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- HONG
KONG OFFSHORE BUSINESS SECTORS
- HONG KONG BANKING
AND FINANCIAL SERVICES
- HONG KONG THE SECURITIES
MARKET
- HONG KONG VENTURE CAPITAL
SECTOR
- HONG KONG INSURANCE
- HONG
KONG FINANCIAL HOLDING AND INVESTMENT ACTIVITIES
- HONG KONG BOOKING
CENTRE COMPANIES
- HONG KONG PROFESSIONAL
SERVICES
- HONG
KONG HEADQUARTERS COMPANIES
- HONG KONG SHIP MANAGEMENT
AND MARITIME OPERATIONS
Hong
Kong Investment Fund Management
Hong
Kong is widely recognised as the leading
fund management centre in Asia with the
largest concentration of fund managers.
The industry is characterised by its international
and offshore nature.
In
August, 2007, the Hong Kong Securities and
Futures Commission released the findings
of its latest Fund Management Activities
Survey (FMAS), which indicated that the
territory's fund industry continued to expand
through 2006.
The
FMAS has been conducted by the SFC on an
annual basis since 1999 to collect information
and data on the general state of affairs
of the fund management industry in Hong
Kong. The survey covers the fund management
activities of two types of firms in Hong
Kong, namely: corporations which are licensed
by the SFC and engage in asset management
and fund advisory businesses; and banks
which engage in asset management and other
private banking activities.
According
to the main findings of the 2006 survey:
-
There was 36% year-on-year growth in the
value of funds in Hong Kong.
- 80%
of the assets managed are located in Asia.
- 62%
of combined fund management business were
sourced from overseas.
- 75%
of the fund management business was enjoyed
by SFC licensed corporations.
- 56%
of the assets under management were managed
onshore.
Separately,
the SFC has reviewed the growth of the retail
fund business in Hong Kong since the establishment
of the SFC in 1989. It found that the number
of retail funds offered to the public has
grown from 783 at the end of 1989 to 1,980
in 2007. In value terms, the size of retail
funds has grown 22 times, from HKD283 billion
to HKD6,154 billion over the same period.
There
has also been substantial increase in the
nature and types of funds available to the
retail investing public. Retail funds in
1989 essentially consisted of four fund
types, namely equity funds, bond funds,
money market funds and bond/equity or diversified
funds. Today, retail investors may also
invest in exchange-traded funds, index funds,
guaranteed funds and hedge funds. The SFC
has been working alongside the industry
to enable these new fund types to come to
the market.
The
SFC report contains an outlook on recent
developments: In April 2007, the SFC entered
into a Memorandum of Understanding (“MOU”)
with the CBRC for co-operation and information
sharing with respect to Hong Kong licensed
intermediaries who provide services to Mainland
commercial banks
conducting overseas wealth management business
on behalf of their clients. In May, 2007,
the CBRC announced a widening of the scope
of investments allowed under the overseas
wealth management business provided by the
Mainland commercial banks for their clients.
The SFC is currently the only securities
regulator with whom the CBRC has signed
an MOU and Hong Kong is therefore the only
non-Mainland equity market in which Mainland
commercial banks may invest on behalf of
their clients. These measures are expected
to contribute to the demand for fund management
services in Hong Kong and to generate increased
investment via the Hong Kong platform.
In June 2007, the CSRC announced that QDII fund
management companies and securities firms are
allowed to invest in overseas stocks and other
specified securities that are listed in markets
regulated by a supervisory authority that has
signed an MOU on regulatory cooperation with
the CSRC. Although the SFC is only one of the
33 regulators who have signed MOUs with the
CSRC, making Hong Kong only one of the markets
that QDII fund management companies and securities
firms can invest in, Hong Kong is well positioned
to capture business opportunities based on:
In
June 2007, CEPA IV was signed. Amongst other
provisions for qualified Mainland fund management
companies to set up subsidiaries in Hong
Kong. Together with prior commitments under
CEPA, Mainland securities and futures companies
and fundmanagement companies can now participate
in the Hong Kong market through their subsidiaries.
CEPA IV complements the QDII scheme announced
by the CSRC and promotes increased participation
of Mainland intermediaries in Hong Kong,
broadening Hong Kong’s intermediary
base.
-
Hong
Kong has already established a strong
base of fund management businesses, both
in terms of product variety and financial
management expertise, and is well positioned
to capture investment fund flows and act
as the springboard for investments in
Asia.
