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Hong Kong Sets Out How It Intends To Stay Ahead As Global Financial Centre
Tom Burroughes
19 November 2013
A recently-minted government body set up in Hong Kong to
promote the financial services industry has called for reforms to ensure the
Asian jurisdiction competes vigorously against hubs such as London,
Singapore and the
up-and-coming centres in Mainland China. Its stance drew praise yesterday, such as from the private equity industry. The Financial Services Development Council, a 22-member body
created in January, 2013, set out policy documents charting how Hong Kong,
already one of the great wealth management, investment and trading centres of
the world, stays that way as competitive threats mount. Its report is called Strengthening Hong Kong
As A Leading Global International Financial Centre. Hong Kong accounts for about 80 per cent of all offshore RMB
trading, and in total, financial services in Hong Kong accounted for more than
HK$300 billion ($38.7 billion), or 16 per cent in value to gross domestic product in 2011 (the
last year for which such data is available), making it the second biggest
sector in the economy. The sector employs over 228,000 people directly, as well
as those in related industries such as the law, accountancy, transport and
property. As of April this year, Hong Kong ranked third in Asia, behind
Singapore and Japan, and fifth in the world, in total foreign exchange turnover
with $275 billion of average daily net turnover (source: Bank for International
Settlements). But this happy picture contains some problems; the jurisdiction’s
IPO market is highly dependent on business from the Mainland, while its fund
management market is hampered by certain rules, the report said. The report pointed out that while the liberalisation – to a
degree – of the Mainland economy and renmnibi created some opportunities for
greater trade, it also means that Chinese cities pose a competitive threat to
Hong Kong as well, noting that Shanghai is slated to become an international
financial centre by 2020, and has already become a Free Trade Zone. Political/business
disagreements within Hong Kong, and a heavy concentration on equities as an
asset class, means Hong Kong needs to become
more financially diverse, the report said. Proposals, comments Among the body’s ideas are that, in the field of fund
management, Hong Kong should review existing rules to create conditions to
attract open-ended investment companies, or OEICs, on a par with those in
foreign centres. In the case of retail estate investment trusts, or REITs, the
current restrictive regulatory regime on these listed vehicles should be
changed. As far as wealth management as a sector is concerned, the
report said policymakers and market players should agree on a “unified
definition for the private wealth management client”, coupled with
principles-based guidelines tailored to the industry to supplement existing
rules. “This,” the report said, “would enable private banks to operate under
business practices more suitable for HNWI than for retail customers, as a more
relationship-based advisory model with different compliance requirements.” It also called for a set of private wealth management
competency standards for product knowledge and advisory approaches should be
set up for people in the industry. In the case of private equity, the organisation welcomed the
move by Hong Kong’s administration in its
2013-2014 budget to extend the offshore tax exemption – or “safe harbour” rule,
to private equity funds. The “safe harbour” rule move was also welcomed yesterday by
the Hong Kong Private Equity Finance Association. The association said the tax
exemption will “bring the private equity industry more or less in par with the
hedge fund industry, and it is expected that this move will lure interest from
many mainland and international fund managers to set up offices in Hong Kong”. “In fact, we have seen a growing number of fund managers
enquiring about the progress of the tax exemption legislation in the last six
months, since the Financial Secretary revealed the policy initiative in the
budget speech in February this year. We are encouraged to see the tax exemption
to cover special purpose vehicles set up in Hong Kong,
a commonly used vehicle for holding assets in the private equity industry, for
as long as these SPVs do not hold substantial real estate assets”, said Simon
Ho, chairman of HKPEFA. “Hong Kong has come a long way in developing the private
equity industry and the tax exemption come just at the right time when our
neighboring cities such as Singapore, Shenzhen and Shanghai are stepping up
their efforts to introduce tax incentives to attract fund managers and other
service providers to move their operations to these destinations”, said Patrick
Ip, vice chairman of HKPEFA. He is also the head of portfolio supervision management
and risk management of the China ASEAN Investment Cooperation Fund, an outbound
China
government quasi-sovereign equity investment fund. Fixed income laggard Among other details, the report noted that, in contrast to
its equity market, the jurisdiction’s fixed income market has been “relatively
weak” and is still in a development stage in terms of liquidity. There are
outstanding debt securities worth $261 billion, way below, say, that of the US, at $35.155 trillion, and Japan, at $14.592 trillion. This difference is explained by the lack of a debt yield
curve for Hong Kong Dollar-denominated debt as a reference for issuers because
of limited government issuance; swapping costs to the Hong Kong Dollar deter
issuers of US dollar debt; there is also, the report said, a relative dearth of
credit rating presence and expertise. More positively, the rise of an offshore RMB bond market –
or “dim sum” market – bodes well for the fixed income business in Hong Kong, the report added.