Were concerns about businesses moving out of Hong Kong to other IFCs unfounded?
Hong Kong has overtaken the UK to become the world’s most important international finance centre (IFC) in the Vistra 2020 report
Hong Kong has overtaken the UK to become the world’s most important international finance centre (IFC) in the Vistra 2020 report.
While Hong Kong has repeatedly appeared near the top of Vistra’s jurisdictional rankings – largely due to its established role as an intermediator for Chinese money entering the global economy – its rise to number one remains significant.
Largely, this is because commentators in recent years have predicted that the opposite might happen. Many warned, for example, that political unrest and an evolving regulatory environment could have a negative impact on the territory’s reputation, prompting some of its Chinese business to go elsewhere.
Singapore, in particular, has been highlighted as an alternative to Hong Kong. The jurisdiction is ranked second by the World Bank for ease of doing business, and has numerous preferential trading and double taxation arrangements in place. As a neutral, sovereign country, the jurisdiction also offers greater risk diversification for mainland Chinese clients that consider Hong Kong to be “too close to home”.
Considering Hong Kong’s ranking in this year’s Vistra 2020 report, we should therefore ask: were concerns about clients taking their business to other jurisdictions unfounded? To some extent, the answer is a simple “yes”.
While some private wealth clients have gone to Singapore – due to proactive marketing, a stable environment and the presence of a Mandarin-speaking populace with good English skills – Vistra’s experience is that the opposite is true for corporate money. Indeed, we have seen many Chinese firms strengthening their base in Hong Kong, consolidating its position as the gateway between China and the rest of the world.
This does not mean, however, that there are no caveats to bear in mind when looking at Hong Kong’s prospects for the longer term.
A balanced view of the unrest
Among Hong Kong respondents to the research in this year’s Vistra 2020 report, 41% believe that political unrest has had a negative impact on the jurisdiction’s reputation. When the Occupy Central protests took place in 2014, it made headlines around the world, with speculation that the situation would intensify.
Today, the view on the ground in Hong Kong is much more settled. Many also note that political unrest is hardly a unique phenomenon for a jurisdiction in the current global climate, so clients are already factoring geopolitical risk into decision-making wherever they are building their presence. This is not to say, however, that clients should pay no attention to the long-term political situation in Hong Kong.
Moving with the wider tide of regulation
In light of the impact that regulation has had – and continues to have – on the wider corporate services industry, it’s not surprising that the Vistra 2020 report’s respondents have concerns about how it will affect Hong Kong’s future position as an IFC.
In our most recent report, 68% of Hong Kong respondents told us they were expecting the Chinese government to ramp up its scrutiny of funds being moved to IFCs. They were also more likely than their peers in other regions to think that, among all IFCs, Hong Kong would be the most negatively affected by regulation.
There is some justification for this view. In early 2018, regulation was introduced that required Hong Kong companies to register their significant controllers, which many at the time proposed should become public. An even more significant impact was the introduction of the Common Reporting Standard (CRS), requiring Hong Kong banks to report to Chinese authorities the accounts held by Chinese taxpayers in the jurisdiction.
In the short term, measures like these may be a disincentive for Chinese clients that are considering Hong Kong as an IFC or thinking about structuring outside of China at all. Ultimately, however, they will likely be guided by the fact that CRS is in force in Singapore, Switzerland and many other jurisdictions – with the exception of Delaware – that they might consider as an alternative.
As a result, we wouldn’t expect changes with regulations to affect Hong Kong’s overall strength in the near future. Regulatory changes and transparency initiatives will simply affect Hong Kong just like in most other financial centres.
Conclusion: The bright future?
Chinese influence across Asia and the rest of the world is gathering pace through the Belt and Road Initiative, which is driving further integration between China and the world economy and may eventually lead to the internationalization of the renminbi. As a consequence, we can expect the jurisdiction to continue to benefit from Chinese economic growth.
The opportunity is heightened by disappointing stock market performance within China in recent times, as evidenced by the Shanghai Composite Index dropping 30% during 2018, which is driving many Chinese corporates to raise capital overseas. Whether they launch IPOs in Hong Kong or in another external market, Hong Kong’s closeness to China and the growing presence of Mandarin-speaking service providers on the ground mean that the jurisdiction can play a crucial role in facilitation.
Nonetheless, there are challenges ahead. Many Chinese clients will be attracted to the proximity of Shanghai as it competes for Hong Kong business, and Singapore will continue to market itself as a viable alternative, particularly for the country’s high-net-worth individuals. Furthermore, despite our sanguine overall view of the impact of regulation on Hong Kong, there are some steps that corporates and individuals should take in response to regulatory pressure whether they are setting up structures in the territory, in Singapore or elsewhere.
To respond to changing income tax rules in China and the ongoing impact of base erosion and profit shifting, for example, they should seek relevant tax and legal advice, and undertake a thorough review of the structures that they currently have in place.
Joe Cheung is managing director and co-head, Greater China at Vistra
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16 Apr 2019