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Speeches

Making Hong Kong the top destination for corporate treasury in Asia

by Vincent Lee, Executive Director (External), Hong Kong Monetary Authority

(Keynote Address at Asia Treasury Leaders’ Forum)

21 September 2016

Peter (Matza), distinguished guests, ladies and gentlemen:

  1. Good morning. I would like to thank the Association of Corporate Treasurers for organising the Asia Treasury Leaders’ Forum in Hong Kong. It’s the third time we have joined this hallmark regional forum which gathers together some of the best corporate treasury minds to dissect key trends and opportunities underpinning the industry. The fact that this forum has drawn more than 300 participants from the region is testament to the growing importance of Asia to multinational corporations. And, what better location for such a gathering!
  2. Hong Kong has long-been the gateway for corporates expanding into and out of China. And this role has expanded exponentially in recent years. For example, in 2014, China’s outward direct investment was in excess of US$123 billion, of which nearly 58% came through Hong Kong; while in 2015, foreign direct investment into China amounted to US$126 billion, with some 68% coming through Hong Kong as well. So, today, I would like to share with you three specific areas which reinforce Hong Kong’s ‘gateway’ advantage. They cover the renminbi market in Hong Kong; facilitating infrastructure financing; and, finally, making Hong Kong the top destination for corporate treasury activities in Asia.

Development of Hong Kong as a Premier Offshore Renminbi Hub

  1. First, in relation to the renminbi, the reform of the yuan’s exchange rate since August 2015 has resulted in more two-way movement of the exchange rate against other currencies. As a result, some market players have started to query whether the progress of China’s capital account liberalisation will continue in the midst of such volatilities.  However, from what we have observed, the answer is a definite, “Yes”. In the past 12 months, the Central Government has continued to open up the country’s capital accounts, and a number of new policies have also been introduced. These include:

    a)     Last month’s approval of the Shenzhen-Hong Kong Stock Connect by the China Securities Regulatory Commission and the Securities and Futures Commission; and the immediate abolition of the existing aggregate quota under the Shanghai-Hong Kong Stock Connect. These decisions will facilitate a greater flow of two-way equity investments between China and rest of the world through Hong Kong.

    b)    In February, access by overseas institutional investors to the onshore interbank bond market was liberalised. And, since May this year, Mainland corporates have been able to obtain cross-border financing with a simplified registration process without the need for pre-approval from the regulators.
  2. In addition, from the beginning of next month, renminbi will be included as one of the IMF’s Special Drawing Rights currencies, signifying a greater international recognition of the renminbi as a ‘widely used’ and ‘widely traded’ currency. Indeed, more countries are considering including the renminbi as part of their foreign reserves. All these developments show that despite challenges in the foreign exchange market, there is continued momentum driving the capital account liberalisation process.
  3. As such, Hong Kong is well-positioned to benefit from this trend. We are the world’s largest offshore hub for renminbi business, with a liquidity pool of close to RMB 750 billion. More than 200 banks from all over the world are using our renminbi clearing platform to conduct a wide range of business activities. And, our platform responds to the global trends and continues to offer new products. For instance:

    a)       Over the past few years, the Hong Kong Stock Exchange has launched a series of exchange-traded renminbi products to meet the market needs for standardised risk management solutions of the currency.

    b)       And, in the first six months of this year, more than RMB 3.3 billion worth of fund units were sold to investors in Mainland China from Hong Kong through the Mainland-Hong Kong Mutual Recognition of Funds scheme.
  4. Thus, the large suite of renminbi products allows Hong Kong to maintain its attractiveness for new fund flows, and its leading position as the world’s largest offshore renminbi centre.
  5. Indeed, a significant role of the HKMA is to promote offshore renminbi business development through securing the necessary policy headroom, facilitating liquidity management and building a robust infrastructure for conducting the business. To help make this possible, we have put in place a RMB400 billion currency swap agreement with the People’s Bank of China, which can be activated when market conditions warrant. We have also made available renminbi liquidity facilities to banks in Hong Kong in the form of an intraday repo facility of RMB10 billion, and a bilateral repo line of RMB2 billion with each of the seven Primary Liquidity Providers.  And to give you just one more impressive statistic, our renminbi real time gross settlement system, has been handling over RMB800 billion worth of transactions every day since July.

Facilitation of Infrastructure Financing

  1. Let me now turn to another key area of our work, also heavily linked to the China theme – infrastructure financing in relation to what is now commonly known as the Belt and Road Initiative. As you are no doubt aware, the initiative was announced by the Central Government in May last year to stimulate economic co-operation among countries along the Silk Road Economic Belt and 21st Century Maritime Silk Road.
  2. One of the major goals is to promote connectivity in the region through the development of infrastructure. Asian Development Bank estimates put the overall infrastructure investment needs of Asia at US$800 billion a year from now to the year 2020.  Under the B&R Initiative, many Chinese corporates will be looking to invest in infrastructure projects in these countries. Hence, we believe the financing and fund management needs of the region will open up immense business opportunities for the financial sector.
  3. To capitalise on this, the HKMA established the Infrastructure Financing Facilitation Office, or IFFO, in July to expedite infrastructure investments and their financing by providing a platform for information exchange and experience sharing; building capacity and knowledge on infrastructure investments and financing; promoting market and product development; and facilitating infrastructure investment and financing flows.
  4. So far, 41 organisations from Mainland China, Hong Kong and overseas have joined IFFO as Partners.  They include multilateral financial agencies and development banks, public sector investors, private sector investors and asset managers, commercial and investment banks, infrastructure project developers and operators, and professional service firms.  IFFO will continue to expand by inviting key stakeholders with deep experience in infrastructure investment and their financing to be our partners, particularly in greenfield projects and emerging markets.

