HONG KONG – Political opposition has been abolished. Freedom of speech has been suffocated. The independent legal system may be next.
But while Hong Kong’s top leaders are taking a tougher line on the city of more than seven million people, they are courting a crucial constituency: the rich. Senior officials are preparing a new tax cut and other sweeteners to portray Hong Kong as the leading place in Asia to make money despite the increasingly autocratic rule of the Chinese Communist Party.
So far, the pitch works. Cambridge Associates, a $ 30 billion investment fund, said in March it planned to open an office in the city. Investment managers have set up more than a hundred new businesses in recent months. Wall Street banks Goldman Sachs, Citigroup, Bank of America and Morgan Stanley are increasing their staffing in Hong Kong.
Beijing cannot easily afford to scare away Hong Kong’s bankers and financiers. The former British colony remains an important gateway to the international financial system. Chinese companies need it to raise money from global investors; these companies and wealthy Chinese also trust that it is easier to move their money abroad.
So Beijing finds a careful balance. It removes the freedoms of the Hong Kong people to stop naughty challenges for the Communist Party regime, such as the sometimes violent anti-government protests that erupted two years ago. At the same time, it tries to charm the city’s financial class to prevent it from moving to another business-friendly place like Singapore.
“It is a one-party state, but they are pragmatic and they will not harm the business,” said Fred Hu, a former chairman of Goldman’s Greater China business about Chinese officials.
For apolitical financial types, the changes have little impact, Mr. Hu, who is also the founder of the private equity firm Primavera Capital Group. “If you are a banker or a trader, you may have political views, but you are not a political activist,” he said.
To lure the wealthy, Hong Kong is ending work on a major tax cut that will primarily benefit private equity, hedge funds and other investors. Officials are moving to make it easier to connect the city’s money managers with wealthy mainlanders. Chinese companies sell $ 10 billion in shares in Hong Kong, increasing the profitability of Wall Street banks.
In its latest move, Hong Kong last week proposed limiting how much companies should disclose their ownership, which could hide wealth in a city where the families of the Communist Party elite have long parked their money.
Not everyone has been won. More than 1 percent of residents have left since Beijing introduced a broad national security law last summer. Ten million dollars have flowed out of local Hong Kong bank accounts and into jurisdictions like Singapore.
Tensions are rising inside Hong Kong’s shining office towers. Even leaders sympathetic to the government have refused to speak in public for fear of being caught in the political crossfire between Beijing and world capitals such as Washington and London. Hong Kong’s strict rules on movement in the pandemic could also cause some expatriates to leave in the summer when school ends.
Today in business
So far, however, financial companies are doubling compared to Hong Kong. Neal Horwitz, a recruiter in Singapore, said funding is likely to remain in Hong Kong “until the ship goes down.”
In its largest offer to the investor class, Hong Kong has proposed removing taxes on investment income called interest rates, which are typically earned by private equity investors and hedge funds. Officials had been discussing the plan for years, but did not introduce a bill until February, and it could pass in the coming months through the city’s Beijing-dominated legislature.
Similar tax deductions have sparked criticism elsewhere, including in the United States. But Hong Kong fears an economic exodus without such benefits, said Maurice Tse, a finance professor at Hong Kong University Business School.
“To keep these people around, we need to provide a tax advantage,” he said.
Hong Kong has also proposed a program, Wealth Management Connect, that will give mainland residents in the southern region known as the Greater Bay Area the opportunity to invest in Hong Kong-based hedge funds and investment companies. Officials have boasted that it would give foreign companies access to 72 million people. In February, Hong Kong and mainland Chinese officials signed an agreement to launch a pilot program at an unspecified time.
Pandemic travel restrictions have slowed the momentum of the proposal, said King Au, chief executive of Hong Kong’s Financial Services Development Council, but it remains a top priority.
“I want to highlight the importance of the Chinese market for global investors,” Au said.
Mainland money has already helped Hong Kong look more attractive. According to Chinese companies, a record high of 52 billion. $ To companies that sold new shares on the Hong Kong Stock Exchange last year, according to data provider Dealogic. New deals this year have already raised $ 16 billion, including $ 5.4 billion for Kuaishou, which operates a Chinese video app. The record start has been helped in part by Chinese companies that have been pressured by Washington to avoid raising money in the United States.
Managing these deals helped Goldman and Morgan Stanley climb to the top of the Asian industry ranking, measuring the fees banks charge. A spokesman for Goldman said it planned to speed up employment in Hong Kong by almost a fifth in 2021 compared to last year. Morgan Stanley has doubled the pace of hiring this year, a spokesman said.
Thomas Gottstein, CEO of Credit Suisse, the Swiss bank, said in mid-March that it would triple its hiring across China, and a spokeswoman said an increase in staff in Hong Kong was part of it. Bank of America is adding more people in Hong Kong, while Citi has said it will employ as many as 1,700 people in Hong Kong this year alone.
HSBC, the British bank, has been exposed to pressure from Chinese state media to cut to the party line. Still, it is considering moving some of its top executives to Hong Kong because it will be “important to be closer to growth opportunities,” HSBC CEO Noel Quinn said in February.
Mutual funds are also pouring into Hong Kong after officials in August lowered regulatory barriers to create legal structures similar to those used in low-tax untaxed jurisdictions such as the Cayman Islands and Bermuda. Government data shows that 154 funds have been registered since then.
City officials last week also proposed allowing businesses to hide sensitive ownership data in a move that could benefit both businesses and Communist Party officials. The measure can enter into force as soon as May and does not need to be approved by legislators. Critics say the move would make it nearly impossible to track down individuals behind companies registering in Hong Kong.
“The proposed law will facilitate corruption, fraud and other crimes,” said David M. Webb, a former banker and longtime investor in Hong Kong.
It could also help those in China’s top management who are sensitive to any accusation that they have used their status for personal gain. The families of Xi Jinping, China’s supreme leader, and Li Zhanshu, the No. 3 official of the Communist Party, at one time owned Hong Kong property according to a trail that can be traced in part through public records.
While officials have welcomed business, they have made it clear to the world of finance and business that they are not going to break with disagreement. In March, Han Zheng, a Chinese deputy prime minister, praised stock market performance and the financial sector in a meeting with a political advisory group, but made his boundaries clear.
“The signal to business is very simple,” said Michael Tien, a former Hong Kong lawmaker and businessman who attended the closed-door session. “Get out of politics.”