Budget Measures to Promote the Development of the Financial Services Industry
After the unveiling of the latest Budget by the Financial Secretary, the general public focused on the government’s cash payouts and various measures to improve people’s livelihood. The general public and different sectors have been affected in varying degrees by the coronavirus disease, and we are committed to the early launch of relief measures so that the public can benefit from them. In relation to the financial services industry, the Budget includes a number of measures on the development of Hong Kong's bond market and asset management business, with a view to making Hong Kong a more comprehensive and competitive financial centre. Hong Kong has topped the world in IPO fundraising for seven of the past eleven years, and we are also the world's largest offshore RMB centre and Asia's leading wealth management centre. But as the saying goes, “a boat sailing upstream must forge ahead or be driven back.” The government therefore takes a proactive approach to strive for breakthroughs and support the development of Hong Kong's financial services industry.
As regards the bond market, Hong Kong ranks third in bond issuance volume in Asia (excluding Japan) as our bond market has continued to grow with government support. Last year, we saw the successful offering of our inaugural green bond of US$1 billion under the Government Green Bond Programme. Orders were received from over 100 global investors, and the subscription amount exceeded US $ 4 billion, at over 4 times the issuance amount. Building on the momentum, we plan to issue a total of about HK$ 66 billion of green bonds within the next five years, subject to market conditions. This will consolidate Hong Kong's position as the region's premier hub for green finance.
As for the retail bond market, we plan to issue inflation-linked retail bonds (iBonds) and silver bonds again this year. We estimate the total issuance amount will be no less than HK $ 13 billion, of which about HK$10 billion may be for iBonds and HK$ 3 billion may be for silver bonds. Looking back on our past experience, the government issued six batches of iBonds between 2011 and 2016, which were very popular with the public. The government also issued four batches of silver bonds between 2016 and 2019, targeting elderly people aged 65 or above. The response was also satisfactory. Incidentally, the Federal Reserve announced last Tuesday a sudden interest rate cut by 50 basis points. The current global environment of low interest rates is expected to continue for some time. The iBonds will target local residents and provide a hedge against inflation. And silver bonds will provide the elderly with investment products with stable returns. These two measures will promote the further development of Hong Kong’s retail bond market.
For the asset management business, the budget proposes two tax concession arrangements. The first is to waive the stamp duty on stock transfers paid by ETF market makers when creating and redeeming ETF units listed in Hong Kong. The second tax concession is on carried interest issued by private equity funds operating in Hong Kong, subject to the fulfilment of certain conditions.
We have seen rapid development of ETFs globally in recent years. According to the Hong Kong Exchanges and Clearing Limited (HKEX), the assets under management of passive funds such as ETFs in Asia Pacific will increase from US$ 1.5 trillion currently to US$ 5 trillion in five years. Since the launch of the first ETF by the HKEX in 1999, Hong Kong has become one of Asia's important ETF hubs. Last year, the average daily turnover of Hong Kong's exchange-traded products was HK $5 billion (accounting for approximately 5% of the overall transaction in the securities market), with a market capitalization of HK $337.8 billion.
In 2015, the government waived stamp duty on all ETF transactions other than those done by market makers. We now propose to expand the scope to cover also transactions by market makers in the issuance and redemption of ETF units listed in Hong Kong. We believe that the measures can reduce the operating cost of ETF market makers, thereby reducing the bid-ask spread and lowering the overall cost of ETF trading. The measures can provide incentives for ETF issuers and attract them to issue ETFs that track stocks in Hong Kong, strengthening the depth and liquidity of the Hong Kong securities market.
Finally, in order to attract more private equity funds to operate in Hong Kong, and to promote Hong Kong's development as a comprehensive fund service centre, we plan to provide tax concession for carried interest issued by private equity funds operating in Hong Kong, subject to the fulfillment of certain conditions. In general, carried interest refers to the share of profits obtained by the general partner of a private equity fund arising from the fund’s investment return.
This measure aims to attract private equity funds to operate in Hong Kong and create high value-added employment opportunities for related professional services such as legal, tax and financial advisory services, auditing and company secretary services. At present, a task force led by the Financial Services and the Treasury Bureau, comprising members from the Inland Revenue Department, Hong Kong Monetary Authority and Securities and Futures Commission, is considering the design of the tax arrangement. In terms of the way forward, the government will consider the mode of operation and main business of the private equity funds. We will consult the industry on the proposal and work out a suitable arrangement as soon as possible.
The financial services industry is an important pillar of Hong Kong's economy, accounting for nearly one fifth of our GDP, and Hong Kong is a major international financial centre. With the fierce competition among financial centres around the world, the government will actively promote market development while keeping up the standard of financial regulation. At the same time, we welcome the financial services industry to work with the government to promote Hong Kong's long term development as an international financial centre.
8 March 2020