Hong Kong became a Special Administrative Region (SAR) of the People’s Republic of China (PRC) on July 1, 1997, with its status defined in the Sino-British Joint Declaration and the Basic Law. Under the concept of “one country, two systems,” the PRC government promised that Hong Kong will retain its political, economic, and judicial systems for 50 years after reversion. The PRC’s imposition of the National Security Law on June 30 undermined Hong Kong’s autonomy and introduced heightened uncertainty for foreign and local firms operating in Hong Kong. As a result, U.S. citizens traveling or residing in Hong Kong may be subject to increased levels of surveillance, as well as arbitrary enforcement of laws and detention for purposes other than maintaining law and order. Hong Kong generally pursues a free market philosophy with minimal government intervention. The Hong Kong Government (HKG) generally welcomes foreign investment, neither offering special incentives nor imposing disincentives for foreign investors.
Hong Kong provides for no distinction in law or practice between investments by foreign-controlled companies and those controlled by local interests. Foreign firms and individuals are able to incorporate their operations in Hong Kong, register branches of foreign operations, and set up representative offices without encountering discrimination or undue regulation. There is no restriction on the ownership of such operations. Company directors are not required to be citizens of, or resident in, Hong Kong. Reporting requirements are straightforward and are not onerous.
Hong Kong remains a popular destination for U.S. investment and trade. Despite a population of less than eight million, Hong Kong is America’s fifteenth-largest export market, ninth-largest for total agricultural products, and sixth-largest for high-value consumer food and beverage products. Hong Kong’s economy, with world-class institutions and regulatory systems, is based on competitive financial and professional services, trading, logistics, and tourism, though tourism suffered steep drops in 2019 due to sustained political protests. The service sector accounts for more than 90 percent of its nearly USD 368 billion gross domestic product (GDP) in 2019. Hong Kong hosts a large number of regional headquarters and regional offices. More than 1,400 U.S. companies are based in Hong Kong, with more than half regional in scope. Finance and related services companies, such as banks, law firms, and accountancies, dominate the pack. Seventy of the world’s 100 largest banks have operations here.
|TI Corruption Perceptions Index||2019||10 of 180||http://www.transparency.org/
|World Bank’s Doing Business Report||2019||3 of 190||http://www.doingbusiness.org/
|Global Innovation Index||2019||13 of 129||https://www.globalinnovationindex.org/
|U.S. FDI in partner country ($M USD, historical stock positions)||2018||USD 82,546||http://apps.bea.gov/international/
|World Bank GNI per capita||2018||USD 50,300||http://data.worldbank.org/indicator/
6. Financial Sector
Capital Markets and Portfolio Investment
There are no impediments to the free flow of financial resources. Non-interventionist economic policies, complete freedom of capital movement, and a well-understood regulatory and legal environment make Hong Kong a regional and international financial center. It has one of the most active foreign exchange markets in Asia.
Asset and wealth managed in Hong Kong posted a record high of USD 3.1 trillion in 2018 (the latest figure available), with two-thirds of that coming from overseas investors. In order to enhance the competitiveness of Hong Kong’s fund industry, open-ended fund companies as well as onshore and offshore funds are offered a profits tax exemption.
The HKMA’s Infrastructure Financing Facilitation Office (IFFO) provides a platform for pooling the efforts of investors, banks, and the financial sector to offer comprehensive financial services for infrastructure projects in emerging markets. IFFO is an advisory partner of World Bank Group’s Global Infrastructure Facility.
Under the Insurance Companies Ordinance, insurance companies are authorized by the Insurance Authority to transact business in Hong Kong. As of March 2020, there were 163 authorized insurance companies in Hong Kong, 70 of them foreign or mainland Chinese companies.
The Hong Kong Stock Exchange’s total market capitalization dropped by 28.0 percent to USD 4.9 trillion in 2019, with 2,449 listed firms at year-end. Hong Kong Exchanges and Clearing Limited, a listed company, operates the stock and futures exchanges. The Securities and Futures Commission, an independent statutory body outside the civil service, has licensing and supervisory powers to ensure the integrity of markets and protection of investors.
No discriminatory legal constraints exist for foreign securities firms establishing operations in Hong Kong via branching, acquisition, or subsidiaries. Rules governing operations are the same for all firms. No laws or regulations specifically authorize private firms to adopt articles of incorporation or association that limit or prohibit foreign investment, participation, or control.
In 2019, a total of 284 Chinese enterprises had “H” share listings on the stock exchange, with combined market capitalization of USD 823.9 billion. The Shanghai-Hong Kong and Shenzhen-Hong Kong Stock Connects allow individual investors to cross trade Hong Kong and mainland stocks. In December 2018, the ETF Connect, which was planned to allow international and mainland investors to trade in exchange-traded fund products listed in Hong Kong, Shanghai and Shenzhen, was put on hold indefinitely due to “technical issues.”
By the end of 2019, 50 mainland mutual funds and 23 Hong Kong mutual funds were allowed to be distributed in each other’s markets through the mainland-Hong Kong Mutual Recognition of Funds scheme. Hong Kong also has mutual recognition of funds programs with Switzerland, Ireland, France, the United Kingdom, and Luxembourg.
Hong Kong has developed its debt market with the Exchange Fund bills and notes program. Hong Kong Dollar debt stood at USD 278.0 billion by the end of 2019. As of February 2020, RMB 1,056.6 billion (USD 147.9 billion) of offshore RMB bonds were issued in Hong Kong. Multinational enterprises, including McDonald’s and Caterpillar, have also issued debt. The Bond Connect, a mutual market access scheme, allows investors from mainland China and overseas to trade in each other’s respective bond markets through a financial infrastructure linkage in Hong Kong.
