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Hong Kong: Corporate Investment

Foreign Investment Regime

Hong Kong was the world's fourth largest foreign direct investment recipient in 2009, up from its ninth position in 2008, according to the World Investment Report 2010 published by the United Nations Conference on Trade and Development.

It was the first time Hong Kong had gained fourth place in the global rankings. For the twelfth consecutive year Hong Kong continued to be the second largest foreign direct investment recipient in Asia, after the Chinese mainland.

The report showed that, although the global financial and economic crisis drove global foreign direct investment inflows down by 37% in 2009, compared to the previous year, the impact on Asia was less profound. The US$48.4bn foreign direct investment into Hong Kong, for example, represented only a 19% drop. Hong Kong's share of foreign direct investment into Asia held up at about 21% in 2009, similar to 2008.

In terms of the stock of foreign direct investment, Hong Kong ranked the highest in Asia, with a share of 37%, or over US$910bn in 2009. This represented a 12% rise on 2008.

The report also highlighted Asia's rapid recovery in foreign direct investment inflows this year, compared to the more gradual improvement in global numbers. In the first quarter of 2010, foreign direct investment into Hong Kong, for example, amounted to US$20bn, representing significant growth of 72% on the same quarter last year.

Hong Kong’s Director-General of Investment Promotion, Simon Galpin, said that Hong Kong's status as an international economy is reflected in this record-high ranking.

"With Hong Kong positioned at the heart of Asia and as the gateway to China, it is benefiting from the region's economic recovery,” he continued "Foreign direct investment is important to Hong Kong's economy, bringing in new technology, transferring soft skills and creating jobs. We are committed to upholding the advantages of Hong Kong to maintain its competitive position as a business location.”

"Measures such as the Closer Economic Partnership Arrangement with China, the growing network of double taxation agreements and positioning Hong Kong as the offshore centre for renminbi trading, all support the city's role as the preferred investment destination for foreign and Mainland companies," he concluded.

Hong Kong's Secretary for Financial Services and the Treasury, Professor K C Chan, says: "Hong Kong is the gateway to the world's economic growth engine in Mainland China. While other developed markets are still recovering from financial crises, Asia is booming. With this shift in the centre of economic gravity towards Asia and China, Hong Kong has a unique role as an international financial centre where both the China opportunities and global opportunities converge.”

“Global investors can use Hong Kong as the gateway to access Mainland China's increasing wealth pool and also tap into opportunities in Asia and the world,” he continued. "Through the series of conferences, we aim to present to the London and New York financial services communities the huge potential that Hong Kong offers for the asset management industries and also the opportunities brought about by the gradual internationalization of the renminbi.”

"Hong Kong is a leading hub for raising capital, not just for overseas companies but also for Mainland China enterprises,” Chan added. “The city is a leading global financial centre where international capital and international investors congregate to lead a range of financial activities."

Chief Executive Officer of the SFC, Martin Wheatley, says: "Hong Kong's robust regulatory regime is widely recognized by the international financial community. Having stood the test of regional and global financial crises, we continue to take a balanced approach in enhancing our regulation to reflect changes in the market landscape. Participants in the Hong Kong market benefit from our stable, transparent operating environment, as evidenced in a thriving asset management sector which saw a 45.4% year-on-year growth in assets under management to US$1,091bn last year."

Deputy Chief Executive of HKMA, Eddie Yue, adds: "In the years to come, economic and financial development in China will underpin the furthering of Hong Kong's role as an international financial centre. In particular, the gradual financial liberalization in Mainland China and the wider external use of RMB will be the two key developments that will help attract market players worldwide to establish their presence in Hong Kong, with a view to leveraging on our advantages to tap the new opportunities arising."

Hong Kong's Permanent Secretary for Financial Services and the Treasury (Financial Services), Au King-chi, speaking in October, 2010, at the Hong Kong Institute of Bankers' 2nd Annual Banking Conference, focused on the evolving role that Hong Kong is playing as China’s global financial centre.

She said that Hong Kong needs to align with the regulatory standards of key overseas jurisdictions to ensure a predictable and consistent regulatory regime within which financial institutions can operate. “Our compatibility with international standards and best practices will help to attract overseas financial institutions wishing to harness the business potential in the region.”

