According to the lunar calendar, we enter the so-called “dog days of summer” in late July, which is the hottest and most uncomfortable part of summer. People inevitably slow down their pace a bit. Hence, there is the traditional saying of “better to stay put than to act” during this period. However, with the pressing demand of work, such folk wisdom can only be put aside.
My colleagues and I went to Beijing during 19-24 July to visit several institutions, including the State-owned Assets Supervision and Administration Commission of the State Council (SASAC), China Development Bank and a number of major central state-owned enterprises. We also attended the inaugural ceremony of the Asian Financial Cooperation Association officiated by Ma Kai, Vice Premier of the State Council. The keynote speech, which I was invited to deliver at the ceremony, was published earlier. In this article, I would like to talk about another highlight of this trip: encouraging large Mainland enterprises to set up their corporate treasury centres (CTCs) in Hong Kong. My conclusion is: this trip was worthwhile, with a fruitful outcome. At least three central state-owned enterprises, including China Huaneng Group, State Power Investment Corporation and China Three Gorges Corporation, have expressed their intention to establish or expand their CTCs in Hong Kong in the near future. Such positive responses are undoubtedly a strong stimulus to our efforts in expanding the scope for further development of Hong Kong’s financial industry.
Due to the wide business scope and geographical coverage of many large multinational corporations, their branch offices and subsidiaries in different locations may face short-term surpluses or shortages of funds across different currencies. Therefore these corporations usually have in-house CTCs, which act like “in-house banks” to effectively manage and deploy funds, such as managing liquidity, financing, foreign exchange, investment and hedging activities of their branch offices and subsidiaries. In-house CTCs not only allow these multinationals to manage their funds in a more flexible manner, but also help reduce their overall financing and operational costs. Very often the operation of CTCs requires the support of liquidity management, financing, risk management, taxation and legal advisory services. As Mainland enterprises are actively expanding in the international market under the “Go Global” initiative, the transfer and allocation of funds overseas has become even more important. They require the support of an efficient CTC to centralise the management of their treasury and risk-management activities. Hong Kong has always been the springboard for Mainland companies to “Go Global”. With its wide-ranging strengths, including a premier financial market, the largest offshore renminbi market in the world, as well as world-class talent in the financial and related fields, Hong Kong is the ideal location for Mainland enterprises to set up their CTCs to support overseas business expansion.
With its geographical proximity to the Mainland, and the “Go Global” strategy of Mainland enterprises, Hong Kong clearly enjoys a competitive advantage in developing itself as a CTC hub. So why hadn’t there been more corporations coming to Hong Kong to set up their CTCs in the past? The HKMA conducted a study on this issue a few years ago and found that the main reason was Hong Kong’s taxation system. The intra-group financing activities of CTCs generate interest income and expenses. However, under our former tax regime, interest income was taxable, while such interest expenses were not tax deductible. This asymmetric tax treatment stifled the development of Hong Kong as a CTC hub. To tackle the issue, we discussed with the Hong Kong Special Administrative Region (HKSAR) Government and successfully convinced it to propose tax amendments in the Budget. A taskforce was formed with the Financial Services and the Treasury Bureau and the Inland Revenue Department to speed up the process. The tax amendments were finally gazatted in June 2016 to rectify the rules on interest deductions and thereby resolve the “tax asymmetry” issue. The amendments also reduce the profits tax rate on specified activities of qualifying CTCs by 50%.
Given the intense competition among financial centres, the good-wine-needs-no-bush mentality is no longer applicable. Therefore, alongside the legislative amendments, we lost no time in preparing for related promotional and lobbying work in parallel. As soon as the legislation was enacted in 2016, a dedicated team of the HKMA embarked on a proactive marketing campaign to promote Hong Kong as a CTC hub. For instance, we jointly organised a seminar on CTCs with SASAC in Beijing in October last year. A month later, we signed a Memorandum of Understanding with the Hong Kong Chinese Enterprises Association to help Chinese companies understand Hong Kong’s CTC-related policies, and organised a seminar for them. These promotional activities have received positive feedback.
In the past year or so, we have reached out to hundreds of Chinese and foreign enterprises, more than 30 of which are actively considering establishing or expanding their CTCs in Hong Kong. Apart from the three central state-owned enterprises mentioned earlier, quite a number of Mainland large enterprises (e.g. China National Petroleum Corporation, China General Nuclear Power Corporation, SAIC Motor Corporation, TCL Corporation, etc.) are spearheading preparations for the setting up or expansion of their CTCs here to support their overseas operations. Action always speaks louder than words. The positive responses of these enterprises are the best advertising for Hong Kong and have the demonstration effect to encourage other companies to follow suit. Indeed, multinational corporations, such as Newell Brands Inc. and Hitachi Capital, are also planning to leverage on Hong Kong’s strengths in expanding their CTC functions.
For Mainland enterprises planning to “Go Global”, setting up a CTC abroad entails a long-term business plan, and therefore requires thorough consideration and careful preparation. The feedback I got from the industry and the direct observation from my colleagues both indicate that Mainland enterprises are increasingly interested in setting up CTCs in Hong Kong. Their enquiries, such as what structures are more suitable to their operations and the steps involved in setting up a CTC, are much more in-depth and specific than those raised a year ago. We are confident that in time – in particular with more and more successful examples as references – many more companies will choose Hong Kong as the destination of their CTCs.
The growing popularity of Hong Kong as a hub for CTCs will also be conducive to the development of headquarters economy in Hong Kong, because many multinational companies tend to set up their CTCs and regional headquarters in the same location. This will provide a greater impetus for Hong Kong’s economic activities and long-term development.
The above experience proves yet again that while tax concessions may be an incentive for multinationals, they are not the only consideration. Other complementary factors including economic, financial and professional services are also crucial. After all, internationally accepted tax guidelines are constantly updated. Hong Kong needs to follow these international guidelines by making appropriate adjustments to its tax regime. Furthermore, having good products by itself is not sufficient – there must also be a targeted and well-planned publicity effort to promote the products.
We are in a highly competitive and changing world and our competitors will not let their guard down. The HKMA will continue to maintain a close dialogue with the industry to identify any potential blind or weak spots in the development of Hong Kong’s financial sector. We will also work closely with the HKSAR Government and relevant stakeholders to introduce further reforms where appropriate, and continuously enhance our competitiveness. As the saying goes, no pain no gain. We too cannot spare ourselves from breaking some sweat.
Hong Kong Monetary Authority
28 August 2017