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Jurisdiction Special Focus: Hong Kong

by Investors Offshore editorial staff, March 2013
01 March, 2013


In geographical terms, the peninsula and collection of islands in south eastern China which make up the territory of Hong Kong are a little over 400 square miles in size, but in economic terms, the former British colony, which in 1997 was handed back to greater China, packs a serious punch on the world stage and can claim to be the globe’s third largest financial centre after New York and London, and the ninth largest economy in the world.

How has this been achieved? Well, the story of Hong Kong’s economic success has its roots in Britain’s colonial past, and is not really the focus of this feature. However, factors such as Hong Kong’s low business and personal taxation burden, its laissez-faire business environment enshrined in a common law system based upon English principles and its unique position as a trading and investment gateway to China have certainly helped.

One Country, Two Systems

Politically, since July 1, 1997, Hong Kong has been a Special Administrative Region of the People's Republic of China and the constitution known as the ‘Basic Law’ is modeled on the constitution of the People's Republic. Under the slogan of ‘one country, two systems’ which was established before the handover, the Chinese Government agreed that Hong Kong's capitalist system would remain unchanged until the year 2047. This means it has been pretty much business as usual in terms of the day to day functioning of the Hong Kong’s economy, (although it has to be said that question marks remain over Beijing’s desire to promote democracy in the SAR).

Nevertheless, the decision by China not to interfere in the local economy means that little has changed since 1997 to upset Hong Kong’s financial services system (apart from external economic factors beyond its control). Tokyo aside, Hong Kong is Asia’s largest banking hub in terms of external transaction volume. At the end of January 2013, there were 155 licensed banks, 21 restricted licence banks and 24 deposit-taking companies in business. These 200 authorized institutions operate a comprehensive network of 1,300 local branches. In addition, there were 59 local representative offices of overseas banks in Hong Kong. Total bank deposits have grown steadily over the past 12 months, and at the end of January 2013 stood at over HKD8.27 trillion (just over USD1 trillion), up from HKD7.6 trillion a year earlier. Renminbi banking is restrained so far, but as much as RMB603bn (USD96bn) in renminbi deposits were held in Hong Kong banks at the end of 2012, five times more than was held in mid 2010. Total employment in the banking sector numbers about 100,000.

Furthermore, Hong Kong is recognized as the leading fund management centre in Asia, with the industry defined by its international and offshore characteristics and it has become a popular choice for hedge fund managers. Until 2006, hedge funds were frequently domiciled elsewhere, owing to the fact that they are subject to profit tax in Hong Kong. But under The Revenue (Profits Tax Exemption for Offshore Funds) Act 2006, offshore funds owned by non-resident entities (which can be individuals, partnerships, trustees of trust estates or corporations) administering a fund, are exempt from tax in respect of profits derived from dealings in securities, dealings in futures contracts and leveraged foreign exchange trading in Hong Kong carried out by specified persons such as corporations and authorized financial institutions licensed or registered under the SFO to carry out such transactions.

Hong Kong’s hedge fund industry has also continued to register growth. According to the Hong Kong Securities and Futures Commission's last survey report of the sector, released in March 2011, assets under management or advisory in Hong Kong increased 14% from the time of the previous survey in March 2009 to USD63.2bn as at September 30, 2010. The number of hedge funds managed by the SFC-licensed hedge fund managers in Hong Kong stood at 538 as at September 30, 2010, nearly five times the level in 2004, the earliest year covered in similar SFC surveys.

The CEPA agreements (Closer Economic Partnership Arrangement) with mainland China have already gone a long way towards opening access for Hong Kong financial institutions to the mainland, and the city’s financial services industry is beginning to play a key role in the growth of fund management and international banking on the mainland, with China opening up its banking and investment sector under WTO rules.

Hong Kong is already one of Asia’s leading asset management centers with HKD9 trillion in funds under management in the territory. However, is determined that the territory become the region’s leading fund management base. To attract more private equity funds to domicile in Hong Kong, it was proposed in the 2013 Budget that the profits tax exemption for offshore funds be extended to include transactions in private companies which are incorporated or registered outside Hong Kong and do not hold any Hong Kong properties nor carry out any business in Hong Kong. As a result, private equity funds will enjoy the same tax exemption as offshore funds.

