Hong Kong Sails

China's accession into the World Trade Organisation can only boost Hong Kong's offshore fund sector, says Victoria Hartley.

International investors seeking a centre through which to buy offshore funds could do a lot worse than Hong Kong. The city, which overcame the handover from British to Chinese rule in 1997, is politically stable. And last month, China's accession into the World Trade Organisation cemented Hong Kong's position in the world's finance community.

More importantly, Hong Kong's offshore funds are not, in fact Hong Kong-domiciled. More than 95 per cent are domiciled in more traditional centres such as the Channel Islands, Cayman, Bermuda etc.
Understandably, the jurisdiction's passage from British to Chinese rule caused a stir among Hong Kong fund management groups who feared stifling bureaucracy would be imposed from the mainland. However, the hand over has not been as damaging as they feared. Indeed, in many respects, the reverse has been true; Hong Kong has thrived since Britain relinquished control.

"In fact, I don't think that 1997 had any impact on Hong Kong's economy - positive or negative. There was uncertainty in the years before the hand over, but by the time the hand over happened, the situation was already clearer," says Francine Kwong of Royal Skandia.

David French chief executive of Inter Alliance International, a financial adviser, points out that before the hand over, the mainland pledged not to make any changes to the way Hong Kong works. In fact, he says, the greater problem for Hong Kong domiciled funds has come from the region's struggling property market.

"The real issue in terms of the retail fund market has been the collapse of the property market in Hong Kong, with most individuals experiencing negative equity and the ongoing under-performance of the US economy which HK seems particularly sensitive to."

Nonetheless, there has been significant growth in Hong Kong's offshore fund scene since the handover. In 1996, there were 1219 Hong Kong SFC-authorised unit trusts and mutual funds that international investors could access, with a net asset value of $82 billion. Back then there was a 4 per cent market penetration in terms of the number of Hong Kong citizens who would buy into funds.

Four years later, and there are now 1870 funds authorised by the SFC (NAV $311 billion). The penetration of Hong Kong SFC-registered funds has risen to 8 per cent, although that is an estimated figure.
For the international investor seeking to create solid, diverse fund portfolios, every sort of offshore fund is available through Hong Kong.

Most Hong Kong-authorised funds tend to be domiciled in more traditional offshore centres such as Cayman, the Channel Islands, Bermuda - a fact that is reassuring for investors who are suspicious of China's Communist government.
Those residing outside the SAR, are permitted to buy Hong Kong-authorised funds, so long as the tax rules where they reside, permit it.

Essentially, this means most Asia- and the Mid-East-based investors can use Hong Kong to purchase offshore funds, although it is essential to investigate the rules carefully before making any investments.
And would-be tax dodgers should beware. The Hong Kong regulators do not facilitate tax evasion at all.