“We must bring together our unique ‘China advantages’ and ‘global advantages’ to reinforce Hong Kong's status as the preferred springboard to carry out not only China-related activities in the global financial arena, but also global operations in the Greater China market.”

“As China's global financial centre, Hong Kong is leveraging its advantages in conducting activities in asset management, offshore renminbi (RMB) business and capital formation, attracting and anchoring capital and talent from within and outside the country,” she added.

To achieve its objectives, she emphasized that Hong Kong is pursuing a number of initiatives to enhance market transparency, to improve its regulatory regime to protect investors and maintain financial stability, and to remove any unnecessary hurdles to facilitate compliance and promote market development.

For example, market transparency is being enhanced by promoting a continuous disclosure culture among Hong Kong’s listed corporations. Proposed legislation will require listed companies to make available more information for investors to make informed decisions. A bill is planned to be introduced into the Legislative Council next year.

The Working Group on Scripless Securities Market led by the Securities and Futures Commission is also to publish its consultation conclusions on the proposed operational model for a scripless securities market. As a first step, the government has already enacted amendments to the Companies Ordinance in July this year to allow for scripless trading.

With regard to investor protection, she stated that Hong Kong’s regulators have already introduced a series of requirements to enhance risk disclosure for investment products and tighten the regulation of sale conduct. In addition, the regulators have also invited the government to establish a financial dispute resolution mechanism.

Finally, she pointed out how the government was attempting to deepen Mainland-Hong Kong financial cooperation. Hong Kong's strategic positioning as China's global financial centre under ‘one country, two financial systems’ gives its financial market “unparalleled strengths in serving China's development needs, while safeguarding its financial security”.

“In a nutshell,” she concluded. “Hong Kong enjoys an ‘offshore’ financial status, while remaining organically domestic in serving the giant economic powerhouse of China. Hong Kong is an effective testing ground for the internationalization of the RMB, as well as a preferred asset management hub, and the premier listing platform for Mainland companies wishing to go global.”

The number of overseas and Mainland Chinese companies running business operations in Hong Kong has increased 2.6% over the past year, to a total of 6,561 companies, according to an annual survey released in October, 2010, by Invest Hong Kong and the Census and Statistics Department.

Director-General of Investment Promotion, Simon Galpin, said: "The results are very encouraging and reflect the rebound of Hong Kong's economy in the wake of the global financial crisis. Hong Kong continues to be an attractive city for these companies to base their operations in this part of Asia."

Of the total number of companies surveyed, 1,285 are regional headquarters (RHQs), 2,353 are regional offices (ROs) and 2,923 are local offices (LOs). This represents a year-on-year growth of 2.6%, 1.1% and 3.8%, respectively. Galpin disclosed that the survey had shown “the highest increase in the number of LOs. We work with these companies to help them set up and expand their business and to, hopefully, fulfil their potential as the RHQs and ROs of tomorrow."

Of the companies surveyed, 20% indicated that they may expand their businesses in Hong Kong in the next three years, either by increasing staff, expanding the scope of business functions or increasing office size.

In terms of sectors, finance and banking demonstrated the most robust growth and, it was said, reinforced Hong Kong's status as a world-leading international financial centre. Finance and banking regional headquarters increased by 5% to 135, while local offices increased by 3% to 622.

With regards to country of origin, roughly half the parent companies came from four countries. The US tops the list with a total of 1,263 companies, followed by Japan with 1,085, Mainland China with 789 and the UK with 505.

Galpin added that: "We are seeing greater numbers of overseas companies setting up in Hong Kong as a base from which to expand into the Mainland and beyond. The same is also true of Mainland companies that use Hong Kong as a springboard from which to go global. This phenomenon highlights the strategic importance of Hong Kong to access business opportunities in the Mainland as well as offer geographical proximity to north and south-east Asian markets."

When choosing to set up RHQs, ROs or LOs, the top five factors in Hong Kong rated as most important were its simple tax system and low tax rate, free flow of information, corruption-free government, absence of exchange controls, and political stability and security.

"We are delighted to see a more optimistic outlook from the companies surveyed this year,” Galpin concluded. “Compared to 12 months ago, 77% of them now consider Hong Kong's outlook as a business location has improved or not changed."



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