Low Taxation

A great deal of Hong Kong’s economic success is undoubtedly attributable to a policy of low taxation. A big advantage is that tax is levied on a territorial basis, meaning that taxes are only charged on income arising from or derived in Hong Kong itself. Furthermore Hong Kong does not levy capital gains taxes, withholding taxes, annual net worth taxes or sales tax, although recent budgetary constraints forced the government to actively consider the latter some years ago. Despite the government's efforts to convince taxpayers of the merits of a sales tax, the proposal was deeply unpopular with Hong Kong's public and is no longer on the agenda.

The main tax encountered by business entities in Hong Kong is profit tax which is charged at a standard rate of 16.5% (15% for unincorporated businesses).

Property tax is also relatively low, and charged at 15% of the annual assessed rental income of the property. Corporations can set it off against profits tax. Hong Kong does buck the world trend somewhat by retaining stamp duty on the transfer of shares and market securities (charged at 0.2%) although it is the intention of the government to eventually phase out stamp duty altogether. Stamp duty on property transactions rises on a graduated scale to a maximum of 4.25%. A Special Stamp Duty (SSD) on residential properties was introduced in November 2010 to curb speculation, and it was recently increased. A Buyers Stamp Duty was also recently introduced (see below).

Personal income taxes are also low by world standards and constitute a major draw for foreign residents. Income tax, known in the SAR as ‘salaries tax,’ is based on the previous year's income. It is charged at either 15% of assessable income after deductions, or at progressive rates to 17% (March, 2013), whichever is lower. The territorial nature of Hong Kong’s tax system means that there is much scope to reduce taxation on various forms of income derived from foreign jurisdictions.

Hong Kong until 2006 levied an estate tax, charged at a maximum of 15% on estates valued over USD1,350,000 (HKD10.5 million); but it was abolished in that year.

Residence

Hong Kong owes much of its success to international input, and its colonial past means that British influences abound. English can still be heard as the territory’s official language alongside Chinese. However, the overwhelming majority of Hong Kong’s densely packed 7 million population (according to the 2010 census) are of ethnic Chinese origin, with the major non-Chinese elements coming from the British Commonwealth, the US, Japan and Portugal.

All foreign nationals attempting to gain entry into Hong Kong must obtain a visa. The one exception to this rule is for British citizens, who may remain in the territory for up to six months before having to acquire a visa. However, the visa rules in Hong Kong are complex, and have become especially so since 1997. As a general rule those seeking to reside or work in Hong Kong who do not already have the right to abode or ownership of land in the territory need a visa. Whilst it may also be possible to arrive in Hong Kong on a tourist visa and obtain employment, it is becoming increasingly difficult for employers to obtain residential visas via this method, and it is therefore not the recommended path.

Employers will find the transfer of specialized staff or management posts within a firm is usually a straightforward business in Hong Kong, although the SAR government’s policy on importing labor makes recruiting specialized staff more difficult, and procedures are in place to ensure that local workers have ample opportunity to fill a vacancy ahead of foreign candidates.

However, highly skilled or talented foreign workers are permitted to reside and work in Hong Kong under the Quality Migrant Admission Scheme, although there are many strings attached. Successful applicants are not required to secure an offer of local employment before their entry to Hong Kong for settlement, although all applicants are required to satisfy one of the two points-based tests, namely the General Points Test and Achievement-based Points Test, and compete for quota allocation with other applicants. Successful applicants under the Scheme may bring their spouse and unmarried dependent children under the age of 18 to Hong Kong provided that they are capable of supporting and accommodating their dependants on their own financial resources without relying on public assistance in Hong Kong. The Scheme is not applicable to nationals of Afghanistan, Cambodia, Cuba, Laos, North Korea, Nepal and Vietnam.

Hong Kong also runs the Capital Investment Entrant Scheme, which facilitates the entry for residence persons who make capital investment in Hong Kong but would not be engaged in the running of any business in the SAR. The entrant is allowed to make his choice of investments amongst permissible assets without the need to establish or join in a business. The scheme is available to all foreign nationals (except nationals of Afghanistan, Albania, Cuba and North Korea), Macao Special Administrative Region (Macao SAR) residents, Chinese nationals who have obtained permanent resident status in a foreign country, stateless persons who have obtained permanent resident status in a foreign country with proven re-entry facilities, and Taiwan residents. Applicants must meet the following requirements:

  • be over 18 years of age, have net assets of not less than HKD6.5m;
  • have invested within six months before submission of his application to the Immigration Department, or will invest within six months after the granting of approval in principle by the Immigration Department, not less than HKD6.5m in permissible investment asset classes;
  • have no adverse record both in Hong Kong and country/region of residence; and
  • be able to demonstrate that he is capable of supporting and accommodating himself and his dependents.

