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Following is the speech (English only) by the Financial Secretary, Mr Antony Leung, at the Luncheon of Hong Kong Investment Funds Association today (May 22):
To Strengthen Hong Kong's Position
as a Fund Management Centre
Distinguished Guests, Ladies and Gentlemen,
It is my great pleasure to be here today to attend the luncheon of the Hong Kong Investment Funds Association, and to be among friends of our investment community. Although I am no longer in the position as a banker trying to market investment products to you, I am delighted to have the opportunity to talk to you about the investment environment of Hong Kong, and to hear any suggestions you may have to strengthen Hong Kong's advantage as a place of choice for your fund management business.
As I have set out in my Budget Speech, the financial services industry is of particular importance to the economy of Hong Kong. It is our policy to strengthen our position as a premier fund management centre of Asia, and I am sure the Association shares with me this mission.
Fund managers play a key role in the development of our financial markets and the overall economy. They are important for the raising of funds for business ventures, and the provision of depth and liquidity to our financial markets. Moreover, institutional investors can help to push for more open corporate reporting and prompt more transparent governance structures amongst listed companies. Last but not least, fund managers also generate business for other service providers such as stockbrokers, trustees and custodians, banks and other administrators and intermediaries.
Hong Kong has been the hub of international fund management in the ex-Japan Asia since the 1970s. From a handful of fund managers ten years ago, there are now over 200 fund management companies in Hong Kong, with a majority of them being subsidiaries and affiliates of major international financial institutions.
For most fund managers, the core part of their businesses are related to institutional, pension and private client funds. Nevertheless, the retail fund sector is also growing rapidly over the years, partly thanks to the launch of the Tracker Fund and the Mandatory Provident Fund Scheme. Ten years ago, there were only 920 authorised unit trusts and mutual funds. As at the end of March this year, the number had risen to nearly 2,000. The aggregate net asset value has also increased nearly ten times to over 280 billion US dollars during the same period.
However, the retail penetration rate has remained low at only 8% in 2001. This is still much lower than the 30% in the US. With a saving rate of 31% and total deposits of 426 billion US dollars, of which about 45% is in foreign currencies, there is a large wealth that the industry could target at.
I believe that two new developments in Hong Kong can contribute to the sustained growth of our fund management industry. First is the further development of our Mandatory Provident Fund Scheme. As at end March 2002, 311 MPF constituent funds were approved, with a net asset value of about 5.4 billion US dollars. It was estimated that the Fund's accrued assets would grow to about 123 billion US dollars in 30 years, with the annual contribution growing to 7.7 billion US dollars by then.
The second factor relates to our hinterland, the Mainland of China. Currently, the fund management market of the Mainland has saving deposits valued at more than 850 billion US dollars, which have not yet tapped for other investment vehicles. Under WTO, China will allow foreign fund managers an initial one-third stake in its fund management companies, which will increase to 49% over three years. Fund managers in Hong Kong are ideally positioned to take on these opportunities.
The Government is mindful of these opportunities, and is keen to facilitate the growth and development of the industry. We are working hard to streamline our regulatory regime. An important recent achievement is the enactment of the Securities and Futures Ordinance in March. We are now working on the subsidiary legislation to bring the Ordinance into operation. When this is completed, our regulatory framework will be on par with prevailing international standards.
To facilitate product and market development, the Securities and Futures Commission has published Guidelines on Index Tracking Funds in January, and is consulting the industry on the proposed Guidelines on the offering of hedge funds. Hedge funds will soon be authorised for sale to the retail public in Hong Kong. Apart from that, SFC is also planning to issue a consultation paper on the offering of real estate investment funds. All these initiatives will enhance our system of market regulation.
From a wider perspective, what Hong Kong offers more is an enabling environment for the industry to flourish, including free flow of capital and information, an independent judiciary based on the rule of law, clean and efficient government, a simple and low corporate tax regime, as well as a state-of-the-art telecommunications infrastructure. Together with a large and varied pool of qualified professionals, Hong Kong is well positioned to be a leading Fund Management Centre of the region.
Nevertheless, Hong Kong is facing strong competition from other financial centres in the region, and we cannot afford to be complacent. To stay ahead of the game, I have asked the Secretary for Financial Services to chair a Financial Market Development Task Force to coordinate new initiatives to promote the development of Hong Kong's financial markets. A Working Group on Fund Management was set up under the Task Force to work on measures to strengthen Hong Kong's position as an international fund management centre. The Working Group will take into account the suggestions of the industry when formulating policies and action plans.
Fund management develops where there is wealth. According to industry survey, international assets of high net worth individuals totalled about 27 trillion US dollars, with Asia accounting for 18% or 4.9 trillion. Our target is to draw the private wealth from Asia to Hong Kong, so that it can be invested in Hong Kong, the Mainland, the Asian region, and the rest of the world.
Another target we can focus on are the pension assets of the US and Europe, which are estimated at about 10 trillion US dollars. If we can attract 5% allocation of this to Asia, it will already represent an inflow of 500 billion US dollars. We can provide the service for managing the assets in Hong Kong for investing in the financial markets locally and across the Asia region.
To achieve these targets, we need to create an environment where people can invest from and in Hong Kong, and provide a secure, efficient and cost-effective platform for the processing and custody of the assets. The Working Group is currently looking into a number of initiatives to meet these objectives, including -
* First, a review of the companies law against international practices for estate planning;
* secondly, a passport system for Hong Kong registered funds to be distributed in the region;
* thirdly, ways to develop Hong Kong into a fund administration and servicing centre for the region; and
* fourthly, taxation issues relevant to the fund management industry.
I think I cannot end this speech without addressing the concern of the industry on government's policy on taxation of the profits of offshore funds. I have received a number of letters from the industry, including one from the Association.
I wish to assure the fund management industry of our commitment to a low, simple and predictable tax regime. Our profits tax rate at 16% is way below that of any other major cities. In addition, Hong Kong adopts a territorial taxation system, under which only profits arising in or derived from Hong Kong are taxed. We do not tax offshore income. Nor do we distinguish between residents and non-residents.
Notwithstanding our low profits tax rate, we provide specific Profits Tax exemptions to the fund management industry. At present, mutual fund corporations and unit trusts authorised under the Securities Ordinance enjoy these exemptions. So do offshore mutual fund corporations and unit trusts where the Commissioner of Inland Revenue is satisfied that they are bona fide widely held funds and are regulated by a supervisory authority under an acceptable scheme, and any other similar collective investment scheme.
We are aware of the fund industry's concerns arising from recent actions by the Inland Revenue Department. I would like to stress that these actions were triggered by availability of new information about the identity of fund management companies. There is no change in taxation policy. However, we have heard your voices. The relevant departments are working with the industries and are reviewing the situation. I am sure that with the support of the industry, we will soon identify appropriate measures to address the issue.
Ladies and Gentlemen, to sum up, I would like to assure you that the Government has no intention to do anything to adversely affect the position of Hong Kong as an international fund management centre. On the contrary, we are committed to promote and strengthen our position as an international fund management centre. To this end, I am sure we will have the support of the Association and your members. Thank you.
End/Wednesday, May 22, 2002
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