-
During
2006, the SFC authorised a total of 223
unit trusts and mutual funds (excluding
REITs), bringing the number of SFC-authorised
funds at the end of the year to 1,973,
with a net asset value of around HKD7,100
billion, up 36.4% year-on-year. In line
with the global interest in emerging markets,
a number of funds authorised during the
year offered exposure to countries such
as the Mainland, Brazil and India.
-
In
2006, a total of 56 Type 9 (asset management)
licences were granted to 56 corporations.
These new entrants engaged in a variety
of activities, including hedge fund management,
collective investment scheme management,
portfolio management and REIT management.
On
the fiscal front, the government’s
action in 2005 and 2006 to respectively
provide for profits tax exemption for offshore
funds and to abolish estate duty further
enhances Hong Kong’s competitiveness
as an international financial centre and
encourages international investors to hold
assets in Hong Kong. This in turn should
attract more overseas companies and professionals
which will facilitate the further development
of Hong Kong’s asset management services.
The
SFC authorises new products and facilitates
industry and market development, bearing
in mind investor interests.
Among
the new fund products authorised by the
SFC in 2006 and 2007 were:
-
the first open-ended China A-share fund
that substantially invests directly in
“A” shares through Qualified
Foreign Institutional Investors quota
-
the first exchange traded fund (“ETF”)
that tracks the performance of the Indian
stock market
-
the first open-ended fund that provides
dedicated exposure to Vietnam
-
the first ETF that tracks an index on
commodities futures
We
have already seen a smooth transition to UCITS
III and welcome the added flexibility provided
by the UCITS III regulations. In March 2007,
the SFC issued streamlined measures for processing
UCITS III funds with special features, such
as guaranteed funds and index funds. Currently,
around 200 UCITS III funds have implemented
expanded investment powers and used financial
derivative instruments for investment purposes.
Hong
Kong is one of the very first jurisdictions
in the world to allow the offering of hedge
funds to the retail public, which started in
2002. As at March 31, 2007, the net asset size
of the 14 authorised retail hedge funds was
HKD12.96 billion.
Hong
Kong has a total of 17 listed ETFs, with an
aggregate market capitalisation of HKD82.82
billion as at mid-July 2007. Hong Kong’s
ETF market is the largest in Asia excluding
Japan, in terms of market capitalisation. Through
these ETFs, investors may participate in investments
in markets such as Hong Kong, the Mainland,
Russia and India, and in Asian bonds and in
commodities futures.
The
mainland will have to open up its fund management
industry now it has entered the World Trade Organisation
(WTO). The full potential of Hong Kong's fund
management industry will be realised through the
Chinese mainland market. China's fund management
industry is emerging, and is still relatively
small in size. China has a growing demand for
fund management expertise to manage its massive
savings pool and rapidly expanding retirement
funds. Hong Kong is expected to play a key role
in sharing its management skills and reservoir
of experience in fostering the development of
the mainland's fund management industry.
In
October, 2003, HSBC Asset Management announced
that it had launched the first A-share mutual
fund, giving Hong Kong retail investors access
to the Chinese mainland's USD480 billion A-share
market. The A-shares market, which accounts for
the majority of Chinese offerings, comprises around
1,250 listed companies. The market was previously
only available to domestic investors, but has
now been opened to investment by qualified foreign
institutional investors.
Over
the medium to longer run, Hong Kong's fund industry
will also be boosted by the implementation of
the MPF scheme (which began collecting contributions
in December 2000). The MPF scheme is expected
to bring about an increase of USD 2-3 billion
per year into the industry and will continue doing
so for the next 30 years.
In
November, 2003, the Hong Kong Legislative Council
passed a bill exempting subscriptions to and redemptions
of units in unit trust funds domiciled in Hong
Kong from the $5 fixed stamp duty.
In
March, 2006, Hong Kong's Legislative Council finally
passed the Revenue (Profits Tax Exemption for
Offshore Funds) Bill 2005.
Under
the provisions in the Bill, offshore funds, i.e.
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 [as defined in the Securities
and Futures Ordinance (Cap. 571) (SFO)] 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.
To
prevent abuse or round-tripping by local funds
disguised as offshore funds seeking to take advantage
of the exemption, the Government has introduced
as a deterrent measure specific anti-avoidance
provisions to deem a resident holding a beneficial
interest in a tax-exempt offshore fund to have
derived assessable profits in respect of profits
earned by such offshore fund in Hong Kong.
These
deeming provisions will not apply if the offshore
fund is bona fide widely held. Considering that
a resident may have difficulty in obtaining information
from an offshore fund in which he only holds a
small percentage of beneficial interest, the deeming
provisions would also not apply if the resident
(alone or with his associates) holds less than
30% of the offshore fund unless such offshore
fund is his associate.