By the end of 2012, 17,000 individuals had been granted formal approval to enter Hong Kong under the scheme, bringing in HKD129bn in investment.

Real estate

Real estate prices in Hong Kong have generally bucked the general global trend witnessed over the last ten years. While prices soared in certain parts of Europe, Northern America and Australia in the years before the credit crunch, Hong Kong’s market was actually deflating as it continued to reel from the effects of the Asian financial crisis of 1997/98.

By the end of the last decade however, things began to reverse, and in January 2008, prices were 90% above those seen five years earlier. The market went into reverse again in 2008, of course, with falls of up to 25% in most categories of property. However, while the property sector in most of the mature economies struggles to stage any sort of recovery, the Hong Kong government is now in a position where it is attempting to prevent a real estate bubble, as strong demand from international investors, and particularly from China, drive up prices. Indeed, mainland Chinese buyers now make up 25% of prime market purchases in Hong Kong.

With space very much at premium, buyers can expect to pay around HKD120,000 per square meter for a small apartment in Hong Kong (less than 40 square meters). For larger properties, in the 100-160 square meter category, the average price per square meter is HKD190,000 (November 2012).

Gross rental yields for residential properties are running at about 2% for luxury units and 3.5% for smaller units.

In its 2010/2011 budget, the government introduced measures to cool the market, including an increase in stamp duty on properties valued at over HKD20m (USD2.6m) from 3.75% to 4.25%.

However, following a significant inflow of 'hot money,' leading to substantial increases in asset prices in Hong Kong, Financial Secretary Tsang announced new anti-property speculation measures in November 2010. Among them was the Special Stamp Duty (SSD) on residential properties, which is charged on top of the current ad valorem property transaction stamp duty.

With property prices spiraling, more stamp duty hikes have been announced.

In late December 2012, Hong Kong gazetted legislation imposing Buyer's Stamp Duty on residential properties acquired by non-Hong Kong permanent residents. The Stamp Duty (Amendment) Bill 2012, tabled at the Legislative Council on January 9, 2013, will be applicable to all residential properties acquired on or after October 27, 2012.

Under the reforms, the Buyer's Stamp Duty will be charged at a flat rate of 15% for all residential properties. It will be levied on top of the existing stamp duty and the Special Stamp Duty, where applicable, on any such property acquired by any person or entity, except a Hong Kong permanent resident.

The legislation also extends the Special Stamp Duty's coverage period and adjusts its rates. The duty will have three levels of regressive rates for different holding periods. It will apply at 20% of the amount or value of the consideration if the residential property has been held for six months or less; 15% for properties held for between six and 12 months; and at 10% for those held for more than 12 but less than 36 months.

On February 22, 2013, Hong Kong’s Financial Secretary, John C. Tsang, announced that the Government has decided to launch a new round of increases to stamp duty rates for both residential and non-residential properties.

In a statement, Tsang said that: “In an environment of persistent, ultra-low interest rates and abundant liquidity, the local private property market continues to be exuberant. It has been dominated by a firm expectation that property prices will continue to increase. The risk of an asset bubble is increasing.”

“The property price increased by 2% in January, and the momentum is continuing this month. In fact, prices have increased by 120% compared to the recent trough in 2008,” he added. In addition, “the price of non-residential property has also soared. In 2012, the price of retail space surged by 39%, office space by 23% and factory space by 44%. The number of transactions has also increased.”

With effect from February 23, 2013, the Government has, therefore, increased the cost of property transactions generally by doubling across the board the rates of existing ad valorem stamp duty applicable to both residential and non-residential properties. For transactions valued HKD2m (USD258,000) or below, the stamp duty will increase from HKD100 to 1.5% per cent of the consideration of the transaction.

