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The Financial Services Landscape in Hong Kong

Spring 2016

Hong Kong’s financial services sector at a glance effective supervision and transparent regulations reflecting international standards

one of the world’s most liberal economies

US HK

a stable currency regime with the exchange rate of the Hong Kong dollar pegged to the US dollar at around HK$7.8 to US$1 uniquely positioned as the premier capital formation centre for Mainland China, supporting its liberalisation of the Mainland capital account and opening of domestic capital markets

PwC champions and supports the financial services sector as it continues its transformation in response to changing needs and values and an increasingly complex business environment. We help our clients navigate these challenges and opportunities, through advice and education. This guide provides a snapshot of the major events and developments that have shaped Hong Kong’s financial services landscape. It is intended as a starting point for those who may be new to the territory’s financial services sector. We hope you find this guide useful. Should you have any questions, please do not hesitate to contact your PwC representative.

TAX TAX

low tax rates and simple tax policy

autonomy to determine financial and monetary policies, and regulatory and supervisory policies and practices under “One Country Two Systems”

a strong emphasis on the rule of law and fair markets

no exchange controls and restrictions on capital inflows and outflows financial services is one of the Four Pillar Industries in the Hong Kong economy, along with trading and logistics; tourism; and producer and professional services

Financial services industries in Hong Kong Banking

Asset & wealth management

157

At the end of December 2015, there were 157 licensed banks, 24 restricted licensed banks and 18 deposit-taking companies in Hong Kong, together with 64 local representative offices of overseas banking institutions.

18

Hong Kong has one of the highest concentrations of banking institutions in the world. They come from 36 countries and include 71 of the world’s largest 100 banks. Together they operate a comprehensive network of 1,376 local branches, excluding their principal place of business in Hong Kong. Banks in Hong Kong can engage in a wide range of retail and wholesale banking businesses.

licensed banks

deposit-taking companies

24

restricted licensed banks

64

local representative offices

Hong Kong has arisen as a premier offshore RMB centre, thanks especially to the scheme for trade settlements in RMB and related financing activities. According to SWIFT, the RMB was the world’s fifth most-used payment currency in October 2015 (trailing the US dollar, Euro, British pound and Japanese yen), with Hong Kong the leading offshore RMB trading hub, handling about 70% of global payment in RMB. As of end-March 2015, there were 224 banks in Hong Kong participating in the RMB clearing platform, while a wide range of RMB products and services is available in Hong Kong’s offshore RMB market, including trade finance, certificates of deposit, bonds, stocks and ETFs.

$

$

2,000+

authorised unit trusts and mutual funds

HK$10,311 billion net asset value of authorised unit trusts and mutual funds

$

HK$17,700 billion

the combined fund management business hit a record high

At the end of June 2015, there were 2,626 SFCauthorised collective investment schemes, including 2,063 authorised unit trusts and mutual funds, 294 investment-linked assurance schemes, 243 pension/MPF-related funds and 26 other investment schemes. In December 2014, the net asset value of authorised unit trusts and mutual funds totalled around HK$10,311 billion (US$1,322 billion). Hong Kong’s combined fund management business grew 10.5% to reach a record high of HK$17,700 billion (US$2,300 billion) total AUM. The ETF market in Hong Kong has demonstrated remarkable growth in recent years. As of endNovember 2015, there were 135 ETFs listed in Hong Kong, compared with 122 ETFs at the end of 2014. In December 2015, seven cross-border funds were approved under Mutual Recognition of Funds (MRF) scheme, which consisted of three Hong Kong funds and four Chinese mainland funds. In November 2014, the Shanghai-Hong Kong Stock Connect was officially launched, providing an alternative route for Hong Kong fund management companies to invest in one of the mainland’s bourses.

Insurance

HK$185 billion total gross premiums

158

authorised insurers

31

44

pure long term insurers

95

pure general insurers

19

composite insurers

Financial markets In the first half of 2015, total gross premiums increased by 13.6% year-on-year to HK$184.9 billion (US$23.7 billion). Long-term insurance business represented about 87% of the total gross premiums for this period, while general business accounted for the remaining 13%. As at 30 June 2015, there were 158 authorised insurers in Hong Kong, of which 95 were pure general insurers, 44 were pure long term insurers and the remaining 19 were composite insurers. According to the statistics provided by the Insurance Agents Registration Board, there were 2,487 insurance agencies, 48,657 individual agents and 27,439 responsible officers/technical representatives. There were 684 authorised insurance brokers. All of them are members of the two approved bodies of insurance brokers, namely The Hong Kong Confederation of Insurance Brokers and Professional Insurance Brokers Association. In addition, there were 9,253 persons registered as chief executives/technical representatives of these.

