SCMP x HKUST - Expert Insight Series 2017: Professor Utpal Bhattacharya
While his internationally recognised research focuses on the “dark side of finance”—manipulation and dishonesty in global markets—Utpal Bhattacharya believes Hong Kong's financial infrastructure stands out as role model of efficiency and transparency.
While his internationally recognised research focuses on the “dark side of finance”—manipulation and dishonesty in global markets—Utpal Bhattacharya believes Hong Kong's financial infrastructure stands out as role model of efficiency and transparency.
In particular, the professor of finance at the HKUST School of Business and Management notes the importance of the city’s low tolerance for corruption, clear regulations, and well established rule of law. These can be seen as marketable advantages and key factors supporting Hong Kong’s status as an international hub for business and finance.
“Institutions from around the world know if they bring their financial services to Hong Kong, their contracts will be verified and, if necessary, enforced,” Bhattacharya says.
He also endorses the Economist magazine's recent observation that Hong Kong facilitates the two-way flow of people, capital and ideas through a "semi-permeable membrane", connecting mainland China with the rest of the world. This happens thanks to a framework which meets the needs of the global financial community and offers unique advantages. For example, it will allow Hong Kong to support the China-led “Belt and Road” initiative, which will see multibillion-dollar investments in road, rail, port and power projects in countries across Asia and beyond.
“Wherever there is infrastructure, there is a need for financing, but we need to ensure we have the people with the right skills to provide financial services,” Bhattacharya says.
If the Asian Infrastructure Investment Bank (AIIB) lets private sector participants finance Belt and Road projects, the region can expect to see significant inflows of capital. Assuming this happens, it should boost demand for Hong Kong-based expertise in capital market financing and asset management. By being a “super-connector” and leveraging its strengths as an offshore renminbi centre and source of funds, the city can create all sorts of new opportunities. Finance students should take due note and realise the value of fluent English and Putonghua.
“Our students can strengthen their language skills, and Hong Kong is the place to do it,” says Bhattacharya, noting that technical know-how alone is not enough to get ahead. “I can state unequivocally that finance students here are very smart and on a level with the best I have taught in the US."
In fact, he has taught at Columbia University, MIT, the University of Iowa, and the University of Chicago Booth School of Business, as well as in Europe, South America and Asia.
“As algorithms reduce or eliminate many of the mundane tasks in financing, it will take creativity, emotional intelligence and interpersonal skills to launch groundbreaking ideas,” he says, “To achieve this, finance professionals must have very strong language skills.”
He believes fintech is another area where Hong Kong can play a leading regional and global role. At HKUST, he is part of a faculty team doing related research with a view to introducing new fintech courses. Various studies have predicted that global investment in fintech will grow from US$12 billion in 2014 to more than US$46 billion in 2020.
Looking ahead, Bhattacharya sees no obvious reason why Asian financial markets should not continue to develop. As this happens, though, he expects more instances of the “dark side of finance” because the temptation is there and humans aren’t perfect. His research paper "When an Event is Not an Event", published in 2000, helped to uncover rampant insider trading on the Mexican stock market and led to broader questions about the value and the enforceability of insider trading laws.
“Interestingly, while most countries ban insider trading, only about one-third, actually enforce the laws,” he says.
He was first drawn to these darker aspects of finance in 1975 when, as a student in Bengal, he was awarded a cash payment instead of a scholarship. Despite a letter from the central government confirming the award, he never received the money. “Almost forty years later, when I enquired about the missing cash, I was told I could have it on payment of a bribe that was almost double the initial award,” he says.
Having presented various research findings to 170-plus institutions in 24 countries, Bhattacharya was invited in 2006 to serve as a member of the “Task Force to Modernise Securities Regulation in Canada”. Six years on, the Securities and Exchange Commission in the US asked him to present the findings of his Journal of Finance paper documenting cross-subsidies in mutual fund families. “Some see me as a bit of a whistleblower,” he says.
In Europe, he also had first-hand dealings with the dark side of finance, when teaching in Russia in the 1990s. He came across a Ponzi scheme run by Sergei Marrodi, a former deputy of the Russian State Duma, promising annual returns of up to 1,000 per cent.
“I advised my MBA students, who were part of a US exchange programme, not to get involved, but they were unable to resist the temptation," he says. “As usual, what sounded too good to be true, was just that.”
At its peak, Marrodi's scheme was raking in an estimated US$50 million a day from the sale of shares to the public. Estimates vary, but somewhere between five and 40 million people are thought to have lost a total of up to US$10 billion. “Thankfully, we don't have these sorts of schemes popping up in Hong Kong," Bhattacharya says. “But there are always different exciting things happening here, which create the city’s own chaotic uniqueness.”
