William Ahern looks at the progress of Asia's finance centres with particular focus on Hong Kong and Singapore.
THE EIGHT-YEAR ATTACK by theOECD1 on offshore finance centres around the world and the recent flight of private capital from Europe, prompted by the disastrous European Savings Directive,2 has focused the offshore world’s attention on Hong Kong and Singapore.
How well are they equipped to capture old and new wealth management and protection business from the Channel Islands, the Caribbean, the Continental centres and even Delaware, Nevada and Wyoming?
This article considers how Hong Kong and Singapore have grown from regional to international finance centres, their respective strengths and weaknesses and speculates as to their standing in the international finance world in 2025.
Hong Kong’s development as an international finance centre mirrored its post-war industralisation, its status as a regional trading centre and its resumption of its pre-China civil war role as the Mainland’s compradore. From the 1960s to 1978 when Deng Xiao Ping announced the PRC’s Open Door Policy, Hong Kong boomed as a manufacturing and trading entrepot. Its attractions were its harbour and infrastructure, its stable exchange control free banking system and its traditional UK style rule of law – not withstanding that it lacked representative democracy. Hong Kong was then significantly ahead of Singapore as a place to establish and administer companies and trusts. People from all over the world, but perhaps mostly North and South East Asia’s wealthy Chinese diaspora, were happy to house their growing wealth in Hong Kong companies and Hong Kong law trusts.
By 1979, Singapore was undergoing a government-led mass industralisation programme. The Singapore government identified financial services as a key source of growth and from the late 1980s “Singapore Inc” placed emphasis on developing investment portfolio management, securities trading and foreign exchange and futures trading. Singapore too had a respected judiciary and confidence was high that business disputes in particular could be satisfactorily resolved – even though its legal profession lacked the depth and breadth that the internationalisation of Hong Kong’s legal profession had brought to it.
The six years between the announcement of the Open Door Policy and the Joint Declaration on the Question of Hong Kong (‘the Joint Declaration’) signed by the PRC and British Governments on December 9, 1984, were particularly bright for the Hong Kong economy generally as the world looked to the jurisdiction as a springboard to the enormous markets opening up in China.
But the Joint Declaration set the Hong Kong offshore financial services sector on its head. The fear of the uncertain political and legal environment in Hong Kong post-1997 saw a wholesale revision of Hong Kong companies and trusts, for fear of what would become of that law post-1997. Also under question was the wisdom of administering foreign companies and trusts in Hong Kong.
It was not only foreigners who reviewed structures involving Hong Kong companies and Hong Kong law trusts (in those days few non-Hong Kong law trusts were administered there) but local businesses and families began to worry about the applicable law of their structures. In most cases, foreigners owned non-Hong Kong assets through local companies or trusts but for them it was relatively easy to switch ownership to non-Hong Kong entities. Locals concerned about their Hong Kong companies and trusts owning local assets faced the far greater challenge of trying to house those assets in foreign law entities that might protect them from the perceived post-1997 threats of nationalisation, confiscation, expropriation and the end of confidentiality of local structures.
Between 1985 and 1989, Hong Kong saw the beginning of the migration of capital, people and structures. But the events of 4 June 1989 in Tiananmen Square gave fresh and urgent impetus to these movements.
Dark scenarios of post-handover Hong Kong took hold in people’s minds including the preposterous notion of a local trust officer of an international (ie non-Hong Kong) trust company valiantly refusing to disclose the identity of a trust’s locally based settlor in the face of a People’s Liberation Army firing squad!
Particularly reluctant to hope for the best was the local Shanghainese business elite whose collective and relatively fresh memory of post-civil war China gave new resonance to the expressions “once bitten, twice shy” and “loose lips sink ships”.
Hong Kong trust law gathered dust and the initials “BVI” became a byword for something into which one placed one’s assets, and which, like the dove in the magician’s hat, was hidden from view until the wave of the owner’s wand to make it re-appear.
The existence of estate duty in Hong Kong (repealed only this year) favoured the use of foreign law entities and BVI, Bermuda and Cayman Island lawyers set up shop in Hong Kong. On the business front, Jardine Matheson led the corporate march out setting up a top holding company in Bermuda. By 1997, 68 per cent of the listed companies in Hong Kong were non-Hong Kong entities and today still only 28 per cent of listed companies are incorporated in Hong Kong or the PRC.