1,780 companies listed on the Stock Exchange of Hong Kong (SEHK)

Hong Kong equity market Hong Kong’s stock market was the fifth largest in the world and the third largest in Asia in terms of market capitalisation at the end of April 2015. At the end of April 2015, 1,780 companies were listed on the Stock Exchange of Hong Kong (SEHK), with a market capitalisation of HK$30,995.2 billion

(US$3,973.7 billion). 896 were Mainland enterprises, which together raised HK$4,531.4 billion (US$580.9 billion) from 1993 to the end of April 2015. Hong Kong is one of the most active markets for raising initial public offering funds. In 2014, HK$232.4 billion (US$29.8 billion) were raised. A wide variety of products are traded in the stock market, ranging from ordinary shares to options, warrants, Callable Bull Bear Contracts, Exchange Traded Funds (ETFs), Real Estate Investment Trusts (REITs), units trusts and debt securities. Hong Kong debt market Hong Kong does not have a large debt market. However, Hong Kong dollar debt issuance in 2014 did reach a record high for a sixth consecutive year. This is a testament to the continued growth of the Hong Kong dollar debt market, attracting an increasing number of issuers to use this funding channel. For 2014, the total issue volume increased 3.1% to reach HK$2,430 billion (US$311.5 billion). Growth in issuance was mainly driven by local corporates and overseas issuers. The amount of debt securities issued by local corporates reached a record high of HK$33 billion (US$4.2 billion), 30% more than 2013. Funding costs continued to show a downward trend during the year. The continuing low-interest-rate environment gave issuers an incentive to lock up funding under favourable market conditions. The tightening yield premium of non-government borrowings in the Hong Kong dollar market provided another incentive for corporate borrowings. As of 31 December 2014, the total outstanding amount of exchange fund bills and notes, as well as other debt instruments were HK$1,409.8 billion (US$180.7 billion) and new issues other than exchange fund bills & notes were HK$252.7 billion (US$32.4 billion). Foreign currency The results of the latest triennial global survey of turnover in the markets for foreign exchange and over-the-counter interest rate derivatives, conducted in April 2013, show that Hong Kong was ranked as the fifth largest centre for FX activity and as the sixth when OTC interest rate derivatives were also included. The average daily turnover of FX transactions in Hong Kong increased by 15.6% to HK$2,141.9 billion (US$274.6 billion), and that of OTC interest rate derivatives increased by 51.1% to HK$217.6 billion (US$27.9 billion).

This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. © 2016 PwC. All rights reserved. PwC refers to the Hong Kong member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. HK-20151102-9-C2

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Hong Kong’s financial services landscape

1989

The Securities and Futures Commission was established in response to the stock market crash of October 1987.

1988

The details of the Hong Kong Handover emerge, including the Basic Law which will govern the Special Administrative Region of Hong Kong (HKSAR).

Hong Kong’s financial services infrastructure developed in step with the city’s growth as a manufacturing and trading centre. In the 70s and 80s its markets were rocked by external events, as well as by growing uncertainty about Hong Kong’s future status. From the 90s to the present day we have seen the establishment of important institutions and regulatory frameworks which have enabled the city not only to cope with shocks such as the Asian financial crisis, but also to take maximum advantage of the steady opening up of the Chinese economy.

1987

Black Monday stock disaster originated in Hong Kong, moving to Europe then the USA. Within two weeks Hong Kong’s stock market drops by 45.5%.

1986

Pressure to strengthen market regulation and to unify the four exchanges leads to the incorporation of the Stock Exchange of Hong Kong Limited.

1984

The UK and China sign Joint Declaration on the conditions under which Hong Kong will revert to Chinese rule in 1997. Under the “one country, two systems” formula, Hong Kong will become part of one communist-led country but retain its capitalist economic system and partially democratic political system for 50 years after the handover.

1983

The Hong Kong dollar is repegged to the pound at a new rate (1 pound = HK$14.55) following the rapid depreciation of the pound.

1965

Formal stock exchange, the Association of Stockbrokers in Hong Kong, formed in 1891 to bring order and certainty to the market. Renamed the Hong Kong Stock Exchange in 1914.

1860s

Hong Kong and Shanghai Banking Corporation, first Hong Kong-based bank, is formed and Hong Kong’s first Companies Ordinance is passed.

Pre – 20th century

Stock disaster – Banking crisis originating in property and stock bubbles. Runs on a number of banks. Ming Tak Bank and Canton Trust & Commercial Bank close down.