Development of Hong Kong into a CTC Hub

  1. The third area I briefly referred to earlier, which reinforces Hong Kong’s gateway advantage, relates to corporate treasury development. Today, corporates face both headwinds and tailwinds in their operating environment.  I believe there are three key trends treasurers should pay attention to in order to mitigate the risks and optimise the benefits.  And these are:

    a)       The growing outward investment from China;
    b)       The divergent monetary policies across economies; and
    c)        The regulatory changes in the financial industry sector.

Key Trends that drive changes in corporate treasury activities

  1. First, the volume of outward investment from China stands at a high level under the ‘Going out’ strategy as Mainland corporates express greater interest in foreign assets. In the latest 2016 Fortune Global 500 list, more than one out of five corporates is from China, showing many Chinese companies have already grown to the point where they are large enough to acquire these assets. According to PwC, in the 1st half of 2016, the transaction amount of China’s overseas M&A activities reached US$134 billion, almost a three-fold growth over the same period last year.
  2. With the increasing international business exposure, these Mainland corporates are facing new challenges in international treasury management. This includes obtaining enough funding for cross-border acquisitions, centralising liquidity and risk management, and upgrading technology and systems for transactions on international markets. The demand for more sophisticated treasury management is, therefore, stronger than ever. More corporates recognise the value of having a corporate treasury centre, or CTC, to plan, co-ordinate, manage and control their international treasury activities.
  3. Secondly, the diverging monetary policies of the major economies have made it more challenging for treasurers to manage liquidity. In the US, in the past 12 months, interest rate movement has lacked clear direction with fluctuating economic growth. Meanwhile, major economies like the Eurozone and Japan have gradually cut their interest rate targets to negative levels, resulting in some deposits becoming unattractive to financial institutions. Treasurers need to be more nimble in managing their currency exposures to avoid interest costs arising from the negative rates, whiling exploiting opportunities to reduce financing costs for the corporates. To achieve these, corporates need to centralise their exposure and enhance their treasury operation efficiency to give  treasurers an holistic view over their cash positions on a real time basis.
  4. Thirdly, reforms on banking regulations continue to reshape the landscape of corporate treasury management. The introduction of BASEL III aims to improve the strength and resiliency of the global banking system. In effect, banks are required to meet new requirements in areas including capital management, liquidity management, market and counterparty credit risk management. Banks also have to face more stringent compliance and customer due diligence requirements.
  5. These regulatory changes will have implications for the cost structure of banks as they offer treasury and risk management products to their customers. As a result, corporates may need to consolidate their banking relationships and work with those banks which can comprehensively satisfy their treasury requirements globally and take on the necessary compliance processes efficiently.

What does this mean to the CTC platform of Hong Kong?

  1. So, what does this mean for Hong Kong’s corporate treasury centre platform? With all these external trends and changes, corporates have greater incentives to centralise their treasury operations for optimal management. And this is where our unique position comes into play. We are keen to attract multinational corporates from overseas and the Mainland to set up their global or regional treasury centres here. Attracting more of these activities to Hong Kong will stimulate more business opportunities for our financial services and deepen our capital markets.
  2. That’s why the HKMA has been working with marketing partners, such as banks, accounting firms, industry associations and government agencies, to showcase our CTC platform and the latest CTC tax regime which is designed to assist corporates. Over the past two years, we have met with over 280 parties, including more than 200 corporates, to promote Hong Kong as a regional hub for CTCs. From this interaction, we received much valuable feedback that helped us identify the challenges faced by corporate treasurers. We were then able to assess how the Hong Kong platform could help corporates meet these challenges.

Key ingredients for a successful CTC operation

  1. As a result, corporates agreed that Hong Kong had all the key elements for a successful CTC operation. And now, with your indulgence, I would like to quote from several corporate treasurers who have already established their CTCs in Hong Kong:

    The first is from an APAC treasurer of an international media company, and I quote, “our company prefers to work closely with our global banking partners in Hong Kong because these banks understand our business and have regional teams to co-ordinate the requirements across all countries.”

     In another endorsement, an international treasurer of a Chinese energy company, says “Through the debt issuance process, we discovered that the Hong Kong market is very transparent, with very little restrictions compared to our home market.”