Singapore’s growth from regional to international finance centre was far less dramatic than Hong Kong’s and Singapore has only recently tried to capture a larger slice of the offshore private wealth management pie.
Singapore-based private wealth managers no doubt saw the opportunity presented by the effect of the Joint Declaration on the confidence in Hong Kong as an offshore jurisdiction. But the Singapore government was uncharacteristically slow in providing specific incentives to the private wealth management industry. Singapore often “backs certain horses” by providing exemptions or concessions to particular industries3. The regional headquarter tax concessions were introduced in 1986 (which were not industry specific) but tax exemptions for non-Singaporean resident/ citizen connected private trusts themselves were not introduced until 2000 when the catch-cry “Singapore – the Switzerland of the East” began to do the rounds.
Hong Kong and Singapore have, it is understood, each recently declined the EU’s overtures to sign up to the European Savings Directive.
About that time private client practitioners began to urge the Singapore government to modernise the trust and company law to encourage local administration of trusts. In December 2004, amendments to the trust laws were enacted updating Singapore’s trust law in important areas such as providing a statutory 100 year “wait-and-see” perpetuity period for trusts, providing for accumulations of income for the trust period and introducing a UK style statutory duty of care4. But the changes did not go as far as some were urging in the areas such as perpetual trusts, statutory reserve powers for settlors and the creation of non-charitable purpose trusts.
There is no doubt that post-1997 Hong Kong has turned out better, in rule of law terms in particular, than even the most optimistic soothsayers predicted beforehand and Hong Kong needs to do more to tell the world that.
Notwithstanding concerns over HKSAR government’s early inclination to seek helpful, but entirely constitutional, PRC ‘interpretations’ of its immigration and election laws (to get it out of political trouble) no-one would suggest for a moment that Hong Kong’s judiciary would bring anything other than an impartial and competent mind to a case, whether or not it involved the government as a party. Singapore also has an experienced and competent judiciary although the Singapore government’s appetite for using the court system to settle political scores tarnishes (probably unfairly) perceptions of its judiciary’s independence.
Hong Kong is at the beginning of the process of updating its trust laws to encourage people to write trusts under local law. Early indications are that the Hong Kong government, and in particular, the Hong Kong Monetary Authority are “all ears” to the growing industry lobby effort which augurs well for rapid modernisation of local trust law. Indeed, this presents a very real opportunity for Hong Kong to steal a march on Singapore by being bolder in its reforms than Singapore was. At this stage neither Hong Kong nor Singapore deserve to be complacent about the other. Each has their strengths and weaknesses.
Hong Kong and Singapore both have much to offer.
Time will tell over the next 20 years whether Singapore can overtake Hong Kong in the private client arena in particular. But if Singapore and Hong Kong stay on course and the EU persists with the European Savings Directive, and the OECD persists with its hypocritical campaign to remove “harmful tax practices”, these two cities will continue to absorb the flight of capital from Europe in particular and be the favoured beacons for the immense new private wealth being created in this region.
1 In 1998 the OECD published a report entitled “Harmful Tax Competition: An Emerging Global Issue” which began its campaign to, inter alia, force offshore financial centres to change their regulations and exchange tax information.
2 This came into effect on 1 July 2005. It provides, very broadly, a system offering participating countries the choice of disclosing to each other’s Revenues details of individuals with bank accounts (etc) in their jurisdiction or withholding tax on interest on those accounts (15% risingto 35%) and sharing it between the withholding jurisdiction (25%) and thehome jurisdiction of the account holder (75%).
3 See sections 13 (exemptions) and sub-sections 43A-43U (for concessionary rates of tax) ofthe Singapore Income Tax Act (Cap 134).
4 Civil Law Act (Cap 43) and Trustee Act (Cap 337).
5 The 14 factors were categorised and examined in the following six groups: availability of skilled personnel and access to suppliers of professional services; regulatory environment and government responsiveness; access to international financial markets and access to customers; availability of business infrastructure and a fair & just business environment; corporate and personal tax regime; and other factors such as operational costs and quality of life.
7 Singapore has 52 double tax treaties, seven limited treaties and five treaties signed but not yet ratified.
8 Hong Kong has double tax agreements with Belgium and Thailand and has concluded negotiations for a full double tax treaty with the PRC to commence next year.
9 Particularly in view of the newly negotiated HK-PRC double tax treaty.