Tax exemption defended

I refer to your article 'Rescue package at sea in fumes of confusion' in Business Post of June 26 and would like to clarify the point regarding the profit tax exemption on interest income.

You mentioned in the article that the amount of offshore deposits, estimated to be about HK$200 billion, 'never left Hong Kong' and 'the fact that it was booked offshore only tells you where the ledger entry was made'. In the first place, it is useful to note that a considerable proportion of this $200 billion has been placed offshore by Hong Kong firms in the form of foreign-currency deposits.

These offshore deposits are used to fund the overseas operations of the banks concerned and are 'lost' to Hong Kong. To the extent that the removal of tax incentive encourages a repatriation of the funds back to Hong Kong, the liquidity and loan to deposit ratio of the banks in Hong Kong would be improved. This may in turn increase the lending appetite of the banking sector.

In respect of the offshore Hong Kong dollar deposits, it is true that they have mostly come back to Hong Kong's banking system through the interbank market. Nevertheless, it is relevant to note that if these funds are placed onshore in Hong Kong's banking system in the form of customer deposits, the loan to deposit ratio and the liquidity ratio of the banks' Hong Kong operations would also be improved. This would again be helpful in stimulating lending activities. I hope you find the above clarification useful.

PETER S.T. PANG Executive Director (Monetary & Policy Markets) Hong Kong Monetary Authority