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 have greatly facilitated Hong Kong’s role as a regional and international financial center. Hong Kong has one of the most active foreign exchange markets in Asia.
The Hong Kong Mortgage Corporation (HKMC, wholly-owned by the government), promotes the development of the secondary mortgage market in Hong Kong. The HKMC purchases residential mortgage loans for its own retained portfolio and also repackages mortgages into mortgage-backed securities for sale. In January 2017, the HKMC’s outstanding amount of debt totaled USD 4.9 billion.
In 2006, a Deposit Protection Scheme (DPS) began operation. Depositors are now protected up to a maximum of HKD 500,000 (USD 64,100) per bank. As a result of the global financial crisis in late 2008, the HKG announced the use of its Exchange Fund to guarantee the repayment of all customer deposits in Hong Kong dollars and foreign currency held with licensed banks, restricted license banks, and deposit-taking companies, including Hong Kong branches of overseas institutions. The assets of the DPS Fund (funded through contributions by member banks) amounted to USD 397.4 million at the end of March 2016, which is sufficient to cope with the simultaneous failures of two medium-sized banks. While Hong Kong requires locally licensed banks to participate, overseas-incorporated banks may apply for an exemption if a comparable scheme in their home jurisdiction covers deposits taken in by its Hong Kong branches. In March 2016, the HKG implemented new amendments to the DPS Ordinance. Under the new gross payout approach (as compared with the previous net payout approach), depositors under most circumstances will be fully compensated in the event of a bank failure within seven days from the previous six weeks.
In 2004, HKMA and Dun & Bradstreet (HK) Ltd. jointly launched a Commercial Credit Reference Agency to collate information about the indebtedness and credit history of SMEs and make such information available to members of the Hong Kong Association of Banks and the Hong Kong Association of Deposit Taking Companies.
In July 2016, HKMA established the Infrastructure Financing Facilitation Office to provide a platform for pooling the efforts of investors, banks, and the financial sector to offer comprehensive financial services for infrastructure projects in the emerging markets.
Under the Insurance Companies Ordinance, insurance companies are authorized by the Office of the Commissioner of Insurance (OCI) to transact business in Hong Kong. As of December 2016, there were 160 authorized insurance companies in Hong Kong. Of these, 71 were foreign companies (from 21 countries) and two were Mainland-Chinese enterprises. A number of the world’s top insurance companies (in terms of assets) have branch offices or subsidiaries in Hong Kong. In April 2014, the HKG introduced the Insurance Companies (Amendment) Bill into the LegCo. The bill, which was enacted in July 2015, aims to provide a legal framework for establishing an Independent Insurance Authority (IIA) and a statutory licensing regime for insurance intermediaries, and to enhance protections for policyholders. The IIA has replaced the OCI since the end of 2016.
The Hong Kong Stock Exchange’s total market capitalization rose by 0.4 percent during 2016, to USD 3.2 trillion, with 1,973 listed firms as of year-end 2016. Hong Kong’s stock exchange ranked fourth in Asia after Tokyo, Shanghai, and Shenzhen, and eighth in the world in terms of capitalization. Hong Kong Exchanges and Clearing Limited, a listed company, operates the stock and futures exchanges. In June 2011, Samsonite International S.A. became the first U.S.-based company to list on the Hong Kong stock market, followed in December by luxury-brand Coach, the first U.S.-domiciled company to list. 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. In practice, foreign firms typically establish operations in Hong Kong in the form of subsidiaries. Rules governing operations are the same, irrespective of ownership. Portfolio investment decisions are left to the private sector. No laws or regulations specifically authorize private firms to adopt articles of incorporation or association that limit or prohibit foreign investment, participation, or control.
The stock exchange plays a significant role in raising capital for Chinese state-owned enterprises (SOEs). Chinese state enterprises may raise equity (through the issuance of so-called “H” shares) in Hong Kong, provided they meet Hong Kong regulatory and accounting requirements. These “H” shares are denominated in Renminbi (RMB), but must be purchased in Hong Kong Dollars. In 2016, a total of 241 Chinese enterprises had “H” share listings on the stock exchange, with combined market capitalization of USD 682.5 billion. In April 2014, Chinese Premier Li Keqiang announced the establishment of a Shanghai-Hong Kong stock exchanges connectivity mechanism (Shanghai-Hong Kong Stock Connect). The scheme, which aims to facilitate individual investor’s ability to cross trade Hong Kong and Shanghai stocks, has operated since November 2014. Meanwhile, the RMB conversion limit for Hong Kong residents of RMB 20,000 (USD 3,000) per day has been removed. A similar “stock connect” scheme, between the Shenzhen and Hong Kong stock exchanges, was launched in December 2016.
In July 2015, the Hong Kong and Mainland China authorities launched the Mainland-Hong Kong Mutual Recognition of Funds scheme. By the end of January 2017, 48 Mainland mutual funds and six Hong Kong mutual funds were allowed to be distributed in each other’s markets. This scheme, together with the Shanghai-Hong Kong Stock Connect, represents significant steps to liberalize the Chinese capital account and have created additional channels for the circulation of RMB funds between the onshore and offshore markets. In December 2016, the HKG announced the mutual recognition of funds program between Switzerland and Hong Kong.
