Brook McConnell, president of fund house South Ocean Management, says Hong Kong's financial strength lies in its efficiency

Legislation exempting offshore fund management companies from corporate tax is likely to be passed in the first quarter of 2006, says Sally Wong, executive director of the Hong Kong Investment Funds Association (IFA).

"This is one of the initiatives that reinforce Hong Kong's position as a fund management centre," Ms Wong said.

Offshore fund management companies that deal in financial assets from Hong Kong have been operating in a grey area in terms of profits taxation, creating uncertainty in the industry.

"Offshore funds' structure is quite unique and falls between the cracks," Ms Wong said. The bill, which is before Hong Kong's Legislative Council, is needed to maintain Hong Kong's competitive edge regionally in the fund management industry.

"All jurisdictions in Asia are very keen to develop this segment," said Ms Wong.

Competitive edge

Hong Kong's traditional rival has been Singapore. But there are a pack of relative newcomers seeking fund management hub status with South Korea among them.

"The Hong Kong government has done a good job in seeing this competition and is very committed to Hong Kong maintaining its (leading) position," Ms Wong said.

In a briefing on the tax exemption bill the government said: "Anchoring offshore funds in the Hong Kong market could help to maintain international expertise, promote new products and further develop the local fund management industry."

The government has already pushed a bill through Legco in November abolishing estate taxes, another key move in strengthening Hong Kong's credentials as a place to park money. Previously residents with assets of more than HK$7.5 million (US$ 967,419.83) faced taxes of up to 15 per cent. The new legislation will come into effect in February 2006.

The estate tax was a particular disincentive on Hong Kong's middle class from keeping their money in the city as they could not afford the expense of setting up an offshore trust, Ms Wong said. The government is acutely aware of the importance of fund management as a "pillar" industry, she said.

Spin-off effects

The creation of jobs in the fund management industry results in a host of other positions being opened in a range of related areas which service the industry, such as stock broking, banking, accounting and the legal profession.

"It's a very important industry which has a multiplier effect. The jobs being created are very high value added at the high end of the value chain," Ms Wong said. The latest figures showing the size of assets being managed in Hong Kong underlines the industry's importance in terms of generating wealth in the city.

Last year, Hong Kong fund managers were taking care of a total of HK$3.6 trillion (US$464 billion), up 23 per cent from 2003, according to financial watchdog the Securities and Futures Commission. The figure is also more than double the HK$1.5 trillion (US$193 billion) in assets under management at the end of 2000.

Hong Kong has traditionally been the premier fund management centre in Asia because of its open financial system which allows the free flow of capital, its quality infrastructure, telecommunications and transport links and its strong legal framework.

"There's a lot of good things about Hong Kong, it's an efficient place to work," said Brook McConnell, president of boutique fund house South Ocean Management. The gradual opening up of China's huge economy and financial markets presents an extraordinary opportunity for Hong Kong's fund management industry to capitalise on, he said.

Future 'looks great'

"I think the future looks great. China is still growing like a weed. It's a case of all roads lead to China," Mr McConnell said.

The conventional thinking anticipates a slow relaxation of China's capital controls, giving foreign investors greater access to its domestic financial markets. Fund management companies at present can apply for a quota under the Qualified Foreign Institutional Investor scheme.

As China reforms its financial markets and further relaxes capital controls, it should also benefit Hong Kong where a host of top fund management firms have their regional headquarters.

But there is the other, less recognised side of the story. China's opening up will also mean a vast amount of money of privately owned domestic money will freed up and could be moved into international investments. Hong Kong will play its traditional middleman role, but this time in reverse. Funds will come from China and be moved to Hong Kong where they will be invested in the city's stock market, across the region, and even globally.

"Hong Kong is strategically well positioned to capitalise on these opportunities in mainland China," said the IFA's Ms Wong.

In the nearer term, the future also looks bright for Hong Kong's fund-management industry as surging stock markets draw in new money - and new entrants to the industry in Hong Kong.

"We are in the mid-cycle of a bull market so there will be more people coming out from the West," said Mr McConnell.

Related link
Hong Kong Investment Funds Association 
Financial Services and Treasury Bureau