2019 was a rough year for many Chinese technology companies because of the Sino-US trade war, which exposed China’s soft spot — its reliance on foreign technology as part of a global supply chain. In past years, China has understood very well that to become and stay a technology powerhouse, it needs to remain at the forefront of new technologies.

One of many examples of China’s interest in new technologies could be the creation of the Guangdong-Hong Kong-Macao Greater Bay Area, which has been called by some media “China’s plan to beat Silicon Valley”. As part of the Bay Area blueprint, Hong Kong will bring to the table its financial expertise, while Shenzhen will bring its technological innovation.

However, in this column, I am going to focus on just one of these new technologies: blockchain, whose economic value was defined by China Central Television in 2018 as “10 times more valuable than the internet”.

Practically unfalsifiable and impossible to change once a record has been added, blockchain is a distributed database stored on multiple computers as a massive number of identical copies. It is best known for underpinning the operation of cryptocurrencies such as bitcoin.

Beijing’s approach toward blockchain and cryptocurrencies seems much clearer now: It is encouraging Chinese companies to seize the opportunity offered by blockchain technology, while it is adopting a tough approach on virtual-currency trading platforms. In this sense, on Dec 27, Chinese regulators issued a joint regulatory warning on the rise of the virtual-currency trading activity in the country.

This distinction may seem confusing, since these currency trading platforms, at the end of the day, use blockchain technology. But we need to bear in mind that blockchain is much more than just cryptocurrency — this technology can be used in security, healthcare, advertising, video games, journalism, the energy sector, etc. Therefore, Beijing is creating its own world-leading and government-ruled digital currency while trying to maintain control over the types of digital or cryptocurrencies traded within China.

It would be wise for Hong Kong to diversify its economy as much as possible. It must therefore seize any opportunity to do so, and blockchain is definitely a great one

This State-ruled digital currency will have two main advantages. First of all, it will allow China to create a very powerful soft-power tool and perhaps beat the US; secondly, it will allow China to fight its shadow-banking system. Shadow banking in China was tolerated by the authorities as a way of meeting the funding needs of private companies and small and medium-sized enterprises, but, because of its rapid growth and increase in debt, the mainland authority has closed thousands of peer-to-peer platforms.

How does all this affect Hong Kong? Beijing’s approach to blockchain technology and cryptocurrencies affect Hong Kong positively in several ways.

When it comes to blockchain technology, the fact that China is promoting it will allow many companies from Hong Kong to grasp this opportunity. Hong Kong, as an international banking and financial hub, is ready to embrace blockchain technology and become a leader in financial technology. These last few years, Hong Kong’s blockchain startups have been steadily growing and showing that they can become an important player in Hong Kong’s banking and financial system.

In this sense, as I mentioned in my column, “HK should leverage Bay Area to become a fintech hub like Singapore” (June 19, 2019), Hong Kong is developing itself into a leading fintech hub. In March, the Hong Kong Monetary Authority announced the issuance of the very first virtual-banking licenses.

Hong Kong’s fintech industry has the potential to develop much faster now if it can leverage its involvement with the Bay Area blueprint.

Hong Kong’s importance as a fintech hub is increasing exponentially. According to a report published by Accenture in March, between 2014 and 2018, Hong Kong’s fintechs have raised a total of over US$1.1 billion, making Hong Kong the fourth-largest destination for fintech investment in the Asia-Pacific region.

Many attribute Hong Kong’s rapid rise into a fintech hub to the government’s active support, one key part of the government’s fintech strategy being Cyberport.

Additionally, in November, the HKMA announced that an agreement was signed between the subsidiaries of Hong Kong Interbank Clearing and the Digital Currency Research Institute of the People’s Bank of China to conduct a test of a blockchain project to improve their trade finance operations. The trial, which is expected to begin sometime in the first quarter this year, aims to connect HKMA’s blockchain-based trade finance platform eTradeConnect and the PBOC’s Trade Finance Platform.

Moreover, the mainland’s crackdown on cryptocurrencies other than its own State-run cryptocurrency opens many opportunities for Hong Kong, since many companies will use Hong Kong as a hub to start their operations, now that their trading operations are not well-regarded on the mainland.

To sum up, blockchain and cryptocurrency offer many opportunities to both the mainland and Hong Kong. The city will continue to profit from being “the gateway” to the mainland, but this “connector” role will diminish as the mainland keeps opening up its economy and financial system. So it would be wise for Hong Kong to diversify its economy as much as possible. It must therefore seize any opportunity to do so, and blockchain is definitely a great one.

The author holds a doctorate in Hong Kong real estate law and economics. He has worked as a business analyst for a Hong Kong publicly listed company, and he has given seminars at the University of Hong Kong on shadow banking in China.

The views do not necessarily reflect those of China Daily.