In a competitive financial universe, staying ahead of the game is a constant challenge for established hubs, such as Hong Kong. Anson Law of the Hong Kong Monetary Authority’s (“HKMA”) Market Outreach Division shares the latest ideas and innovation designed to maintain the city’s status at the top of global rankings.
Anson Law, Market Outreach Division, Hong Kong Monetary Authority
Global Excellence in Hong Kong
“Our day-to-day work involves devising the best promotional and outreach strategies for Hong Kong so we can stay ahead of global standards,” explains Anson. His background in government-policy formulation, private equity buy side, and investment compliance has helped generate a series of progressive concepts designed to keep Hong Kong at the forefront of market development.
“We cover not only conventional but also alternative investments, including hedge funds, private equity (“PE”) and venture capital (“VC”) managers,” says Anson. “On the financial-investing front, we target the entire ecosystem, from ultra-high-net-worth individuals and family offices to financial institutions, such as pension funds, sovereign wealth funds, and banks, as well as professional services providers. The purpose is simple – we want more investment and related activities in Hong Kong.”
A Three-Step Solution
One of the opportunities Anson spotted was the absence in Hong Kong of a domestic legal and tax regime that is friendly to PE and VC investments. This gap led to the development of a “three-step” solution designed to boost Hong Kong’s appeal to PE and VC funds:
- Limited Partnership Funds (“LPF”)
- Fund-Level Tax Exemption
- The Carried Interest Tax Regime
The LPF reforms aimed to establish a set of Hong Kong-specific limited-partnership laws of the kind operating in the Cayman Islands, Luxembourg, and Delaware. Since the associated legislation came into effect in August 2020, more than 230 LPFs have been established in Hong Kong.
Fund-Level Tax Exemption
Fund-Level Tax Exemption was designed to create a fairer environment for investors deploying capital through fund vehicles. “For the drafting of Hong Kong’s tax law, we faced a remnant of the past: our local code lacked the concept of tax transparency,” says Anson. “That’s why we needed to establish tax exemption to carry out more or less the equivalent function of tax transparency. As such, we took existing tax exemption at the fund level and expanded it to make it more compatible for the PE world.”
The bill to bring the carried interest tax concessions into law, which was recently passed, creates a considerably more attractive environment for PE and VC. It takes retrospective effect from 1 April 2020, says Anson.
“The Government, as lobbied by the HKMA, agreed that we should encourage PE and VC investments because we believe these are unique in creating a real impact on the economy,” observes Anson. “If we build a robust platform, this will nurture those based in Hong Kong who are knowledgeable in the real economy. In turn, this will ultimately benefit the city’s long-term development. Furthermore, we want to offer PE and VC investment managers tax concessions on their carried interest, so that more investment management activities happen in Hong Kong.”
The Drive to Attract Global Capital
To qualify, funds need to satisfy specific requirements, such as making PE or VC investments, maintaining a minimum employee headcount of two relevant personnel in the city, and show local spending of HK$2 million a year.
This innovation is a central part of the HKMA’s remit to make Hong Kong more agile and responsive to lure global capital and create a financial ecosystem that feeds its requirements. To this end, the HKMA’s market outreach team has worked tirelessly with fund managers and professional services providers. It plans to focus principally on asset owners in its next phase of work.
“To further boost the adoption of our new regime, we need to establish a greater level of comfort among investors that it is as commercial and flexible as conventional offshore systems, except with much lower set up and compliance costs. Fund managers cannot afford to spend too much of their precious time during capital raising sessions on fund structures, and that’s why I believe we should do more,” says Anson. “This is in line with our overall outreach strategy to focus on asset owners. If asset owners choose to settle in Hong Kong, they will naturally attract more service providers and fund managers to the city,” adds Anson. “Eventually, this will help energise the entire ecosystem.”
A Shift to Venture Capital and Fintech
“In the past 10 years or so, Asia has focused on PE funds, but this is slowly shifting to VC and fintech. The growth drivers of the entire spectrum are changing, and we want to do more to capitalise on these business opportunities,” explains Anson.
Hong Kong is aiming for a broader market outreach beyond PE and VC. Much of the team’s recent work has targeted traditional asset managers, primarily to counter rumours that funds have been pulling out of the city.
“The number of investment managers in Hong Kong has been steadily increasing in the past few years,” Anson points out. “In terms of private wealth management, we’ve seen a 20% growth in AUM in the past 12 months, so we need to actively engage and instil confidence in overseas investors, especially those who have yet to establish a presence in the city.”
In 2020, there were significant net capital inflows, indicating that many institutional investors see opportunities in Hong Kong SAR and mainland China. This development showcased a vital cornerstone of the financial ecosystem: the free flow of capital.
Until now, that flow has cemented Hong Kong’s position as a gateway to opportunities in the broader regional economy. As China gradually opens its markets, some have raised concerns that the status of the Hong Kong market may be eroded. However, the city still enjoys significant strategic benefits.
“There are a lot of advantages associated with the Hong Kong market. There’s already a tax treaty between mainland China and Hong Kong SAR that offers much better terms than mainland China’s tax treaties with other countries or territories. The agreement is proof that China very much supports the inflow of capital into Hong Kong,” says Anson.
For instance, while direct channels to the mainland’s onshore bond market have been available as early as 2010, Bond Connect, which was launched in 2017, has become widely accepted by international investors in only a few years. “Through Bond Connect, international investors can conveniently access the mainland China bond market via Hong Kong SAR, which commands international regulatory standards and market practices, while being served by well-established and trusted financial intermediaries,” he adds.
Greater Bay Area Connections
“We see time and again that China envisions Hong Kong as a financial centre. With the upcoming Wealth Management Connect program, banks and private wealth management service providers can take their products to the Greater Bay Area and offer them in the mainland retail market. This is a progressive policy that will eventually include more collaborations, with Hong Kong continuing to serve as a gateway,” notes Anson.
Businesses located in Hong Kong can also enjoy Corporate Treasury Centre tax concessions, a robust yet light-touch regulatory banking system, one of the world’s best stock markets, and access to multilingual business services expertise, as well as the lifestyle advantages offered by the city.
Developments in the Special Purpose Acquisition Companies Sector
Hong Kong is also exploring the possibility of joining Asia’s emerging SPAC (Special Purpose Acquisition Company) space.
“From the HKMA’s point of view, we support the idea of exploring the SPAC concept,” Anson points out. “In terms of market development, the city encourages a diverse range of products. At the same time, we need to be mindful of what the checks and balances should be when we launch this product.”
“If SPACs are successfully introduced, they will provide an additional exit channel for PE and VC funds.”
Innovate, Relate, and Communicate
The world of financial innovation never stops, and even established global hubs cannot afford to rest on their laurels. Not only do centers, such as Hong Kong, need to relate to and keep pace with the latest market developments, they also need a forward-looking outreach team that can share Hong Kong’s message with the wider world.