    And, finally, a treasurer of a US electronics parts supplier told us: “We have renminbi exposure in China and we perform the hedging in Hong Kong. This is because Hong Kong does not have any FX control. And the CNH market in Hong Kong is highly liquid.”
  2. As you can see, this small sample of testimonials highlights some of Hong Kong’s key strengths for a successful CTC operation:
  3. First, our extensive network of corporate and investment banks. Around 70 of the world’s 100 largest banks have a presence in Hong Kong. So, whether you are a corporate trying to centralise all your regional treasury activities with a single bank to maximise efficiency, or a corporate seeking to diversify your portfolio of banking partners for the lowest cost provider, Hong Kong’s banking market is able to provide the right solution to meet your corporate objectives.  In addition, our capital markets are highly competitive and efficient. CTCs operating here are able to capitalise on the deep liquidity of our markets to lower their costs when obtaining financial or risk management products.
  4. Secondly, our simple and transparent regulatory environment. Many corporate treasurers recognise that the absence of any capital or foreign exchange controls in Hong Kong facilitate their cross-border cash movements and for obtaining financing in foreign currencies. Hence, corporates can achieve their treasury objectives with minimal regulatory cost.
  5. Thirdly, we are a regional hub for commercial activities and a home for many buyers and suppliers. Many of the corporates we spoke to had set up their supply chain hubs or regional headquarters in Hong Kong, and it was a natural progression to also establish their corporate functions, including CTCs, to closely support their business operations here.
  6. Fourthly, Hong Kong, as I explained earlier, is a gateway to and from China. Many companies have leveraged on our position as the largest offshore renminbi centre and chosen to centralise their global renminbi positions in Hong Kong to tap our large liquidity pool. They also utilise the cross-border cash pooling structures between Mainland China and Hong Kong to move funds to and from the country.
  7. And, last, but not least, our talent pool. With an abundance of trilingual finance and accounting professionals, there is little difficulty for corporates to hire the right staff. As you are well aware, throughout the process of establishing CTCs, corporates require external advice in areas like tax and treasury structures, systems integration and operating procedures. Hong Kong’s professional services industry, including accounting and consulting firms, and the various technology solution providers, are invaluable in assisting corporates through this process.

Hong Kong’s CTC tax regime

  1. But the assistance doesn’t stop there. We already have a well-recognised low and competitive tax regime for commercial activities. But in order to attract more corporate treasury services and further develop our strengths as a CTC hub, the Government explored various options, including amending the Inland Revenue Ordinance to further improve the tax environment. And, I’m delighted to tell you the relevant legislation was passed and came into operation in June this year.
  2. Under the Ordinance, the interest deduction rules have been amended so that interest expenses arising from genuine cross-border intra-group financing activities, under specified conditions, are now deductible.  This will lower the overall tax cost and resolve the “tax asymmetry” issue currently perceived by some MNCs as an impediment to their establishing or expanding CTC operations in Hong Kong. 
  3. In addition, the qualifying profits derived from corporate treasury activities and transactions conducted by qualifying CTCs now benefit from a half-rate concession.  In other words, the applicable tax rate has been cut from the current 16.5% to 8.25%.  Broadly speaking, the scope of this concession encompasses corporate finance, liquidity management and risk management activities typically conducted by CTCs for their non-Hong Kong associated corporations. 
  4. In terms of the effective date, the half rate concession applies to relevant sums accrued on or after 1 April 2016 and the new interest deduction rule applies to interest payable on or after the same date, 1 April 2016.
  5. I would also like to highlight the fact that the tax regime is simple and transparent. There is no separate approval process for corporates to go through and for interest deductibility, any corporate can enjoy the deduction as long as the transactions meet the specific conditions. For the half-rate deduction, eligible corporates can elect into the regime during their annual tax filing.
  6. As a result of the improved tax environment, some corporates have already made a move to review their treasury structures and consider conducting more corporate treasury activities in Hong Kong, such as cash pooling, financing and FX management. And we hope to convince even more of them to set up their CTCs here.
  7. However, revising the tax regime does not mark the end of our work. It is an ongoing process as we strive to make the Hong Kong platform even more attractive. Indeed, some of you have expressed the view that we should do more to expand our double taxation relief network. Well, I can say that in 2009, there were only five countries in the network. Today, that figure has grown to 35 countries with another 13 under negotiation. And, the Government will continue in this direction, but I would like to add that while the number of DTAs is important, the quality of the DTAs also matters. Given that our agreements were negotiated more recently, we have more certainty in matching the latest developments in international tax standards, for example, the “Base Erosion and Profit Shifting” Project, by the OECD.

Closing

  1. Ladies and gentlemen, I realise I have been on my feet for some little while – some might even say for too long! But, I always like to take the opportunity to promote Hong Kong’s advantages whenever I can. There are certainly many changes on the horizon, creating a more complex operating environment for corporate treasurers. So, I’m pleased to note the Forum will discuss other timely topics such as further liberalisation of the renminbi, Fin tech and treasury technology trends, and the implications of Brexit. I hope the upcoming sessions will inspire new ideas for treasury management, and I wish you all a very successful conference.  Thank you.
Last revision date: 21 September 2016
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