"Profits
derived by offshore funds from securities trading
transactions in Hong Kong were prevoiusly liable
to profits tax. The effect of the deeming provisions
is merely to recoup the tax amount in the hands
of residents holding substantial interests in
the offshore funds which became tax-exempt under
the proposal. There are other deeming provisions
in the IRO for tax collection and anti-avoidance
purposes," a spokesman explained.
The
exemption provisions apply with retrospective
effect to the year of assessment commencing on
April 1, 1996, in order to provide legal certainty
on the tax liability of offshore funds in respect
of past years, which was much called for by the
industry as otherwise there would be huge problems
for offshore funds to finalise their tax liabilities
for past years.
Secretary
for Financial Services & the Treasury Frederick
Ma told lawmakers that exempting offshore funds
from profits tax is vital for Hong Kong to reinforce
its status as an international financial centre
and enhance its competitiveness.
"The
proposed exemption will strengthen Hong Kong's
competitiveness in attracting new offshore funds
and encourage existing funds to continue their
investment," he stated.
"It
will lead to an increase in market liquidity and
employment opportunities in the financial services
and related sectors. Downstream service sectors
such as brokers, accountants, bankers, lawyers,
will also benefit from the proposal," Mr Ma added.
Under
the bill, individuals', partnerships', corporations'
and trust estate trustees' offshore funds will
enjoy tax exemption by satisfying two conditions
- the entity that owns the fund is non-resident,
and does not carry on any business in Hong Kong
other than the fund-related qualifying transactions.
Mr
Ma said the well-established common law rule of
'central management and control' many other places
adopt will be used to determine whether a non-individual
entity is resident in Hong Kong or not.
He
said the proposed scope of the qualifying transactions
includes those in securities, futures contracts,
foreign-exchange contracts, deposits other than
by way of a money-lending business, foreign currencies
and exchange-traded commodities.
Early
in 2007, the SFC decided to prioritise the streamlining
of its licensing processes for all types of intermediaries,
and to implement these changes gradually by means
of a phased approach. Given the overall complexity
and impact of this exercise, the SFC decided to
confine the first initiatives to the licensing
of fund managers. A circular to intermediaries
was issued on June 11 - principally directed at
overseas hedge fund managers - because there appears
to be insufficient understanding amongst this
group as to the SFC’s licensing requirements.
The
SFC intends to apply similar principles to the
licensing of fund managers more generally, where
they will only be serving professional investors
and where the particular circumstances of a case
warrant this.
The
SFC said the initiatives described in the circular
reflect a pragmatic and flexible approach:
- Firms
that are already licensed or registered in the
US or UK as investment managers or advisers,
and which only serve professional investors
and have good compliance records, will benefit
from an expedited licensing process.
-
Persons nominated to be the Responsible Officers
(ROs) of hedge fund managers, who fulfil the
necessary criteria, can be exempted from the
local regulatory examination.
-
A broader range of relevant past industry experience
will be recognised as satisfying the competence
requirements for ROs.
The
Hong Kong Securities and Futures Commission authorised
the first Islamic fund for sale to retail investors
in the territory in November 2007.
The
Commission's Intermediaries & Investment Products
Executive Director, Alexa Lam explained that facilitating
the development of the Islamic investment market
is a high priority. "The introduction of
Islamic retail funds gives added variety to our
retail fund market and underscores the versatility
of our asset management industry".
In
support of the government's initiative to develop
Hong Kong's Islamic finance capabilities, the
Commission has been working with industry participants
to enable the introduction of Islamic financial
products to the Hong Kong market. It has also
uploaded related educational materials to its
website.
Islamic
funds comply with the investment principles under
the Islamic religious law of Sharia. The Sharia
Principles preclude investments in businesses
such as conventional financial services, alcohol,
pork-related products, gambling, leisure and entertainment.
Sharia principles also preclude interest bearing
investments and investments in companies with
unacceptable levels of debt.
Hedge
Funds
In
May, 2002, the SFC published guidelines governing
the sale of hedge funds to retail investors. The
guidelines, effective on May 17, divided hedge
funds into three categories - single hedge funds,
fund of hedge funds and hedge funds with a capital
guarantee.
For single hedge funds, a retail investor must
subscribe at least USD50,000, while funds of hedge
funds, seen to be less risky, will require a minimum
investment of USD10,000. No minimum investment
has been set for guaranteed capital funds.
However,
the SFC has imposed strict rules on managers of
single hedge funds and funds of hedge funds, requiring
them to have five years' hedge fund management
experience, and limiting access for retail investors
to fund managers with at least USD100 million
worth of hedge funds under management.
