission, are preparing their public consultation on a climate reporting framework. “In the last few months, we have embarked on very robust rounds of soft consultation. We have spoken to over 50 different sets of stakeholders, including listed companies and other professional groups. We are mindful that it’s a big exercise, and depending on listed companies’ scale and access to resources, they may have different varying levels of readiness in terms of being able to comply with climate disclosures requirements.” HKEX is reviewing its rules to further enhance climate disclosures to align with the new ISSB standards, says Chan. “We hope the ISSB standards will generally be what investors are looking for in terms of climate disclosure for them to make their investment decision. We will closely monitor the international regulatory developments in this regard, and continue to provide guidance and training to our listed issuers to promote ESG and climate change stewardship.” Chan says that climate reporting is an area where accountants can play a substantial role. She points out that based on the soft consultation of its rules, it is evident that there is a need among listed companies for more advisors to help them comply. “One comment we keep getting is that ‘we don’t mind doing the work and complying, but we cannot find enough advisors in the market to help us with our climate reporting.’ I think the biggest auditing firms already know that they need to make the investment and build capacity in this area. It’s just that the pace needs to be accelerated as there are a lot of opportunities there for the profession.” As well as the development of ESG reporting, Chan is looking forward to seeing more women sitting on the boards of Hong Konglisted companies in the near future. Starting from July, HKEX no longer accepts IPO applicants with singlegender boards. Existing listed issuers with single gender boards have until 31 December 2024 to appoint at least one director of a different gender. “I think it’s going to create a very strong momentum. For new listings, usually we’ll have about more than 100 new listings each year. Even if everyone simply has at least one female director, that’s already a big pool of female talent we’re adding,” she says. According to Chan, a third of existing listed issuers have all-male boards, accounting for around 800 companies. “I don’t think they’re going to wait until 2024. I think the churn will start whenever they have to bring in a new director, so that’s going to be quite exciting.” “ So far as IPOs are concerned, they will continue to be very critical. They are the gatekeepers.” In line with the prevailing global trend, fundraising activities slowed in Hong Kong, but on the upside, Hong Kong saw an increase in IPO activities in the third quarter this year, with 27 IPOs raising a total of HK$51.3 billion, more than twice that had been raised during the first two quarters of 2022, according to KPMG’s report: Mainland China and Hong Kong IPOmarkets: 2022 Q3 review. 18 October 2022
APLUS Leading to win Chan graduated from the University of Hong Kong and Harvard Law School. She has worked as a solicitor, banker and in-house counsel for an investment bank. “These were diverse experiences that gave me different perspectives when approaching a new problem,” she says. Chan first joined HKEX in 2007 as head of the IPO department, and moved to private practice in 2010. She then spent nine years with international legal firm Davis Polk in Hong Kong as a private practitioner before assuming her current role. “HKEX is one of the world’s biggest and most-respected exchange groups in the world. I am as exhilarated as I was when I first joined in 2007 to play a role in carving the future of global financial markets. In the past two years, I have had the privilege to continue working with a very professional team, and together we have driven a number of initiatives that have contributed towards Hong Kong’s enduring success as an international financial centre.” As Chan oversees the listing function’s relationships with key stakeholders, she says that the ability to address the needs and pain points of different stakeholder groups is crucial in her current role. “For example, in 2020, we worked very closely with the accounting profession to overcome audit challenges resulting from the COVID-related travel bans. Through our direct engagement with the accounting profession and the affected listed issuers, we were able to come up with innovative solutions that kept the market informed. Having the empathy to appreciate and address the difficulties of the affected stakeholders was key to get that challenge to a safe resolution.” A new passion that Chan developed during the pandemic is weight training. “Since COVID, it dawned on me that it is very important to make sure that I’m physically and mentally fit. So I began going to the gym about a year ago, and now I’m completely hooked, going to the gym five times a week.” This fitness side of her was highlighted during a recent twomonth corporate wellness challenge for HKEX staff, in which she came in among the top few performers across the entire organization. “More than a thousand colleagues joined; I did 4,300 kilometres of cycling in two months, and the listing teamwon the challenge as a division,” says Chan, still shocked. “There were moments, especially after the first month, where I thought I was going to give up, but I stuck with it thinking I should set an example for my team.” Chan graduated from the University of Hong Kong and Harvard Law School. Besides her two stints at HKEX, she has worked as a solicitor, banker and in-house counsel for an investment bank. October 2022 19
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