Hong Kong has made a concerted effort to develop a local debt market with the Exchange Fund bills and notes program. Maturities now extend to ten years. Hong Kong Dollar debt (public and private) has increased gradually, from USD 3.46 billion at the end of 1989 to USD 221.9 billion by the end of 2016. Between July 2007 and June 2016, when the PRC Government approved the sales of RMB-denominated bonds in Hong Kong, RMB 786.9 billion (USD 114.0 billion) of offshore RMB bonds were issued in Hong Kong. The range of issuers has diversified to include a number of multinational enterprises such as McDonald’s, Caterpillar, Unilever, Volkswagen, and Renault. Regional infrastructure financing requirements and increasing investor demand are projected to stimulate further development of the local debt market. 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 2016, the net asset values of MPF funds amounted to USD 82.9 billion. In September 2014, the HKG made a successful inaugural issuance of sovereign Islamic bonds, with an issuance size of USD 1 billion and a tenure of five years. It was the world’s first U.S. dollar-denominated sukuk (Islamic bond) originated by an AAA-rated government, creating a 4.7-times oversubscription rate. In May 2015, the HKG launched its second sukuk, with an issuance size of USD 1 billion and a tenure of five years. Buyers of this sukuk were 42 percent from the Middle East, 43 percent from Asia, and 15 percent from Europe. In February 2017, the HKG issued the third sukuk, which had an issuance size of USD 1 billion and a tenure of 10 years. This launch was oversubscribed by a factor of 1.7.
In March 2014, the LegCo enacted the Securities and Futures (Amendment) Ordinance, which provides for a regulatory framework for the over-the-counter derivatives market in Hong Kong, to meet the commitments of the Group of Twenty (G-20). The HKG implemented the new regime in July 2015 in phases, starting first with mandatory reporting and related record keeping obligations, followed by mandatory clearing and related record keeping obligations in a later phase.
In November 2015, the HKG introduced the Financial Institutions (Resolution) Bill to the LegCo in order to promote the quality of the financial markets. The bill intends to establish a regime to facilitate orderly resolution of financial institutions when risks are posed by their non-viability to the stability and effective working of the financial system of Hong Kong. The bill was passed by the LegCo in June 2016. The HKG has not yet enacted the legislation.
Money and Banking System
Hong Kong has a three-tier system of deposit-taking institutions: licensed banks, restricted license banks, and deposit-taking companies. Only licensed banks can offer current (checking) or savings accounts. In February 2017, Hong Kong had 156 licensed banks, 22 restricted licensed banks, 17 deposit-taking institutions, and 55 representative offices. The Hong Kong & Shanghai Banking Corporation (HSBC) is Hong Kong’s largest banking group. With its majority-owned subsidiary Hang Seng Bank and 170 branches, HSBC controls more than 33.3 percent of Hong Kong dollar deposits. The Bank of China (Hong Kong) is the second-largest banking group, controlling 12.8 percent of Hong Kong dollar deposits throughout 220 branches. Thirty-five U.S. “authorized financial institutions” operate in Hong Kong. Most banks in Hong Kong maintain U.S. correspondent relationships. Hong Kong has begun implementing the Basel III capital, liquidity, and disclosure requirements from January 2013 in phases, with full implementation expected by January 2019.
Hong Kong’s five largest banks, in terms of total assets (2016):
||Total Assets (USD Billions)
||Bank of China (Hong Kong)
||Hang Seng Bank
||Standard Charter Bank (Hong Kong)
||Bank of East Asia
|Source: Companies’ annual reports.
Credit in Hong Kong is allocated strictly 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 functions as a de facto central bank. It is responsible for maintaining the stability of the banking system and managing the Exchange Fund that backs Hong Kong’s currency. The HKMA, with the assistance of the banking sector, has upgraded Hong Kong’s financial market infrastructure. 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 been stepping up their anti-money laundering and counter-terrorist financing controls, including the adoption of more stringent customer due diligence (CDD) process for existing and new customers. A few international banks also apply different account opening processes in order to comply with the requirements or standards mandated by their head offices or overseas authorities. Under these circumstances, the HKMA has received 95 complaints over the past two years about banks rejecting applications to open business accounts. In September 2016, the HKMA issued a circular to the banking industry, stressing “the CDD measures adopted by banks must be proportionate to the risk level and banks are not required to implement overly stringent CDD processes.” In addition, the HKMA has set up a dedicated website since March 2017 to communicate with the public regarding bank account opening and maintenance.
Foreign Exchange and Remittances
Conversion and inward/outward transfers of funds for any purpose are not restricted. The Hong Kong dollar is a freely convertible currency that, since late 1983, has been linked via a de facto currency board to the U.S. dollar, at an exchange rate that is allowed to fluctuate in a narrow band between HKD 7.75 – HKD 7.85 = USD 1.
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 confiscating of proceeds derived from drug-trafficking and organized crime. Hong Kong also has an anti-terrorism law, which allows the authorities to freeze funds and financial assets that belong to terrorists.
Hong Kong is not on the Financial Action Task Force List of Countries identified as having strategic AML deficiencies. Hong Kong, however, was identified as a “Jurisdiction of Primary Concern” among those “major money laundering countries” by the U.S. Department of State 2017 International Narcotics Control Strategy Report, based on the significance of the amount of proceeds laundered, not on the AML measures taken.
Sovereign Wealth Funds
In February 2015, the Financial Secretary John Tsang announced in his Budget Speech that the HKG will set up a new sovereign wealth fund, dubbed the Future Fund, with an endowment of USD 28.2 billion from part of the fiscal reserves and a proportion of future budget surpluses. The Future Fund, which has been in place since January 2016, seeks higher returns through long-term investments. The Future Fund adopts a “passive” role as a portfolio investor, and will be placed with the Exchange Fund, which follows the Santiago Principles, for an initial ten-year period. About half of the Future Fund will be 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, part of which is a multi-currency portfolio invested in the major fixed-income markets.