Exemptions have been granted similar to those available in the existing SSD and BSD regimes. The new stamp duty rates will not apply to HKPR buyers who are not beneficial owners of any other residential property in Hong Kong at the time of acquisition of a residential property.

Secondly, while stamp duty is presently charged when a conveyance on sale of non-residential property is executed, the arrangement has been amended so that stamp duty is charged on an agreement for sale and purchase of a non-residential property. This amendment will standardize the stamp duty regime for both residential and non-residential property transactions.

Tsang believed that “the two new measures, together with the enhanced supply of flats, will help cool down the overheated property market,” both residential and non-residential. However, Hong Kong’s Chief Executive, C Y Leung, emphasized that “the Government will continue to monitor the property market. If the market continues to get overheated, we will introduce further demand-side management measures in a timely manner.”

The stamp duty changes have been taken simultaneously with housing finance measures announced by the HKMA, which has issued tougher guidelines to banks in a new round of prudential supervisory measures on their property mortgage business.

In stress-testing mortgage applicants’ repayment ability, banks are now required to assume a mortgage rate increase of 3%, instead of the previous 2%, applying to all mortgage loans for residential, commercial and industrial properties; the maximum loan-to-value (LTV) ratios of mortgage loans for all commercial and industrial properties is lowered by 10%; and the maximum LTV ratio of mortgage loans for standalone car park spaces is set at 40% and the maximum loan tenor at 15 years.

In addition, the Hong Kong Mortgage Corporation Limited has revised the eligibility criteria for the Mortgage Insurance Program (MIP). Previously, properties with value at or below HKD6m were eligible for the maximum MIP cover of 90% LTV, but, after the revisions, only mortgage loans of properties with value at or below HKD4m are now eligible for that maximum.

Properties with value above HKD4m and below HKD4.5m are now eligible for MIP cover up to HKD3.6m, being 80-90% LTV; while properties with value at or above HKD4.5m are only eligible for a maximum MIP cover of 80% LTV. The cap on the value of properties under MIP will remain unchanged at HKD6m.

Any residential property acquired on or after November 20, 2010, either by an individual or a company, listed or unlisted, and regardless of where it is incorporated, and resold within 24 months will be subject to the proposed SSD.

The SSD is payable jointly and severally by both the buyer and the seller in the resale transaction, and is calculated based on the consideration for the resale transaction at regressive rates for different holding periods. It is charged at 15% if the property is held for six months or less; 10% if the property is held for more than six months but for 12 months or less; and 5% if the property is held for more than 12 months but for 24 months or less.

It was also proposed to disallow deferred payment of stamp duty, including SSD, for residential property transactions of all values, while, to deter non-compliance, the existing statutory sanctions were to be extended to cover the SSD. Any person who fails to pay the SSD by the deadline for payment is liable to penalties up to 10 times the amount of the SSD payable.

Closer Economic Partnership

As mentioned, Hong Kong’s unique relationship to China allows it to serve as a convenient base for international manufacturers and investors with plans to tap into the Chinese market place. Beijing and Hong Kong have sought to oil the wheels of the trading machinery that exists between the two jurisdictions by agreeing to the Closer Economic Partnership Arrangement (CEPA), which came into effect on 1st January 2004, and has been extended several times since.

CEPA has brought encouraging economic benefits to both the Mainland and Hong Kong. By the end of April 2012, more than 81,000 applications for Certificate of Hong Kong Origin under CEPA had been approved, with the total export value of the goods amounting to more than HKD40bn. By the end of March 2012, tariff savings for businesses amounted to RMB2.8bn.

CEPA, in parallel with China's accession to the World Trade Organization, has set in motion a process of trade liberalization in goods and services between the SAR and China and has cemented Hong Kong’s position as the conduit for investment into the mainland. Tariffs have been removed on a wide range of goods and services; it has also removed or reduced geographical, financial and ownership constraints on a variety of services sectors including professional services, communications and media, financial services and trade related services, legal services, construction, information technology, conventions and exhibitions, audiovisual, distribution, tourism, air transport, road transport, and individually owned stores. Importantly, these liberalizations apply to companies of any nationality provided the firm is incorporated in Hong Kong, has operated there for a minimum of three years, is liable to pay tax in the territory, and employs at least 50% of staff locally.