1982 – 1986

After the stock market crash in 1973, the Securities Ordinance and the Protection of Investors Ordinance came into effect on 1 March 1974 to better protect investors.

1973 1960s

1950 1935

Creation of Hong Kong’s Exchange Fund – China abandons silver standard and Hong Kong immediately follows suit. The Hong Kong Government declares the Hong Kong dollar as the local monetary unit, with an exchange value fixed at HK$16 to the pound.

1930s Jun 2003

The opening up of China’s financial markets and development of Hong Kong as the global offshore RMB trading hub

1974

1974

1967

1891

Peg to the US dollar is removed. The Hong Kong dollar becomes a floating currency.

At a time of financial crisis and political uncertainty about Hong Kong’s future, the HKSAR government links the Hong Kong dollar to the US dollar at a fixed exchange rate of HK$7.8=US$1 under a currency board system.

The Chinese mainland and HKSAR signed Closer Economic Partnership Arrangement (CEPA), which covered three broad areas: trade in goods, trade in services and trade and investment facilitation. CEPA aimed to foster closer economic ties between the mainland and Hong Kong by phasing out tariffs and non-tariff barriers on trade in goods, phasing in liberalisation of trade in services and promoting trade and investment facilitation.

Nov 2003

The People’s Bank of China, or the central bank, agreed to provide clearing arrangements for banks in Hong Kong to run personal RMB businesses on a trial basis. The central bank later appointed Bank of China (Hong Kong) Limited (BOCHK) as the RMB clearing bank in Hong Kong. In February 2004, personal RMB banking services were launched in Hong Kong, marking a step forward for Hong Kong’s development as RMB offshore centre while enhancing its status as an international financial centre.

Hong Kong enjoys economic revival under British rule based on light industries such as textiles.

1946

Britain re-establishes civil government.

1941

Japan occupies Hong Kong.

New decade marks era of confidence and growth. Hong Kong’s infrastructure develops rapidly and manufacturers benefit from inexpensive pool of skilled labour. There is a mushrooming of industries and the financial sector becomes increasingly active. Share issues are heavily over-subscribed and share trading booms in the early 1960s.

1940s – 1950s Feb 2004

Hong Kong first offshore market to launch RMB Business Scheme. The scheme initially covered RMB banking services, including deposit-taking, currency exchange, remittance and debt and credit cards. Over the years, Hong Kong has developed into an offshore RMB business centre with the deepest and most liquid RMB market outside Mainland China. The RMB Real Time Gross Settlement system plays a critical role in facilitating market participants from all over the world to handle RMB transactions both with Mainland China and offshore markets.

Jan 2007

The State Council announces approval for financial institutions on the Mainland China to issue RMB-denominated bonds in Hong Kong. The first offshore RMB bond was issued in Hong Kong in 2007. The RMB bond market in Hong Kong, or the ”dim-sum bond market”, continued to develop steadily and is now the largest outside Mainland China. Outstanding bonds amounted to HK$436.2 billion (US$55.7 billion) at the end of October 2015.

Jul 2009

Mar 2006 Apr 2006

Nov 2010

On 13 April 2006, the Chinese central government announced the Qualified Domestic Institutional Investor (QDII) scheme, allowing Chinese institutions and residents to entrust Chinese commercial banks to invest in financial products overseas. Investment limited to fixed-income and money market products.

1972

The Hong Kong dollar is pegged to the US dollar at HK$5.65 = US$1, with a ±2.25% intervention band around a central rate.

1960s

Cross-border trade settlement using RMB introduced in Hong Kong, allowing enterprises to settle transactions with their Mainland counterparts using the RMB.

RMB Settlement System launched.

Stock market disaster due to 1973 – 74 bear market. Affecting all major stock markets globally, it is one of the worst stock market downturns in modern history. The Hang Seng Index drops from 1,774 to 150.

RMB sovereign bonds issued through the Central Moneymarkets Unit.

HKSAR government is forced to take over Hang Lung Bank, Overseas Trust Bank, and Hong Kong Industrial and Commercial Bank to forestall their outright collapse. To redress this, an overhaul of the supervisory system is launched and the new Banking Ordinance comes into force in 1986.

1981

Stock market disaster due to negotiation deadlock between China and the UK on transfer of sovereignty over Hong Kong. The Hang Seng Index falls 63%.

1980s

Series of banking crises, triggered by the bursting of property bubble and concerns about Hong Kong’s future.

