I recently spent a week in Hong Kong, the Special Administrative Region of the People’s Republic of China, just off the Mainland’s southeastern coast.
It was an eye-opening experience that showed a marked contrast to only 20 years ago, when billions of dollars of capital – and tens of thousands of wealthy investors – fled the city. They were rushing to depart before 1997, when a century of British rule was scheduled to end and Hong Kong reverted to China.
Their biggest fear was that China wouldn’t honor its agreement to maintain, for at least 50 years after the handover, Hong Kong’s independent judiciary and legal framework based on English law (the “Basic Law”).
Were these fears unfounded? The answer from the financial markets seems to be an unabashed “yes.” The local stock market index has tripled since 1998. Real estate values hit all-time highs in 2013, although they fell off in 2014 as the government took measures to rein in property speculation.
While some of the residents who left Hong Kong in the 1990s have now returned, the real source of the city’s transformation in the last two decades has been its proximity to the rapidly growing economy of Mainland China.
International investors have poured billions of dollars into the securities of Mainland companies floated on the Hong Kong stock exchange. And Chinese entrepreneurs doing business internationally use Hong Kong as a trusted conduit to their trading partners.
But with few exceptions, Hong Kong banks and financial service companies have isolated themselves from US-resident or US-citizen clients.
That’s not entirely surprising. Uncle Sam requires these institutions to enforce US tax, securities, and money-laundering laws, along with US trade sanctions. Those that fail to do so face heavy penalties.
Hong Kong financial institutions, though, have more reasons than most countries to “opt out” of US business. They don’t need the money. A leading provider of international financial services in Hong Kong explained it to me this way:
Imagine you’re the CEO of a bank in Hong Kong. You can do business with minimal formalities with people from just across the border in China who come to you (as they do to us) with an average portfolio of HK$300 million (US$38.4 million) or so. Or you can do business with US clients who come to you with an average portfolio of about 3-5% of the size of the typical Mainland Chinese client. What’s more, as soon as you take on a single US client, you face draconian sanctions if you fail to comply with extraordinarily complex US tax, securities, and money laundering laws. Which customer base would you choose?
Joining me for some of the meetings I held during my stay was my old friend and colleague PT Freeman. The reception that PT, a former US citizen (and now an “economic citizen” of the Commonwealth of Dominica) received was far different from the one I experienced. Whereas employees of the banks and financial service companies we visited were extremely nervous while speaking with me, a US citizen and resident, they were much more relaxed with PT.
I was frequently asked why a US person would want to invest in Hong Kong. I explained that many economists and financial advisors believe that Asian countries – and China in particular – will continue to be the fastest-growing economies in the world. Many of our US clients would like to have a stake in that growth.
How US Investors Can Gain a Foothold in Hong Kong
Fortunately, I discovered several “workarounds” that provide US citizens and residents with the ability to obtain financial services in Hong Kong. But there are several conditions:
- With very few exceptions, you need to make a personal visit to set up even the most basic account relationship. There’s only one exception I found. That’s to set up a “premier” account at a US branch of one of Hong Kong’s major banks and then move it to Hong Kong.
- It’s difficult to set up a company account unless you form a Hong Kong company. Unfortunately, a Hong Kong company provides little asset protection. If that’s what you’re seeking, you’ll want to set up a more protective structure.
- Hong Kong banks and financial service providers are ultra-suspicious of US customers. When I mentioned to one banker that I wanted to set up the account to be “tax efficient,” he stood up and told me the meeting was over. What I was trying to communicate was that I wanted to set up the account through a company so that it would be subject to only one layer of US tax. Once I explained that I understood that any account I set up would be subject to US tax, and that I didn’t mind having his bank exchange information with the IRS, he relaxed… a little. Bottom line: Avoid the word “tax” in your discussions. Even “tax planning” is suspicious.
- You will be asked to show a connection to Hong Kong and rationale as to why you need a Hong Kong account. An acceptable answer is that you want exposure to Asian markets, the HK dollar, Chinese renminbi, etc. If you’re applying for Hong Kong residence, that’s another acceptable reason. You could also point out that compared with US banks, Hong Kong banks are extremely safe.
In addition, Hong Kong banks offer only basic banking services to US residents. Trading securities is mostly off limits, thanks to rules that require offshore banks and brokers with US-resident customers to register with the Securities and Exchange Commission. However, I found three ways this is still possible:
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You can open a self-managed account with an SEC-registered broker with no minimum deposit.
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You can open a managed or self-managed account through a local securities firm. For this option, you’ll need to make a personal visit to Hong Kong to set up a Hong Kong bank account and a Hong Kong company.
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You can open a managed or self-managed account at one of the world’s safest private banks. There’s a $2 million minimum to set up the account. And while the bank accepts US-citizen clients, it won’t do business with anyone living in the US.
Immigration to Hong Kong
Hong Kong’s 7 million residents live in a land area of only slightly more than 400 square miles (about one-third the size of Rhode Island). That makes Hong Kong one of the world’s most densely populated locations. But with that population density comes a superbly developed infrastructure, not to mention unsurpassed access to the rapidly emerging Asian markets.
Another reason why Hong Kong is a desirable residence is its tax system. Hong Kong imposes no tax at all on income outside its territory. A top tax rate of 17% applies to personal income. There are no capital gains taxes, no withholding taxes, no sales taxes, no value-added tax (VAT), and no annual net-worth taxes.
The easiest way to obtain residence is to invest the equivalent of US$1.3 million in the Capital Investment Entrant Scheme. After a period of seven or more years of legal residence in Hong Kong, you and your dependents may apply for permanent residence. But to get it, you'll need to demonstrate that you maintained "continuous ordinary residence" during this period. This doesn't mean you can't leave Hong Kong, but you must account for any absences.
Challenges Ahead
Hong Kong’s biggest challenge is also its biggest advantage: the political, economic, and military clout of its overseer, the People’s Republic of China. Major political issues include affordable housing, the right of abode of mainland Chinese citizens in Hong Kong, and the increasing interference of China in what many residents view as local affairs.
The Basic Law under which China assumed political control of Hong Kong in 1997 provides that China won’t assume control over Hong Kong’s economy and legal system until 2047. Despite this assurance, China already exercises great influence in local politics. Many residents distrust China’s ruling Communist Party and resent the influx of millions of visitors from Mainland China.
Indeed, a movement reminiscent of the “Occupy Wall Street” protests in the US is now sweeping Hong Kong. The “Occupy Central” proposes disrupting business in Hong Kong’s central business district to promote universal suffrage there. Mainland China – and the local business community – opposes the initiative. During my visit, I witnessed firsthand this movement’s banners and signup tables, along with increasingly dire press warnings about how China would react if protestors actually were to take over the central business district.
Despite fears of increasing Chinese interference and ongoing economic challenges, Hong Kong’s “haven” status appears secure. Its trusted legal system and world-class financial infrastructure give stability for investments moving into China. Of course, China could crack down on Hong Kong’s way of life when the 50-year transition period stipulated in the Basic Law ends in 2047. But that’s more than 30 years away – and in the meantime, there’s a great deal of money to be made.
Mark Nestmann
Nestmann.com
