Hong Kong has little to gain from relaxing rules just for competition's sake
Jake van der Kamp
Make no mistake, as the world gets smaller, Hong Kong is in competition with Shanghai, Singapore, Sydney, Kuala Lumpur, London, New York and every other global centre for financial services business
William H. Strong, Financial Services Talk Shop,
Letters to the Editor, December 7
Kuala Lumpur? We are reaching well down the barrel if Kuala Lumpur ranks as a global financial centre. Why not scrape the bottom then? Why not Dubai, Vanuatu or the Cayman Islands? All of them are recognised names in global finance.
There is a good reason why not. A global financial centre has to offer more than just the Dubai model of office buildings and a boss man begging the world to set up shop. Aside from physical infrastructure and amenities, it has to be cost competitive and offer good legal security and ease of operations. How far do you trust the Vanuatu courts? Leaving aside that the Cayman Islands does not even have the physical infrastructure, what happens if the United States refuses to recognise transactions done there?
The point is one Mr Strong has to consider, because when he speaks of accommodating reits - real estate investment trusts - in Hong Kong, he does not mean the Link reit or Champion reit. He means foreigners dealing in foreign reits with other foreigners and using Hong Kong as a base for doing so. The reason Hong Kong is under consideration is obvious. Aside from good physical infrastructure, amenities and a convenient time-zone location, we have low taxation, good legal security and ease of operations.
But Mr Strong and some of his colleagues in the Financial Services Development Council disagree with me on this last point. Ease of operations is a problem here, they say. Hong Kong still has all kinds of restrictive rules that other jurisdictions have dropped long ago as impractical.
Fine, we can talk about this. We can change things if these people can really make a case that the regulations are needlessly hindering Hong Kong's development as a financial centre. But let's be plain about this. The real substance of what they demand is that we cut the taxes they pay here to the bone, if not eliminate them entirely, and relax the rules so far as to make it easy in some cases to perpetrate fraud.
Specifically, the reit proposals would have neither reits nor their shareholders pay any tax here at all, and the private equity proposals would have us revive shareholding structures that we already rejected on the grounds that they lend themselves to manipulation by minority management cliques.
In return, we will get an extra pittance in an already low salaries tax from the foreigners who move here. These people will soon start complaining about shortage of international school places and the cost of club memberships. In response, we will then spend what we get from them in salaries tax to keep them quiet again.
Net benefit to the working family in Sham Shui Po? Nothing at all, whether directly or indirectly when, with a 3.3 per cent unemployment rate, the family members already have work and don't need foreign banks to find jobs. All we would have done is score a public relations point against Singapore. Big win.
It's not worth it. We have something valuable here in the rule of law. We set a price on it in our stock exchange with stamp duty revenues of HK$20 billion a year and people are happy to pay it for the security of tenure they get here. Other financial services that want this benefit can pay for it too.
Likewise, we do ourselves no good by diving to the bottom in our regulatory standards just to compete with the world's wannabes. That's short-term gain for long-term pain. Let the Caymans play there. We don't.
You understand deals, Mr Strong. You're in the business. But now skip the bafflegab and tell us what we really get from the deal you propose when what little money it has for us will just go back to keeping you here and we don't need the jobs.
Let's talk where pointless regulations obstruct Hong Kong's progress. But don't present self-serving market distortions to us as financial reform.