With a big tax break, Hong Kong tries to appease the rich

HONG KONG – The political opposition has been suppressed. Freedom of expression has been repressed. The independent judicial system can be the following.

But as Hong Kong’s top leaders take a tougher line on the city of more than seven million people, they are courting a crucial constituency: the wealthy. Senior officials are preparing a new exemption from taxes and other sweeteners to portray Hong Kong as the top place in Asia to make money, despite the increasingly autocratic rule of the Chinese Communist Party.

So far, the playing field is working. Cambridge Associates, a $ 30 billion investment fund, said in March that it planned to open an office in the city. Investment managers have created more than a hundred new companies in recent months. Wall Street banks Goldman Sachs, Citigroup, Bank of America and Morgan Stanley are increasing their staff in Hong Kong.

“Hong Kong is second only to New York as the world’s billionaire city,” said Paul Chan, Hong Kong’s finance secretary, at an online meeting of finance executives this year.

Beijing cannot afford to drive off Hong Kong’s bankers and financiers. The former British colony remains an important gateway to the international financial system. Chinese companies need it to raise money from global investors; those companies and wealthy Chinese also depend on him to move their money overseas more easily.

So Beijing is striking a careful balance. It is taking away the freedoms of the Hong Kong people to stop blatant challenges to the Communist Party government, such as the sometimes violent anti-government protests that erupted two years ago. At the same time, he’s trying to charm the city’s financial class from moving to another business-friendly location like Singapore.

“It’s a one-party state, but they are pragmatic and they don’t want to hurt business,” Fred Hu, former president of the Goldman company in Greater China, said of the Chinese officials.

For apolitical financial types, the changes will have little impact, said Hu, who is also the founder of private equity firm Primavera Capital Group. “If you are a banker or a merchant, you may have political opinions, but you are not a political activist,” he said.

To attract the rich, Hong Kong is working on a large tax break that will primarily benefit private equity, hedge funds and other investors. Officials are moving to facilitate the connection of the city’s money managers with the wealthy of the continent. Chinese companies are selling stocks worth tens of billions of dollars in Hong Kong, increasing the profitability of Wall Street banks.

In its most recent move, Hong Kong proposed last week limiting how much companies must disclose about their property, which could engulf wealth in a city where elite Communist Party families have long deposited their money.

Not everyone is convinced. More than 1 percent of residents have left since Beijing imposed a comprehensive national security law last summer. Tens of billions of dollars have flowed out of local Hong Kong bank accounts into jurisdictions like Singapore.

Tensions rise inside Hong Kong’s gleaming office towers. Even executives sympathetic to the government have refused to speak publicly for fear of being caught in the political crossfire between Beijing and world capitals like Washington and London. Hong Kong’s strict rules on movement during the pandemic may also cause some expats to leave in the summer after classes are over.

However, for now, financial firms are doubling over Hong Kong. Neal Horwitz, an executive recruiter in Singapore, said the finances are likely to remain in Hong Kong “until the ship sinks.”

In its largest offering to the investor class, Hong Kong has proposed eliminating taxes on investment income called posted interest, which is typically earned by private equity investors and hedge funds. Officials had discussed the plan for years, but did not present a bill until February, and it could pass through the Beijing-dominated city legislature in the coming months.

Similar tax breaks have drawn criticism elsewhere, including in the United States. But Hong Kong fears a financial exodus without those benefits, said Maurice Tse, a finance professor at the University of Hong Kong business school.

“To keep these people close we have to give a tax benefit,” he said.

Hong Kong has also proposed a program, Wealth Management Connect, that would give mainland residents in the southern region known as the Greater Bay Area the ability to invest in Hong Kong-based hedge funds and investment firms. Officials have boasted that it would give 72 million people access to foreign companies. Hong Kong and mainland Chinese officials signed an agreement in February to start a pilot program at an unspecified time.

Pandemic travel restrictions have slowed the proposal’s momentum, said King Au, executive director of the Hong Kong Financial Services Development Council, but it remains a top priority.

“I want to highlight the importance of the China market for global investors,” said Mr. Au.

Mainland money has already helped Hong Kong look more attractive. Chinese companies largely drove a record $ 52 billion revenue for companies that sold new shares on the Hong Kong Stock Exchange last year, according to Dealogic, a data provider. This year’s new offerings have already raised $ 16 billion, including $ 5.4 billion for Kuaishou, which operates a Chinese video app. The record start has been helped in part by Chinese companies that have been pressured by Washington to avoid raising money in the United States.

Managing those offerings helped Goldman and Morgan Stanley climb to the top of the Asian industry rankings that measure the fees charged by banks. A Goldman spokesperson said it planned to accelerate its hiring in Hong Kong by nearly a fifth in 2021 compared to last year. Morgan Stanley has doubled its hiring pace this year, a spokesperson said.

Thomas Gottstein, chief executive of Credit Suisse, the Swiss bank, said in mid-March that he would triple his hires in China, and a spokeswoman said a staff increase in Hong Kong was part of that. Bank of America is adding more people in Hong Kong, while Citi has said it will hire up to 1,700 people in Hong Kong this year alone.

HSBC, the British bank, has faced pressure from Chinese state media to stick to the party line. Still, it is considering moving some of its top executives to Hong Kong, because it will be “important to be closer to growth opportunities,” HSBC chief executive Noel Quinn said in February.

Mutual funds are also arriving in Hong Kong, after officials in August lowered regulatory barriers to establish legal structures similar to those used in low-tax, opaque jurisdictions like the Cayman Islands and Bermuda. Government data shows that 154 funds have been registered since then.

Last week, city officials also proposed allowing companies to hide sensitive proprietary data, in a move that could benefit both companies and Communist Party officials. The measure could take effect as early as May and does not need to be approved by lawmakers. Critics say the move would make it nearly impossible to track down the people behind companies registering in Hong Kong.

“The proposed law will facilitate corruption, fraud and other crimes,” said David M. Webb, a former banker and longtime investor in Hong Kong.

It could also help China’s leaders, who are sensitive to any accusations that they have used their status for personal gain. The families of Xi Jinping, China’s top leader, and Li Zhanshu, the third Communist Party official, at one time owned property in Hong Kong, according to a trace that can be traced in part through public records.

While officials have welcomed business, they have made it clear to the financial and business world that they will not tolerate dissent. In March, Han Zheng, a Chinese vice premier, praised the performance of the stock market and the financial sector in a meeting with a political advisory group, but made his limits clear.

“The signal to the business community is very simple,” said Michael Tien, a former Hong Kong lawmaker and businessman who attended the closed-door session. “Stay away from politics.”

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