27 October 2016
Hong Kong can help the new China-led Asian Infrastructure Investment Bank in optimizing capital distribution and management, observers say. Photo: Xinhua
Hong Kong can help the new China-led Asian Infrastructure Investment Bank in optimizing capital distribution and management, observers say. Photo: Xinhua

Hong Kong well placed to be treasury center of AIIB

Hong Kong, as the global financial hub close to mainland China, has various advantages in financial infrastructure, taxation, legal system, renminbi capital pool and professional talents. The city is well placed to serve as a treasury center for the Asian Infrastructure Investment Bank (AIIB).

China’s “One Belt One Road” strategy encompasses major seaports and trade routes and links two vibrant regions — Asia Pacific and Europe. The plan covers an area so big in scale that the infrastructure projects require complex cross-border financing and operation.

If the AIIB sets up a financing center within Asia, it could put together grants from various nations and different currency investments and chart a centralized plan on how to use the money.

That will help optimize capital distribution and management, dealing with regulations in different markets and regions to ensure better forex strategy, cross-border payments, risk control, etc.

Compared with other financial centers like London, Singapore and Shanghai, Hong Kong is more suitable to act as the financial management center of AIIB.

Geographically, Hong Kong mainly serves China and North Asia, while Singapore targets Southeast Asia. That means Hong Kong is the natural choice for setting up financial management units for companies that have close business links with China.

By contrast, London is far away from the headquarters of the AIIB and locations of most projects along the Belt and Road routes. Meanwhile, Shanghai, despite its geographical advantage, still faces restrictions in currency and capital, apart from tax and legal issues.

Tax is a dominant factor when companies decide on possible locations for treasury centers. The corporate tax rate is 17 percent in Singapore, and 16.5 percent in Hong Kong. Corporate treasury centers in Singapore need to pay less than 10 percent under various tax cuts.

The Hong Kong government announced in its budget last year that a profits tax rate cut of up to 50 percent will be offered to entice firms to set up their corporate treasury centers in the city. As a result, the tax rate in Hong Kong for corporate treasury centers will be similar to that in Singapore.

Avoiding double taxation is also a major consideration. Currently, Singapore has signed over 70 double taxation treaties, while Hong Kong has inked less than 40 such deals. However, Hong Kong has signed a treaty with the mainland, boosting its competitiveness versus Singapore.

Hong Kong authorities are also trying to expand the network of double taxation treaties.

Besides, the city has obvious advantage in equity financing, debt issuance and hedging trade. It can fully assist in investment and execution of key infrastructure projects of the AIIB, Silk Road Fund, and the New Development Bank BRICS.

Hong Kong is the world’s largest IPO market, and over half of the market capitalization on the city’s stock exchange is made up of mainland firms. Last year, up to US$33.5 billion was raised in IPO deals in Hong Kong.

Given this situation, the city can help companies to raise capital for Belt and Road projects and supplement the limited funds of cross-national institutions.

Also, Hong Kong has a well-developed debt financing market. And the debt issuing cost here is cheaper than in many other places. The city has a more diversified foreign currency debt portfolio, and around half of the debt market is denominated in foreign currencies.

More importantly, the city has unique strengths in renminbi business as it is the world’s largest offshore RMB center.

Renminbi is set to be more easily accepted as China cements trading ties with countries along the Belt and Road routes. The strategy needs a deep and developed global offshore RMB center in order to deal with renminbi settlement, financing and capital management.

As of end of 2015, the RMB deposit pool in Hong Kong reached 851.1 billion yuan, and cross-border RMB remittance for trading settlement hit 667.5 billion yuan last December. The offshore RMB market is very active in the city, as the daily turnover has reached around 1 trillion yuan.

Meanwhile, the dim sum bond market has grown to over 360 billion yuan by the end of October last year. And up to 70 percent of global cross-border RMB payments are made in Hong Kong.

This article appeared in the Hong Kong Economic Journal on Feb. 23.

Translation by Julie Zhu

[Chinese version 中文版]

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Lecturer of Department of Logistics and Maritime Studies, the Hong Kong Polytechnic University

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