However, overseas firms without a presence in Hong Kong can still take advantage of the CEPA provisions by outsourcing to, or partnering with, a qualified Hong Kong-based manufacturer or service provider. Foreign manufacturers can achieve this by satisfying rules of origin requirements which essentially means that goods must be ‘substantially changed’ in Hong Kong to qualify. Overseas service providers meanwhile, can partner with or invest in a CEPA-qualified firm to gain greater access to the mainland market.

CEPA also includes a number of rules enabling mutual recognition of professional qualifications as part of the services rules in a number of sectors.

Supplement IX to the CEPA was signed on June 29, 2012, by Hong Kong’s Financial Secretary, John C Tsang, and the Chinese Vice-Minister of Commerce, Jiang Yaoping, and provides for a total of 43 services liberalization and trade and investment facilitation measures, strengthens co-operation in areas of finance, trade and investment facilitation, and further promotes the mutual recognition of professional qualifications in the two places.

For example, market access conditions was further relaxed in 21 existing sectors, including legal, accounting, construction, medical services, computer and related services, placement and supply services of personnel, printing, telecommunications, audiovisual, distribution, banking and securities, and tourism. Including the measures in Supplement IX, the two sides have so far announced 338 liberalization measures in 48 service sectors.

Hong Kong law firms that have set up representative offices on the Mainland are now allowed to operate in association with one to three Mainland law firms, while Hong Kong accounting professionals, who have obtained the Chinese Certified Public Accountants qualification, will be allowed to become partners of partnership firms in Qianhai on a pilot basis.

In addition, in banking and securities, Hong Kong banks are now permitted to offer custodian services regarding settlement funds of customers of securities companies and margin deposits on futures transactions; and Hong Kong securities companies that satisfy the qualification requirements as foreign shareholders of foreign-invested securities companies, and Mainland securities companies that satisfy the requirements for establishing subsidiaries, are allowed to set up equity joint venture securities investment advisory companies on the Mainland.

Such an equity joint venture securities investment advisory company shall be a subsidiary of the Mainland securities company, and the shareholding of the Hong Kong securities company can be a maximum of 49% of its total shareholding.

All measures under CEPA Supplement IX relating to the liberalization of trade in services took effect from January 1, 2013.

With regard to financial co-operation under the new Supplement, the Mainland will amend and improve the relevant requirements for overseas listing to support Mainland enterprises that satisfy Hong Kong's listing requirements in listing in Hong Kong, and create favorable conditions for Mainland enterprises, especially small- and medium-sized enterprises, to raise capital through direct listing in overseas markets.

Furthermore, the Chinese government will actively explore ways and means to deepen co-operation between the commodity futures markets on the Mainland and in Hong Kong, to lower the eligibility requirements for Hong Kong's financial institutions to apply for Qualified Foreign Institutional Investor status in order to facilitate Hong Kong's long-term capital investing in the Mainland's capital markets, and to support qualified Hong Kong financial institutions in setting up fund management companies and futures companies on the Mainland.

In January 2013, Invest Hong Kong (InvestHK) announced that it assisted 316 overseas and Chinese mainland companies to set up or expand in Hong Kong in 2012, representing a new record and a 4% increase over a year ago.

The Director-General of Investment Promotion, Simon Galpin, welcomed the increase in completed projects but noted that global uncertainties because of the euro debt crisis and American economy remained a concern. "2012 was another record year for InvestHK in terms of completed projects," he said. "The positive results showed that Hong Kong continues to attract overseas and Mainland investors because of its enduring advantages and new business opportunities."

However, he noted that, "in the year ahead, we will remain cognizant of global economic trends and continue to identify the sectors and markets which will reap the best benefits for Hong Kong. Our targets will include both multinationals and start-up businesses, which aspire to set up in our city."

The 316 completed projects derived from 34 countries. Mainland China continued to be the largest single source of investment into Hong Kong with a total of 62 projects, followed by the United States with 54 projects, the United Kingdom (29), Japan (27) and Germany (17). The 316 companies planned to employ 2,937 people in Hong Kong for their first year of set up or expansion, up 8% from a year previously.

By broad sector definitions, the top three in terms of number of completed projects were transport and industrial (48), tourism and hospitality (46) and innovation and technology (43). By subsector, there were an increasing number of companies from the fashion apparel and asset management industries. That was said to reflect the role of Hong Kong as China's international business and financial center, and its attractiveness to visitors and high net-worth individuals who are boosting the demand for retail and asset management.

