In her recent speech on navigating the path out of economic uncertainty, President of the European Central Bank (ECB) Christine Lagarde recalled the words of Abraham Lincoln, who said that “the best way to predict the future is to create it”.
However, against this backdrop, predicting future economic outcomes seems daunting. The International Monetary Fund (IMF) has projected that the global economy will contract by 4.9 per cent, take a US$12 trillion hit, and moreover, take at least two years for the world output to return to the same levels as at the end of 2019. Yet, despite this, President Lagarde, like many other world leaders, has advocated for steps that will help the global economy navigate out of the fog of uncertainty and towards a positive vision for what our economies will look like after.
As governments look to help their economies recover from the pandemic-induced financial crisis, International Financial Centres (IFCs) and Asian economies, such as China, are in a unique position to lead the way towards economic recovery.
As the first economies to be affected, China and Asia are leading the way out of the financial crisis. With governments across the world fixed on the resumption of economic activity in Asia, early signs of recovery are beginning to emerge as people cautiously return to business and pre-outbreak levels of activity. However, alongside economic activity restarting, many other concerns begin to arise; and the search for security and stability intensify with the growing realisation that we are moving into a ‘new normal’.
IFCs will play a crucial role in guiding economic recovery and providing that stability and security. As businesses seek reassurance in the ‘new normal’ economic landscape, these highly specialised centres are proving more attractive to business, as they have been designed to ensure stability. While they may vary in size, scope, areas of expertise, geographical coverage and services offered, IFCs are renowned for providing a resilient and trusted platform for business establishment, growth and diversification – areas that are crucial to help stimulate global economies.
As the desire for geographical diversity, socio-political stability, and legal and commercial security increases, mitigating risks that may arise in various countries and keeping assets protected from potential loss, damage or sequestration will continue to be important. IFCs provide security in the form of jurisdictional neutrality, administrative convenience, and a robust and appropriate regulatory framework – all of which are an essential part of the protection circle required for asset protection.
In particular, IFCs have played a critical role in knitting together global economies and facilitating cross border trade and investment, especially with countries like China. As the world looks to China for the blueprint towards economic recovery post-COVID-19, the role of IFCs like the British Virgin Islands (BVI) will become even more important.
As one of the leading IFCs, the BVI has had a symbiotic relationship with China for the last 30 years, and 35 per cent of all active BVI Business Companies have ultimate beneficial owners in China (including Hong Kong and Macao). In fact, the BVI has been one of the main doorways to China and has become the second largest source of Foreign Direct Investment (FDI) inflows into China and the fifth largest source of FDI outflows from China. Other Caribbean IFCs have similarly been in the top 10 sources of FDI flows in China.
Research recently conducted by East & Partners, a leading specialist business and banking market research and analysis firm, revealed that investors across key markets in Asia are increasingly turning to IFCs for protection and risk mitigation of their assets, with a fifth of large Asian corporates benefitting from IFC usage and many more planning to engage further in the future. According to the research, the use of IFCs is already commonplace in various Asian markets, with institutional investors leading the way with more than a third (36 per cent) currently benefitting from engagement. These investors cite risk management and international portfolio management as their main reason for using an IFC and see their biggest opportunities in the year ahead coming from emerging markets (47 per cent) and China’s Belt and Road initiative (44 per cent). Existing engagement with IFCs by institutional investors is strongest in Hong Kong (64 per cent) at present, followed by Singapore (47 per cent), China (24 per cent).
However, it is not just corporate entities utilising IFCs. Almost half (48 per cent) of Asian high-net-worth-individuals’ (HNWIs’) investable assets are managed through IFC entities. According to the research, asset management and the ease of investing are among the key benefits cited, with use most prevalent in Hong Kong (53 per cent), China (40 per cent) and Singapore (30 per cent). Many HNWIs from these markets not currently using IFCs are planning to ramp up their involvement in the near future, with 35 per cent from Hong Kong actively looking, followed by Singapore (32 per cent), China (23 per cent) and Vietnam (15 per cent).
Wealthy individuals in Asia are alive to the possibilities afforded by IFCs. The role IFCs play will continue to be of great importance, as Asia and the rest of the world begin to rebuild their economies and seek to not only mitigate risk, but to unlock valuable opportunities in a globalised world.
How countries emerge economically from COVID-19 will be a significant challenge. However, due to their long legacy and resilient nature, IFCs such as the BVI are once again in a strategic position to keep the wheels of the global economy turning and join with their Asian partners to help lead the way to economic recovery.