GBA: Hong Kong and its key role as Financial Services and Securities Investment center
Hong Kong, with its low, simple and limited tax, its open capital/forex market, and proximity to the Greater Bay Area (GBA) and China continues to offer clear advantages and opportunities for foreign companies.
Currently Hong Kong is being absorbed into the Greater Bay Area (GBA), which will help the city redevelop and reposition itself as a key financial player in the region. The GBA would be the world’s 12th largest economy if taken as a single bloc, including 11 cities with a combined population of 72 million and an economy worth about US$1.7 trillion.
At the time of Hong Kong’s handover to China in 1997, the city represented nearly 20 percent of China’s GDP, but due to China’s rise since then, this has shrunk to 3 percent today. Despite that smaller slice of the pie, China’s growth is now creating benefits for Hong Kong rather than the other way around.
Hong Kong is one of Asia’s financial centers, with free capital movement, a low tax regime and strong expertise in financial services (services are 95 percent of Hong Kong’s GDP). These will play an important role when it comes to tapping into the GBA’s huge private and corporate savings, and capital markets.
Firms and professionals in financial services will clearly benefit. This Hong Kong sector has been gradually developing over the past few years, starting with the launch of Stock Connect in 2014 to Bond Connect in 2017, allowing offshore money to tap into China’s growing economy and bourses.
New regulations approved this year on Wealth Management Connect provide significant opportunities for both local, Chinese and foreign companies in Hong Kong looking to access the US$3 trillion of privately held financial assets in mainland China (of which over US$1 trillion is in the Greater Bay Area alone). This in turn will provide access to new investment and insurance products, green finance, and other innovative financial services and products.
Besides wealth management, there are plenty of opportunities for life insurance, funds, securities, and asset management, among others. Insurance Connect will also follow on the successes of the other “connect” services, while B2B and B2C financial sector products, green finance, family offices, block-chain, and fintech are all creating new incentives to be in Hong Kong and the region.
GBA tax regimes are also being modified. At the moment, the Individual Income Tax (IIT) system of mainland China adopts a seven-level progressive rate, ranging from three percent to 45 percent, which is higher than Hong Kong’s salary tax and personal assessment. Hong Kong has a five-level progressive rate, ranging from two percent to 17 percent, or a standard rate of 15 percent.
To lower the IIT rate and offset the difference with Hong Kong, nine mainland GBA cities have introduced IIT subsidies from 2019 to 2024, which may tempt small- and medium-sized enterprises (SME) looking at Hong Kong to consider other Greater Bay Area locations, where taxes are similar but operating costs, such as rent and cost of living, are far lower.
On another note, Hong Kong is still the world’s largest RMB clearing center (75 percent of the total) and will continue to maintain its role as an RMB business hub, in turn, fitting in with China’s desire to position the RMB as an international currency. The RMB is already the second-most transacted currency through SWIFT, overtaking the euro in use back in 2013. That trend will continue and runs parallel to Beijing’s desire to internationalize the RMB.
There are significant back-office and customer relationship center requirements throughout the Greater Bay Area which Hong Kong will both fund, and support, while Hong Kong’s universities and academics are already expanding their activities into China.
For foreign investors, the question of why you need to be in Hong Kong will depend on the type of business and the best way to position it. China has been opening up and improving its business environment with initiatives such as the new Foreign Investment Law, Negative List, outbound investment trends and Belt and Road projects.
Though other cities in the GBA, such as Guangzhou, Shenzhen, Dongguan and Zhongshan, will be competing for a bigger role in the region, the future of Hong Kong as the biggest financial hub in the area will be uncontested.
Last year, Hong Kong handled two of the world’s top five IPOs in Alibaba (US$12.9 billion) and Budweiser (US$5.7 billion).
The Securities and Futures Commission, Hong Kong's market regulator, is seeing a rebound in licenses it issues for people involved in asset management, securities and other financial activities, according to data on its website. The total number of licenses it issued was up 1.7% at the end of March, compared with nine months earlier, and just shy of an all-time peak in 2019.
"Hong Kong has some unique advantages, and it will remain the gateway for many of our local and global clients to access China," said Kaleem Rizvi, Head of Citi's Asia-Pacific corporate bank.
Protests against Chinese rule and a new security law imposed on the city to crush dissent by Beijing, as well as the coronavirus pandemic, forced many financial institutions to slow down. But the increased hiring plans of some major players show that they are now willing to live with the political risks.
"Everyone in the business community I have spoken with welcomes the peace and stability now, compared with the chaos of 2019," said to Reuters Weijian Shan, chairman and chief executive of Hong Kong-based private equity group PAG.
Politics remains contentious and unsettling for some finance professionals. Hong Kong police have asked some banks to hand over account details of opposition activists and politicians arrested under a stringent national security law imposed by Beijing.
Despite the political situation, the city's close ties to China and the business it brings keep attracting investors. Flows via the stock connect schemes linking Hong Kong with the Shanghai and Shenzhen exchanges rose to record highs in the first quarter of 2021.
Companies, mostly from mainland China, raised more money through Hong Kong listings in the first five months of this year than they did in the same period of the last four years combined, Refinitiv data shows. Mergers and acquisitions in Greater China are the highest since 2018.
Anthony Fasso, Asia Pacific chief executive of global asset manager PineBridge Investments, said Hong Kong was adapting to the new realities. “We believe that Hong Kong will remain a globally competitive international city at the doorstep of one of the largest and fastest growing economies in the world,” he commented.
Hong Kong not only represents a springboard for foreign firms’ investment and expansion into the Chinese markets, but also benefits foreign countries given Hong Kong’s special status under the “one country, two systems” principle of the Basic Law.
Even before the return of Hong Kong to Chinese sovereignty in 1997, all these stakeholders had economic incentives to maintain and promote Hong Kong’s status as an international financial center. In recent years, however, this situation has become more difficult to sustain because of political and ideological conflicts.
However, there is no doubt that China recognizes the importance of an international financial center in fulfilling the Chinese Dream: the nation needs money and finance to accomplish its series of grand projects such as Made in China 2025, internationalization of the RMB, the Belt and Road Initiative, and the development of the Guangdong–Hong Kong–Macau Greater Bay Area.
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DISCLAIMER: All information in this article is verified to the best of our ability and is assumed to be correct at time of release; however, Woodburn Accountants & Advisors does not accept responsibility for any losses arising from reliance on the information provided within. The information provided is for general guidance and does not replace specialized advice.