Profile: Charles Li

Charles Li, who previously spent a decade as the public face of Hong Kong Exchanges & Clearing (HKEX) is quick to dispense with formalities in his new role as an entrepreneur.

Entering the conference room in an office on the 21st floor of Exchange Square, not far from his former stomping ground, Li is dressed casually in a polo shirt and wearing his signature bright smile. The public relations professional in attendance is dismissed to work on other projects.

“To be honest, who cares about what happened decades ago to a 60-year-old man? And I don’t really like making ‘chicken soup for the soul,’” Li said in jest, referencing the popular, motivational speaker-written book series that comprises inspirational stories involving members of the public. “I am very focused on what we do today.”

Li has a very practised style when answering questions, capturing something of the reasoned-based approach that shaped his reformist reputation at HKEX. He begins with the big picture, identifies the fundamental issues at play, and then elaborates on specific solutions.

For example, the role of HKEX is defined as building bridges between four key components: Chinese companies and overseas capital plus overseas companies and Chinese capital. During his decade-long tenure as CEO of HKEX, Li was an earnest bridge builder.

The Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect systems, initiated in 2014 and 2016, respectively, facilitated capital flows between Hong Kong and the mainland, giving companies exposure to a swath of new investors. Bond Connect, rolled out in 2017, expanded coverage from listed equities into listed debt.

Arguably Li’s most significant reform was the introduction of weighted voting rights in Hong Kong in 2018, which enabled founders to retain control of companies despite diluting their equity interests. It led to a surge in new economy listing activity as Chinese technology players trading in the US offered shares in Hong Kong. IPOs by pre-revenue biotech companies were allowed around the same time.

Weighted voting rights might have arrived even earlier, accommodating Alibaba Group’s desire to list in Hong Kong rather than New York, but the proposed change provoked fierce opposition.

Li dramatized the debate – offering context to the different perspectives – in a 2013 blog post supposedly based on a dream. Mr. Tradition, Mr. Innovation, Mr. Disclosure, Mr. Big Fund, Ms. Small Retail, Ms. Pragmatic, Mr. Morality, Ms. Future, and Mr. Procedure all weighed in on investor protection versus innovation. The post attracted widespread attention.

“There were a lot of objections at that time, and I couldn't talk to them one by one, yet I felt that there were logical problems behind many of the criticisms. I wrote the article to express those different opinions, and they figured out the logical flaws themselves – if you insist on this, then that is the final trade-off,” Li explained.

When he departed HKEX at the end of 2020, daily turnover and the combined capitalisation of listed companies were twice the 2010 levels. HKEX’s own market capitalisation climbed to HKD 579bn (USD 73.7bn) from HKD 190bn, making it the world’s most valuable bourse.

Burning ambition

Behind these various reforms, Li nurtured a more ambitious plan to revolutionise traditional financial markets by creating a new kind of exchange that could meet the needs of micro, small, and medium-sized enterprises (MSMEs). However, over time he realised that the scope for innovation with traditional exchanges was limited. “There are no new dishes in the old shops," he observed.

The fundamental challenge is one of concentration: there are about 15,000 listed companies in the world and only the top 20% of each market are actively traded, which means the needs of smaller players are not properly met.

The imbalance, according to Li, is driven by bottlenecks in three areas: access to formal and legal products, such as stocks and bonds; valuation and information discovery mechanisms which rely on participation by analysts and accountants; and delivery guarantee mechanisms, provided by exchanges, clearing houses, and stock registries, that ensure the performance of contracts.

Given the extent of the role that financial professionals and institutions must play in this process, transaction costs are too high for MSMEs to bear.

Inspired by the role digitalisation has played in financial inclusion by enabling mom-and-pop stores across China to realise cashless transactions, Li resolved to create a new platform that can connect global capital with the country’s MSMEs. This led to the emergence of Micro Connect last year.

Private markets investors were quick to respond. The company raised USD 50m in angel and Series A funding last year from the likes of Sequoia Capital China. This was followed by a USD 70m Series B in March from a string of investors including ABC International, Horizons Ventures, Lenovo Capital, and New World Development’s Adrian Cheng

The Series B coincided with Micro Connect reaching its first milestone – providing financing to 100 MSMEs. It crossed the 1,000 threshold in September, having supported businesses in catering, retail, services, and sports and culture across 30 provinces. The average ticket size is CNY 428,000, which means around CNY 500m has been deployed to date.

Expansion plans

With 140 employees in Hong Kong and mainland China, Micro Connect wants to provide financing to 10,000 MSMEs by 2023. The pursuit of this goal is helped by 90% of business arising from inbound inquiries – which Li believes is due to a strong design that originated from clear big-picture thinking.

