With a Large Tax Break, Hong Kong Tries to Soothe the Wealthy

HONG KONG – The political opposition has been suppressed. Freedom of speech has been suppressed. The independent judicial system may be next.

While Hong Kong’s leaders are following the city of more than seven million people, they are campaigning for a crucial constituency: the rich. Senior officials are preparing a new tax break and other sweeteners to portray Hong Kong as the most important place in Asia to make money, despite the increasingly autocratic rule of the Chinese Communist Party.

So far the playing field works. Cambridge Associates, a $ 30 billion mutual fund, announced in March that it would be opening an office in the city. Investment managers have launched more than a hundred new companies in the past few months. Wall Street banks Goldman Sachs, Citigroup, Bank of America and Morgan Stanley are increasing their workforce in Hong Kong.

“Hong Kong is the second largest billionaire city in the world after New York,” said Paul Chan, Hong Kong finance secretary, at an online meeting of financial managers this year.

Beijing cannot easily afford to scare 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. These companies and wealthy Chinese also rely on it to make getting their money overseas more easily.

So Beijing strikes a careful balance. It deprives the people of Hong Kong of the freedom to stop brazen challenges to Communist Party rule, such as the sometimes violent protests against the government that erupted two years ago. At the same time, efforts are being made to charm the city’s financial class to prevent them from moving to another business-friendly place like Singapore.

“It’s a one-party state, but they’re pragmatic and don’t want to interfere with business,” Fred Hu, former chairman of Goldman’s Greater China business, told Chinese officials.

The changes will have little impact on apolitical financiers, said Hu, who is also the founder of private equity firm Primavera Capital Group. “If you are a banker or a trader, you might have political views, but you are not a political activist,” he said.

To attract the rich, Hong Kong is working on a major tax break that will primarily benefit private equity, hedge funds and other investors. Officials are moving to make it easier for the city’s money managers to connect with affluent mainland residents. Chinese companies are selling tens of billion dollars worth of shares in Hong Kong, making Wall Street banks more profitable.

In its latest move, Hong Kong proposed last week to limit the amount of corporate ownership disclosure, which could obscure prosperity in a city where Communist Party elite families have long parked their money.

Not everyone was won. More than 1 percent of residents have left since Beijing passed a comprehensive national security law last summer. Tens of billions of dollars have flowed into Hong Kong local bank accounts in jurisdictions such as Singapore.

Tensions are high in Hong Kong’s gleaming office towers. Even leaders who approve of the government have refused to speak publicly for fear of falling into the political crossfire between Beijing and world capitals like Washington and London. Hong Kong’s strict rules on movement in the pandemic may also lead some expatriates to leave after school in the summer.

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April 6, 2021, 7:10 p.m. ET

However, currently, financial firms are doubling in Hong Kong. Neal Horwitz, a recruiter in Singapore, said the finances would likely stay in Hong Kong “until the ship goes down”.

In its largest offering for the investor class, Hong Kong has proposed removing taxes on investment income, known as carry interest, typically earned by private equity investors and hedge funds. Officials had debated the plan for years but didn’t come up with a bill until February that could be passed by the city’s Beijing-dominated legislature in the coming months.

Similar tax breaks have sparked criticism elsewhere, including the United States. However, Hong Kong fears a financial exodus without such benefits, said Maurice Tse, a finance professor at Hong Kong University’s business school.

“In order to keep these people close, we have to give a tax break,” he said.

Hong Kong has also proposed a program, Wealth Management Connect, that will allow mainland residents in the southern region known as the Greater Bay Area to invest in Hong Kong-based hedge funds and investment firms. Officials have boasted of giving foreign companies access to 72 million people. Officials from Hong Kong and mainland China 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, the executive director of Hong Kong’s Financial Services Development Council, but it remains a top priority.

“I would like to emphasize how important the Chinese market is for global investors,” said Au.

The mainland money has already helped Hong Kong look more attractive. Chinese corporations raised a record $ 52 billion in companies that sold new shares on the Hong Kong Stock Exchange last year, according to Dealogic, a data provider. New deals this year have raised $ 16 billion, including $ 5.4 billion for Kuaishou, which operates a Chinese video app. The record start was partly supported by Chinese companies pressured by Washington not to raise funds in the US.

By managing these offerings, Goldman and Morgan Stanley rose to the top of the Asian industry rankings, which measure fees charged by banks. A Goldman spokesman said it plans to accelerate hiring in Hong Kong by nearly a fifth in 2021 year over year. Morgan Stanley has doubled its hiring pace this year, a spokesman said.

Thomas Gottstein, the executive director of Credit Suisse, the Swiss bank, said in mid-March that it would triple its hiring across China, and a spokeswoman said an increase in staff in Hong Kong was part of that. Bank of America is adding more employees in Hong Kong, while Citi has announced that it will be hiring up to 1,700 employees in Hong Kong this year alone.

The British bank HSBC has been pressured by Chinese state media to stick to the party line. Still, it is considering moving some of its top executives to Hong Kong as it “will be important to be closer to growth opportunities,” said Noel Quinn, CEO of HSBC, in February.

Mutual funds are also pouring into Hong Kong after officials in August removed regulatory barriers to building legal structures similar to those used in opaque low-tax areas like the Cayman Islands and Bermuda. Government data shows that 154 funds have been registered since then.

City officials also suggested last week allowing companies to hide sensitive property information, which could benefit companies and Communist Party officials alike. The measure could come into force as early as May and does not have to be approved by the legislature. Critics say the move would make it nearly impossible to track the people behind companies that register in Hong Kong.

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

It could also help those in China’s top leadership who are aware of the allegation of using their status for personal gain. The families of Xi Jinping, China’s top leader, and Li Zhanshu, Communist Party official No. 3, once owned property in Hong Kong, according to a lead that can be traced in part through public records.

While the officials have welcomed the deal, they have made it clear to the financial and business world that they will not tolerate opposition. In March, Chinese Vice Premier Han Zheng praised the performance of the stock market and the financial sector at a meeting with a political advisory group, but made clear its limits.

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

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