In
September, 2005, the SFC announced new hedge fund
guidelines, effective immediately.
The SFC published its conclusions on the Consultation
Paper on the Review of the Hedge Fund Guidelines
(HF Guidelines) contained in Chapter 8.7 of the
Code on Unit Trusts and Mutual Funds, which were
generally supportive of its main proposals:
However,
taking into consideration the responses of the
Consultation Paper, recent international regulatory
developments, and the need to ensure investor
protection, the SFC decided that: the minimum
subscription threshold for SFC-authorised single
hedge funds is maintained at USD50,000; and there
will not be a relaxation of the current restriction
imposed on the level of collateralisation to prime
brokers for SFC-authorised hedge funds.
The
SFC says it will keep monitoring the overseas
regulatory and market developments regarding these
two issues, and may revisit them in the future.
Respondents
also provided comments relating to other provisions
of the HF Guidelines. In view of these comments,
the SFC has made revisions to clarify its regulatory
intent on certain provisions, such as the requirements
on valuation. The HF Guidelines requires SFC-authorised
hedge funds to value their assets in a fair and
independent manner. A principles-based approach
has been adopted in the revised HF Guidelines
to set out the general principles in respect of
fair and independent valuation, including the
need to ensure proper segregation of the functions
of investment management from those of valuation
and the need to maintain proper checks and balances
in the way valuation is carried out.
Mrs
Alexa Lam, SFC’s Executive Director of Intermediaries
and Investment Products, said: “The Commission
is fully aware of the changing international regulatory
landscape for hedge funds. Extensive discussions
about the risks associated with hedge funds and
how to handle these risks are taking place among
industry and market practitioners as well as regulators
in major overseas jurisdictions. As one of the
first jurisdictions to allow the sale of hedge
funds to the investing public, the Commission
will continue to monitor the international regulatory
developments in the hedge fund arena, and make
further changes to the HF Guidelines when necessary.”
Speaking
in December 2007 at the 5th Annual Hedge Funds
Conference, Secretary for Financial Services &
the Treasury, Professor KC Chan suggested that
Hong Kong is fast becoming the hedge fund hub
of Asia.
To
back up this assertion, he quoted figures which
showed that the number of hedge funds in Asia
had increased substantially from 160 in 2001 to
about 1,240 in the first half of 2007. Total assets
under management had also increased by nine times,
from USD16 billion to about USD167 billion during
the same period, Professor Chan revealed.
"Hong
Kong got the largest number of new Asia Pacific
hedge funds launched in 2006 as well as in the
first half of 2007, ahead of Singapore, Japan
and Australia."
"We
have adopted various tax measures to promote the
growth of the industry. Since 2006, offshore funds
have been exempted from profits tax. This brings
us in line with other major financial centres
such as New York and London. More importantly,
the measure helps attract new offshore funds to
come to Hong Kong and encourages existing offshore
funds to continue to invest in Hong Kong."
"We
have also abolished estate duty since last year
to encourage local and overseas investors to invest
in Hong Kong. To further enhance our competitiveness,
the Chief Executive announced in his Policy Address
in October this year that our profits tax will
be reduced from 17.5% to 16.5% in 2008-09. Given
our already low and simple tax regime, these measures
will further enhance our attractiveness to overseas
fund managers."
Collective
Investment Funds
In
Hong Kong, approved Collective Investment Funds
are exempt from profits tax. In August, 2003,
the Securities and Futures Commission decided
to allow Reits (Real Estate Investment Trusts)
to take the form of Collective Investment Funds,
leading the stock market regulator HKEx (Hong
Kong Exchanges and Clearing) to simplify the listings
process for all Collective Investment Funds, including
Reits.
HKEx
announced: 'The Stock Exchange of Hong Kong Limited
(the Exchange) has amended Chapter 20 and its
ancillary sections of the Main Board Listing Rules
for the purposes of:
'The
rule change came into effect on 1 September 2003.
'Since
the offer structure and offer document of a collective
investment scheme would have been vetted by the
SFC during its authorisation process, the Exchange’s
role at the time of listing will be confined to
ensuring compliance with procedural aspects of
the listing process. Therefore, the function to
grant listing approvals will now be discharged
by the Listing Unit, instead of the Listing Committee,
of the Exchange.'
'An
authorised collective investment scheme listing
applicant will no longer require a “sponsor”.
Given the involvement of the SFC in all aspects
of the approval of a CIS, the SFC is in a position
to impose requirements as to the qualification
and behaviour of persons involved in arranging
the offering of interests in a CIS. The new rules
simply codify the current practice of the Exchange
in accepting the administrative nature of the
listing related work of the “sponsor”,
which can be carried out by an experienced agent
of the CIS.'