1970s Mar 2011

The Chinese central government published a guideline of the country’s 12th five-year development plan for national economic and social development between 2011 and 2015. For the first time it carried a separate chapter for the development of Hong Kong and Macau. The blueprint, which promises measures to consolidate and strengthen Hong Kong’s status as an international financial, trade and shipping centre, and support Hong Kong’s efforts to become an international asset management centre and an offshore RMB trading centre, was widely welcomed by the general public in Hong Kong.

Apr 2011

The Hui Xian REIT, the first RMB– denominated IPO in Hong Kong, made its debut on 29 April 2011. The listing paved the way for more RMB– denominated IPOs in Hong Kong.

1998

During the Asian financial crisis, currency speculators sold the Hong Kong dollar heavily and shorted local stocks and Hang Seng Index futures. The government controversially used the exchange fund to acquire HK$120 billion (US$15 billion) of bluechip shares in a two-week market intervention, with the aim of punishing and deterring currency speculators. The intervention was widely criticised at the time as being detrimental to the reputation as one of the world’s financial centres but it also had the effort of raising public confidence in the market at a time of near collapse and possibly averting a bigger crisis.

1997 – 1998

Bear market due to Asian Financial Crisis. After the Asian Financial Crisis, Hong Kong experiences a period of prolonged economic difficulty, relieved only by a brief recovery between 1999 and 2000. A series of external shocks, coupled with sharp declines in asset prices, led to high unemployment, deflation and fiscal deficits. The Hang Seng Index drops around 40%.

1997

Handover of Hong Kong from the United Kingdom to China takes place on 1 July 1997.

1995

Banking Ordinance is further enhanced by strengthening provisions governing the authorisation and section 52 control of authorised institutions.

1993

The Hong Kong Monetary Authority (HKMA) is established with responsibility for monetary and banking stability, reserves management, and financial infrastructure.

1992

Hong Kong stock market crashes.

1980s Dec 2011

Foreign investors allowed to invest in the Mainland China’s bond and equity markets through funds issued by qualified fund management and securities companies in Hong Kong under the RMB Qualified Foreign Institutional Investors (RQFII) scheme.

Jun 2012

The HKMA introduced facility to provide RMB liquidity to banks in Hong Kong.

Sep 2012

Launch of RMB currency futures in Hong Kong.

1990s

2000s - present

Jul 2015

Nov 2014

RMB liquidity facility provided by the HKMA enhanced to provide T+0 funding to banks.

Interest rates are completely deregulated. Banks free to set interest rates for all types of deposits.

Sep 2013

Jul 2013

Jun 2013

2001

Apr 2015

The China (Shanghai) Pilot Free Trade Zone (PFTZ) was officially launched in Shanghai. The establishment of PFTZ has been recognised as a crucial economic reform initiated by China’s new leadership. The ‘pilot experiment’ focused on financial reform; upgrading of customs supervision framework; simplification of administrative systems; and creation of more favourable regulatory and tax environment for businesses.

Launch of CNH HIBOR fixing by the Treasury Markets Association in Hong Kong.

The Qianhai RMB cross-border lending scheme commenced in January 2013. Companies established in Qianhai and with operations or investments there can borrow RMB funds from Hong Kong banks engaging in RMB business.

The Hong Kong subsidiaries of Lehman group go into provisional liquidation. Numerous financial institutions face censure from regulators over mis-selling of “minibonds”.

Sep 2013

Unveiled by Chinese President Xi Jinping in 2013, the “One-Belt, One-Road” is a significant development strategy with the intention of promoting economic cooperation among countries along the proposed Belt and Road routes. The Initiative has been designed to enhance the orderly free-flow of economic factors and the efficient allocation of resources. It is also intended to further market integration and create a regional economic co-operation framework of benefit to all.

Jan 2013

2008

Launch of the Shanghai – Hong Kong Stock Connect, enabling mutual access between stock markets in Hong Kong and Mainland China.

The China (Guangdong) Pilot Free Trade Zone launched to further open up the Mainland to the world through in-depth co-operation between Guangdong, Hong Kong and Macau, including promoting cross-boundary RMB business to strengthen Hong Kong’s position as an offshore RMB centre. A plan to launch pilot reforms of foreign exchange control will also help expedite the pace of internationalisation of the RMB. Implementation of the Mainland-Hong Kong Mutual Recognition of Funds initiative, through which qualified Mainland and Hong Kong funds can be offered directly to retail investors in each other’s market through streamlined vetting process.

Dec 2015

International Monetary Fund (IMF) approves reserve currency status for China’s yuan, joining the US dollar, Europe’s euro, Japanese yen and British pound in its Special Drawing Rights basket. Sources: www.hkma.gov.org, www.bbc.co.uk, www.hktdc.com, www.hkex.com