“What do the small businesses like most? They like the equity-style investment in the sense that you don’t need collateral and there is no need to pay anything back if a business shuts down. They also like debt in the sense that it has a clear upper limit. Balancing these considerations with the needs of investors was the key issue,” he said.

It largely comes down to having a reliable repayment mechanism. Micro Connect copied the model used by many franchise holders and franchisee stores of small daily payments. MSMEs are supposed to clear the principal in two years and then take another two years to pay off the interest, which amounts to 50% of the principal. It translates into an annual return of about 12.5%.

Repayments are set at a fixed percentage of the borrower’s daily income, reducing the risk attached to end-of-term settlement and allowing investors to redeploy the proceeds in other deals. Micro Connect developed a hybrid equity-debt product called a daily revenue contract, which requires no collateral or guaranteed repayment and prevents investors from interfering in daily operations.

The business model withstood the stresses of pandemic-driven lockdowns. Average daily repayments in Shanghai were at 60% of current levels, but to date, no MSME borrowers have collapsed. “Our stores are resilient because we follow the good vines and find the good melons – we track chain stores and invest in smaller stores in the same networks,” Li explained.

The existing portfolio of 1,000 borrowers has ties to 68 brands or so-called node enterprises. Single brand exposure is capped at 5%, although in time this will fall below 1%. Micro Connect is in talks with 965 brands to expand and diversify its exposure. Additional downside protection comes through binding repayments from new outlets to those of existing outlets in the same network.

Through this lending activity, Micro Connect is accumulating a treasure trove of data from across China. Li plans layer over information sourced from other channels and create business activity heat maps for each city in which the company operates. Explaining the rationale, he returns to the vine and melon metaphor, with commercial landlords such as shopping mall operators becoming the vine.

“Small to mid-size developers have many shops, but they often find it hard to attract investment. Based on our data, I know there should be two McDonald's outlets and three hot pot restaurants in a particular mall,” he said.

“I can bring in these stores and invest in these stores, on the condition that the developer hires a SaaS [software-as-a-service] provider to install ERP [enterprise resource planning] systems for all stores in the mall and let us take a portion of the daily income. In this way, these real estate projects become node enterprises.”

The road to Hong Kong

Studying Li’s career, ambition and endeavour come to the fore. Born in 1961 in northern China, his childhood and adolescence were overshadowed by the Cultural Revolution. With high schools shuttered for an extended period, he learned English as a teenager by listening to Voice of America on short-wave radio. Days were spent working on an offshore oil field in the Bohai Sea.

When the education system was restored, Li studied English literature at Xiamen University, and on graduation, became a journalist at English language publication China Daily. He then realised a long-held dream to study in the US, winning a scholarship for a report on corruption in Chinese football.

Knowing little of US universities, he made applications in alphabetical order and was admitted by the University of Alabama. A master’s degree in journalism was followed by a juris doctor (JD) degree from Columbia University.

Li secured jobs at two US law firms, Davis Polk and Brown & Wood, and then Merrill Lynch, a legal client, enticed him into investment banking. Li relocated to Hong Kong, where he focused on China deals, and ultimately became president of Merrill Lynch’s China team. He then moved to J.P. Morgan and was promoted to China chairman in 2003.

The HKEX CEO job came up six years later. Asked by Laura Cha, then the exchange’s independent non-executive director, what made him qualified for the role, Li replied that he was not: he had no experience managing a company, wasn’t proficient in IT, and couldn’t speak Cantonese. Honesty clearly counted for a lot.

Having spent most of his career in Hong Kong, Li has seen the city undergo profound change, yet he remains bullish about its prospects. Hong Kong continues to be favoured by Chinese entrepreneurs given its proximity to the mainland and ability to serve as an access point for international markets.

Li advocates deepening financial ties between Hong Kong and the mainland by extending the Stock Connect systems to include IPO subscriptions. However, he accepts that challenges remain around the movement of capital and competition between exchanges on either side of the boundary.

Moreover, Li contends that concerns about capital and talent fleeing to other jurisdictions – which have intensified in the past three years as Hong Kong has faced a variety of pressures, to the perceived benefit of Singapore – are overblown. The territory has always been an open economy; there is nothing preventing the outflow of assets, and equally, no reason why they may not return.

“Unless there is broader structural change in Hong Kong, the movements we see today will not impact the relative importance of Hong Kong versus Singapore in the financial world,” he said. “Money might flow out, but the real wealth of businesspeople is not in assets that are mobile, it is in their domestic businesses."

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• Topics
• Greater China
• Financials
• IPO
• Regulation
• Hong Kong (China)