Initially,
many Hong Kong institutions expressed major doubts
about the usefulness of Reits in the SAR, but
recently property companies and agencies have
warmed to the idea. The Housing Authority is said
to want to use reits to dispose of $20 billion
worth of car parks and shopping centres, while
Sun Hung Kai Properties, Cheung Kong (Holdings)
and Hutchison Whampoa have all expressed interest.
In
July, 2005, the Court of Final Appeal finally
rejected an application by an elderly resident
of the territory for a permanent ban on the government's
USD3 billion real estate investment trust (REIT)
plan.
The
launch of the massive REIT offering - which includes
180 car parks and almost 1 million square metres
of retail space - was set to take place in December,
2004, but Lo Siu-lan, an elderly resident of government-owned
accommodation submitted a last minute application
for a judicial review, in which she argued that
the deal undervalued the assets, and could lead
to higher costs for tenants.
However,
in an unanimous judgment, Hong Kong's highest
court held that the Housing Authority "plainly
has the power to sell the... retail and car park
facilities to the Link REIT."
The
decision brought to an end an embarrassing episode
for the Hong Kong government. Some half a million
private investors had signed up for shares in
the world's largest share sale by a property trust,
in addition to several large investment firms.
"We
are pleased to note that the CFA today (July 20)
has unanimously ruled that the sale of the retail
and carpark facilities by the HA to The Link Real
Estate Investment Trust (The Link REIT) is within
the capacity of the HA," commented Chairman of
the Hong Kong Housing Authority, Mr. Michael Suen.
"Following
the CFA judgment bringing finality to the whole
legal proceeding and reaffirming the legality
of our divestment exercise, it remains the intention
of the HA to re-launch the Initial Public Offering
of the Link REIT as soon as practicable," he added.
Hong
Kong's nascent market for real estate investment
trusts (REITs) has "huge potential" for growth,
with potent sources of growth located in mainland
China and the other parts of Asia, according to
Martin Wheatley, Chief Executive Officer of the
Securities and Futures Commission.
Wheatley
said in September, 2006, that the REIT market
was relatively new in Hong Kong, but the capitalisation
of the four REITs launched up to that point had
reached USD6.5 billion, with average daily turnover
of USD38 million in the first seven months of
the year.
Giving
the keynote address at the Asia Pacific Real Estate
Securitisation Summit 2006, Mr Wheatley said the
opportunities presented by the sheer size of the
Mainland and its rapidly growing economy were
a major driving force of the Hong Kong REIT market.
“The
size of Hong Kong is limited and Hong Kong has
already got a substantial universe of listed real
estate assets in the form of listed property companies,"
Wheatley observed.
"A
significant part of the growth of our market will
be through the process of overseas investments
by REITs in Hong Kong. In the process, it is only
natural that issuers of REITs will look to the
Mainland for assets. It is physically close to
Hong Kong; market practitioners and Hong Kong
investors are familiar with the languages, culture,
business practices and systems in the Mainland,”
he added.
Wheatley
also noted the geographical advantage of Hong
Kong as being in the heart of Asia; home to half
the world’s population and where real estate per
capita is among the lowest globally.
“As
Asian real estate markets are opened up in the
coming years due to rapid urbanisation, strong
economic growth and the increasing presence of
foreign institutional investors, the Asian market
will constitute a potent force in the development
of REITs in Hong Kong. In the process, large scale
funding has to be obtained and REITs offer an
attractive means to property owners to liquidate
their holdings to fund further development projects,”
he noted.
The
SFC is committed to facilitating the development
of REITs with Asian real estate exposure, said
Wheatley.
“While
we are encouraged to see the development of local
expertise in REIT management, we very much like
to see and welcome international professional
asset managers to package their real estate investments
into REITs for listing in Hong Kong. Our aspiration
is for the Hong Kong REIT market to attract not
just assets already listed in the portfolio of
Hong Kong listed companies, but a new universe
of quality listing grade real estate assets in
the region, managed by internationally renowned
houses, as in the case of the more developed REIT
markets of Australia and the US," he stated.
According
to the regulatory chief, the SFC’s role was to
maintain a regulatory framework of international
standards and market integrity. This would attract
investors and quality issuers, and preserve an
environment conducive to product development and
market growth.
“In
this regard, the Commission has to uphold a fine
balance between market facilitation on the one
hand, and investor protection and reputation of
Hong Kong as an international financial centre
on the other,” he concluded.
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