By region, Europe led the field with 110 projects completed, compared with 105 a year ago. Some 60 projects were from the eurozone economies, up by almost 16% compared to a year earlier. North America, including Canada, also reported growth, with 65 projects compared with 59 a year ago. Asia Pacific, excluding Mainland China, reported milder growth, with 74 projects, compared with 73 in 2011.

By market, Germany was the fastest growing from Europe, with 17 projects compared to seven in 2011 (up 143% from over a year ago). In Asia, Mainland China and Japan were ahead (up 10.7% and 17.4% compared to a year ago, respectively). Galpin confirmed that InvestHK is delighted "to see that German companies are choosing to set up in Hong Kong in growing numbers."

Galpin concluded that Hong Kong "is not only popular for multinationals with global functions but is also increasingly a magnet for entrepreneurs who are attracted by the business convenience and opportunities it has to offer."

Renminbi

More recently, CEPA has led to the easing of restrictions on the trading of the Chinese currency, the renminbi, in Hong Kong. Hong Kong importers are now allowed to settle direct import trades from the Mainland in renminbi, while financial institutions in the Mainland have begun to issue renminbi financial bonds in Hong Kong.

While the renminbi is not yet fully convertible, the Chinese government has taken several steps to incrementally liberalize the currency in recent years. In March 2011, the State Administration of Foreign Exchange (SAFE) confirmed that it will look for a developing use of China's currency, the yuan, in capital account transactions. While it will continue its close monitoring of capital account flows, it is now to be expected that convertibility of the yuan for cross-border investment purposes will mirror the use of the yuan for cross-border trade settlement, which is already much further developed.

Inevitably, much of the growth in offshore renminbi business is taking place in Hong Kong, and progress has been seen in various areas, including cross-border trade settlement, deposits, bond issuance and the introduction of financial products. Moreover, in February 2011, the Tsang announced in his budget presentation that further measures will be taken to foster growth in offshore renminbi trade.

In May 2012, Hong Kong Exchanges and Clearing Limited (HKEx) received approval from the Securities and Futures Commission to offer renminbi (RMB) currency futures. As the first exchange-traded currency futures settled in RMB, the planned USD/CNH (RMB traded in Hong Kong) futures contracts are designed to provide a way for investors to hedge RMB exposure. The contracts will require delivery of USD by the seller and payment of final settlement value in RMB by the buyer at maturity. Contracts will be quoted in RMB per USD (for example, RMB6.2500 per USD) and margined in RMB, with the trading and settlement fees charged in RMB. When announcing its plans last month, HKEx Chief Executive Charles Li said: "This initiative is part of our strategy to expand beyond equities and equity-related derivatives, offer a wide range of RMB-traded products and take advantage of the opportunities we see in fixed income, currencies and commodities."

HKEx welcomed the debut on October 29, 2012, of the first RMB-traded equity security on Hong Kong’s Stock Exchange – the world’s first RMB-traded equity security outside Mainland China, and the Exchange's first dual counter equity security. The RMB-traded shares of Highway Infrastructure Limited are in addition to its previously-existing HKD-traded shares, and all of the shares are under the dual counter model (under the dual counter model, there are RMB and HKD counters of the same class of shares that trade in RMB and HKD respectively, have different stock codes and short names, and are fully transferable).The RMB counter will also be a Designated Security eligible for short selling (the HKD counter is already a Designated Security eligible for short selling). As a result, borrowing RMB-traded shares and selling HKD-traded shares or vice versa will be regarded as a covered short sale.

"The debut of the first RMB-traded equity security outside Mainland China and our first dual counter equity security will be major milestones in our development of RMB products and will reinforce Hong Kong’s position as a leading offshore RMB centre," said HKEx Chief Executive Charles Li. "RMB-traded equity securities will be a significant addition to our RMB-traded bonds, Exchange Traded Funds (ETFs) and Real Estate Investment Trust (REIT), as well as our deliverable RMB currency futures," he added. "We expect interest in RMB products will continue to grow with the increasing internationalization of the RMB."

At this time, there were 49 RMB-traded products in HKEx’s markets: 42 debt securities, five ETFs, and one REIT and RMB currency futures.

