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Hong Kong protests

Fearing capital flight, Hong Kong eyes tax breaks for the rich

Territory's $1.5 trillion wealth industry lobbies for help amid the protests

Five months of unrest have prompted the very rich to make plans to protect their wealth, with about $4 billion in capital fleeing Hong Kong in September, according to Goldman Sachs.   © Reuters

HONG KONG -- Fearful that a trickle of capital outflows could become an exodus, Hong Kong authorities are offering private banks and family offices a range of incentives that could include tax cuts to try and bolster the city's $1.5 trillion wealth management industry, the Nikkei Asian Review has learned.

The move follows over five months of unrest that has left some of Hong Kong's streets looking like a war zone, and prompted some tycoons to make contingency plans to protect their wealth. Around $4 billion of funds left Hong Kong in September, according to Goldman Sachs.

Worried about capital flight, especially to nearby financial centers such as Singapore, the government and regulators including the Hong Kong Monetary Authority will over the next three months launch a campaign to highlight current incentives, such as a recently-amended profits tax regime, and also canvas investors about other possible incentives.

Among the possibilities already broached are additional tax breaks, regulatory streamlining and proposals to facilitate cross-border wealth management between Hong Kong and mainland China, especially around the Greater Bay Area.

"The authorities are aware of sentiment and are closely following what other markets [and governments] are doing to attract fund flows [from Hong Kong and elsewhere]," said Hong Kong-based Eva Law, who chairs the Association of Family Offices in Asia.

"While we believe that Hong Kong has advantages given its size and number of family offices, we need to do something more to boost the status of the city. We are also involved in the discussions led by the HKMA and the government."

Consultations with family offices and private banks have increased over the past four months as the protests have intensified, wealthy clients have become more skittish and local commercial property prices have plummeted.

On Monday, violent clashes broke out after the police shot a demonstrator and a video went viral on social media that appeared to show protesters dousing a man in liquid and setting him on fire. On Tuesday, police fired tear gas at demonstrators at two universities and in the central business area, where office workers blocked roads.

Interviews with bankers and family offices reveal that client inquiries about opening offshore bank accounts have increased markedly, while some clients have said they want to park as much as a third of their liquid assets overseas.

Executives at two family offices said it was the first time in many years that city regulators had reached out to them directly. Others said they had lobbied for tax breaks comparable to those at Singapore, which offers income tax relief under certain conditions.

They have also asked that Hong Kong make it easier for family offices to set up structures where they can join with other wealthy families to invest as a group. While it takes four weeks to approve such vehicles in Singapore, it can take four months in Hong Kong.

"Authorities need to take the initiative to make Hong Kong attractive," said Chiman Kwan, chief executive of Raffles Family Office, which manages $2 billion. "The regulators are aware and we've had discussions with them...The conversation centers around one factor: what needs to be done to elevate Hong Kong’s status as a wealth management hub."

A spokesman for the Hong Kong government's Financial Services and Treasury Bureau declined to comment and referred to a paper submitted on Oct. 28 to the Legislative Council Panel on Financial Affairs that listed several ways of developing Hong Kong as an asset and wealth management center, such as providing a "facilitating tax environment."

Assets under management of the private banking and private wealth management business stood at HK$7.6 trillion ($974 billion), and holdings under trust accounts amounted to a further HK$4.3 trillion in 2018, according to July data from the territory's Securities and Finance Commission. The asset management business employs 42,000, the data showed.

There are already signs of capital outflows. Hong Kong dollar-denominated deposits dropped 1.6% in August, the steepest monthly fall since May 2018, after dropping slightly in July, according to the HKMA. A summer surge of initial public offerings helped deposits edge ahead in September, but they remain below levels seen in April.

One Southeast Asian bank said inquiries from customers with liquid assets of $1 million about using its offshore bank have trebled in three months.

Private banks such as UBS and Credit Suisse have also seen an increase of wealthy clients wanting to open offshore accounts, with Singapore, London and Zurich topping the list as alternative destinations.

Family offices are also looking to diversify where managed assets are booked by re-registering them in alternative centers, such as Singapore. The process can take six months.

A senior banker based in Singapore, who helps rich business owners set up family offices, said inquiries from Chinese and Hong Kong clients had doubled from a year ago. While they have not yet set up family offices in Singapore, the banker expects that to follow soon.

"Families are looking to book 30% to 40% of their portfolio in offshore centers as part of their diversification drive," an executive at another global private bank said. "The unrest has raised the fear of concentration risk among family offices and flagged the benefits from diversification."

The assets most likely to be moved abroad first are liquid investments in secondary markets and cash products, which typically make up $20 million to $30 million in an average $100 million family office portfolio.

However, the majority of the holdings are locked up in property or as private investments in companies founded by the family. These are long-term, strategic holdings that families would seldom unwind, wealth managers said.

That, combined with the cost of maintaining accounts across several jurisdictions and the widespread desire to maintain exposure to China, has played a "large role" in limiting outflows so far, said the Association of Family Offices in Asia's Law.

Nevertheless, bankers say the time is ripe for Hong Kong to unveil fresh incentives.

"In the tussle to be Asia's wealth hub, Hong Kong has had a poor few months when compared to Singapore," said Raffles' Kwan. "It hasn't been an even fight, with Hong Kong just receiving the punches. It is time to hit back."

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