Hong Kong's International Financial Centre: Retrospect and Prospect

income instruments, foreign-currency instruments, real estate, private equity funds, hedge funds
and other types of managed funds. This clientele is obviously growing in Hong Kong itself, and
many of their counterparts technically still resident on the Mainland are becoming more
prominent participants in Hong Kong’s market for asset-management services. A range of
similar kinds of services also exists for non-profit and for-profit institutions, as well as for
financial intermediaries operating at least in part out of Hong Kong. Hong Kong’s low-tax
system attracts wealth holders, and the market for high-end advisory services develops in train.
Nevertheless, given conservative banking habits, and controversial episodes associated
with alternative investment vehicles like ‘mini-bonds’ issued by the ill-fated local subsidiary of
Lehman Brothers, innovation in the field of wealth management in Hong Kong has not been
straightforward. Real estate investment trusts, for example, were only authorized in 2005, and
they attracted controversy from inception. REITs are essentially mutual funds for real estate
driven partly by corporate tax advantages deriving from the requirement that 90% of associated
income be distributed to investors. The Hong Kong Housing Authority launched the first one as
soon as the SFC gave it permission to do so. Although it was substantially oversubscribed,
groups fearful of the implications for the future availability and pricing of public housing
objected. Later issues were modest and the financial performance of the trusts has been
disappointing.
Despite the challenges, wealth management looks set to become a much more important
source of activity for Hong Kong’s IFC. The seeds have already been sown. Private equity
pools, hedge funds of various kinds, and alternative investment vehicles comprise a fast-growing
sector. Bolstering their growth have been recent regulatory moves in the United States and
Europe aimed at pushing riskier and more speculative activities out of banks and bank holding
companies. At base, however, it is the search for yield that simultaneously seems to be pushing
them out of developed markets and toward perceived new opportunities, not least in greater
China. Hong Kong’s strategic position in this context is obvious. Less obvious are associated
risks.
Net capital flows from the Mainland are expected to contribute significantly to the demand
for asset-management services, but of those flows the HKMA estimates that Hong Kong will
retain around 10%. The liberalization of the RMB will increase flows both ways, but the HKMA
recently announced that RMB deposits in Hong Kong-based banks totaled RMB 279.6 billion
(US$42 billion) as of November 30, 2010, an increase of 29% from the previous month and
246% from a year earlier. 52
52 Financial Times, December 23, 2010.
By the end of 2010, 67,000 Mainland firms had been authorized to
settle cross-border trade accounts in Hong Kong, facilitated by an expanding currency swap
arrangement between the HKMA and the PBOC. Since this growth also increased the risk that
unauthorized transactions would take place, Hong Kong’s banks were directed especially to
monitor transactions in large amounts by new customers or between firms known to be related to
one another. In any event, even as Hong Kong-based firms continue to invest heavily on the
Mainland in anticipation of continuing rapid growth and currency appreciation, the amount of
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