The HKG requires workers and employers to contribute to retirement funds under the Mandatory Provident Fund (MPF) scheme. Contributions are expected to channel roughly USD five billion annually into various investment vehicles. By the end of 2019, the net asset values of MPF funds amounted to USD 124.3 billion.
Money and Banking System
Hong Kong has a three-tier system of deposit-taking institutions: licensed banks (163), restricted license banks (17), and deposit-taking companies (13). HSBC is Hong Kong’s largest banking group. With its majority-owned subsidiary Hang Seng Bank, HSBC controls more than 40.3 percent of Hong Kong Dollar (HKD) deposits. The Bank of China (Hong Kong) is the second-largest banking group with 13.9 percent of HKD deposits throughout 200 branches. In total, the five largest banks in Hong Kong had more than USD 1.8 trillion in total assets at the end of 2018. Thirty-five U.S. “authorized financial institutions” operate in Hong Kong, and most banks in Hong Kong maintain U.S. correspondent relationships. Full implementation of the Basel III capital, liquidity, and disclosure requirements completed in 2019.
Credit in Hong Kong is allocated on market terms and is available to foreign investors on a non-discriminatory basis. The private sector has access to the full spectrum of credit instruments as provided by Hong Kong’s banking and financial system. Legal, regulatory, and accounting systems are transparent and consistent with international norms. The HKMA, the de facto central bank, is responsible for maintaining the stability of the banking system and managing the Exchange Fund that backs Hong Kong’s currency. Real Time Gross Settlement helps minimize risks in the payment system and brings Hong Kong in line with international standards.
Banks in Hong Kong have in recent years strengthened anti-money laundering and counter-terrorist financing controls, including the adoption of more stringent customer due diligence (CDD) process for existing and new customers. In September 2016, the HKMA issued a circular stressing that “CDD measures adopted by banks must be proportionate to the risk level and banks are not required to implement overly stringent CDD processes.”
The HKMA welcomes the establishment of virtual banks, which are subject to the same set of supervisory principles and requirements applicable to conventional banks. The HKMA has granted eight virtual banking licenses by end-March 2020.
The HKMA’s Fintech Facilitation Office (FFO) aims to promote Hong Kong as a fintech hub in Asia. FFO has launched the faster payment system to enable banks customers to make cross-bank/e-wallet payments easily and created a blockchain-based trade finance platform to reduce errors and risks of fraud. The HKMA has signed nine fintech co-operation agreements with the regulatory authorities of Abu Dhabi, Brazil, Dubai, France, Poland, Singapore, Switzerland, Thailand and the United Kingdom.
Foreign Exchange and Remittances
Conversion and inward/outward transfers of funds are not restricted. The HKD is a freely convertible currency linked via de facto currency board to the U.S. dollar. The exchange rate is allowed to fluctuate in a narrow band between HKD 7.75 – HKD 7.85 = USD 1.
There are no recent changes to or plans to change investment remittance policies. Hong Kong has no restrictions on the remittance of profits and dividends derived from investment, nor reporting requirements on cross-border remittances. Foreign investors bring capital into Hong Kong and remit it through the open exchange market.
Hong Kong has anti-money laundering (AML) legislation allowing the tracing and confiscation of proceeds derived from drug-trafficking and organized crime. Hong Kong has an anti-terrorism law that allows authorities to freeze funds and financial assets belonging to terrorists. Travelers arriving in Hong Kong with currency or bearer negotiable instruments (CBNIs) exceeding HKD 120,000 (USD 15,385) must make a written declaration to the CED. For a large quantity of CBNIs imported or exported in a cargo consignment, an advanced electronic declaration must be made to the CED.
Sovereign Wealth Funds
The Future Fund, Hong Kong’s wealth fund, was established in 2016 with an endowment of USD 28.2 billion. The fund seeks higher returns through long-term investments and adopts a “passive” role as a portfolio investor. About half of the Future Fund has been deployed in alternative assets, mainly global private equity and overseas real estate, over a three-year period. The rest is placed with the Exchange Fund’s Investment Portfolio, which follows the Santiago Principles, for an initial ten-year period. In February 2020, the HKG announced that it will deploy 10 percent of the Future Fund to establish a new portfolio focusing on domestic investments.
13. Foreign Direct Investment and Foreign Portfolio Investment Statistics
* Source for Host Country Data: Hong Kong Census and Statistics Department
|Direct Investment from/in Counterpart Economy Data|
|From Top Five Sources/To Top Five Destinations (US Dollars, Millions)|
|Inward Direct Investment||Outward Direct Investment|
|Total Inward||1,706,788||100%||Total Outward||1,636,445||100%|
|British Virgin Islands||623,152||37%||China, P.R.: Mainland||740,713||45%|
|China, P.R.: Mainland||466,525||27%||British Virgin Islands||551,764||34%|
|Cayman Islands||138,069||8%||Cayman Islands||64,659||4%|
|“0” reflects amounts rounded to +/- USD 500,000.|
|Portfolio Investment Assets|
|Top Five Partners (Millions, current US Dollars)|
|Total||Equity Securities||Total Debt Securities|
|All Countries||1,596,386||100%||All Countries||1,002,321||100%||All Countries||594,064||100%|
|Cayman Islands||475,874||30%||Cayman Islands||457,839||46%||United States||138,669||23%|
|China, P.R.: Mainland||343,873||22%||China, P.R.: Mainland||208,012||21%||China, P.R.: Mainland||135,861||23%|
|United Kingdom||80,001||5%||United States||37,438||4%||Luxembourg||32,374||5%|