In response to a question in the Legislative Council in January 2013, on the increasing competition from other financial centers, the Secretary for Financial Services and the Treasury, Professor K C Chan, confirmed that the government will continue to promote the services that Hong Kong as a global offshore RMB business center provides for corporates and financial institutions.

Chan pointed out that, with the wider use of RMB in cross-border trade, the demand for RMB financial services from overseas individuals and corporates will increase gradually, and that it is a natural development that overseas financial centers are making efforts to promote RMB business. However, he said that, along with that competition come business opportunities for banks and financial institutions in Hong Kong. For example, Hong Kong's banks will be allowed more room for developing RMB business with overseas banks, such as the provision of RMB correspondent banking and inter-bank lending services.

With regard to the increasing RMB business in Taiwan, the monetary authorities of the Mainland and Taiwan signed the Memorandum of Understanding on Cross-strait Currency Clearing Cooperation (MoU) in late August2012. It was agreed that the two sides will establish a cross-strait currency clearing mechanism based on the principles and co-operation framework laid down in that MoU, but details of the clearing arrangements have yet to be announced. The government has also been closely monitoring the development of RMB business in other places (for example, London and Australia), and is promoting co-operation and establishing linkages between these places and Hong Kong's offshore RMB platform, thus furthering Hong Kong's important role as the offshore RMB business center.

He emphasized that Hong Kong has the "first-mover" advantage over other places for launching offshore RMB business. Hong Kong has all along been a platform for mainland China to trade and invest overseas, and, with an increasing number of these transactions being settled in RMB, Hong Kong can have a role to play and can seize the business opportunities that come with it. Hong Kong is, he stated, the largest and most competitive offshore RMB business center, providing a one-stop service to corporates and financial institutions from different parts of the world. Apart from conducting cross-border trade settlement in RMB, Hong Kong also has the largest offshore RMB liquidity pool and financing market, with a diversified range of RMB-denominated products on offer.

The financial industry and government are actively providing RMB services to overseas financial institutions at the wholesale level. For example, overseas banks have set up over 1,300 RMB correspondent banking accounts with banks in Hong Kong, in order to satisfy their clients' needs for RMB trade settlement and financing through Hong Kong, while Hong Kong's RMB clearing platform has developed into a global RMB payment network with over 200 participating banks, providing efficient and reliable service to more than 30 other places.

Looking ahead, Chan concluded, the government will consolidate and enhance Hong Kong's strengths in various areas and, at the same time, make joint efforts for a win-win situation with other places, by assisting and facilitating financial institutions and corporates around the world to expand their RMB business while promoting the use of Hong Kong's RMB financial platform to settle their transactions.

The Outlook

Economically speaking, Hong Kong hasn’t had an altogether easy ride in recent years, and has had to deal with a long period of deflation and the widespread impact of 9/11 and the SARS epidemic in early 2003, which joined with cyclical factors to slow economic growth considerably.

However, the government is determined to avoid a repeat of the SARS crisis which virtually shut down the city for a number of weeks in 2003, in the process crippling the economy across all sectors and eventually claiming the lives of 300 people. Realizing that there is much at stake if another epidemic were to occur, Hong Kong in 2003 earmarked some HKD1.3 billion (US$100 million) to be spent on various public health projects whilst laws have been changed to strengthen and enforce hygiene standards and promote a more hygiene-conscious culture among the city’s population.

Economic growth has see-sawed somewhat. Gross domestic product grew by 6.4% in 2007, before slowing to 2.2% in 2008 and shrinking by 2.7% in 2009. The economy rebounded sharply in 2010, by 6.8%; but growth slowed to a disappointing 1.4% in 2012, with GDP expected to grow by a similar rate in 2013.

As an entrepot and trading city, with only a small domestic manufacturing base, Hong Kong's performance has historically tended to reflect overall global trading conditions, which have scarcely been benign in recent years. Whatever short-term travails it may have experienced, however, Hong Kong holds an enviable position as the conduit for global investment into China, and with its economy built firmly on a foundation of low taxation and decades of expertise as a financial services hub, it seems that prospects for the former British colony appear bright. The jurisdiction is likely to remain popular both as a place to do business, and a place where foreigners can take advantage of an attractive tax regime, for some time to come.




 

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