If you’re in Hong Kong, here’s why you need an offshore bank account. Hong Kong has long been recognised as an offshore banking centre, but now is in its first recession in a decade. Since the protests started in earnest in early June, Hong Kong stocks have lost billions.
Hong Kong’s wealth management centre had enjoyed a growing client base in the lead up to Hong Kong’s sustained protests. According to Deloitte, Hong Kong gained more assets than any other financial centre between 2015 and 2017. The Bank for International Settlements calculates that Hong Kong oversaw $437 billion in foreign exchange transactions in 2016.
The city also became the fourth largest international wealth management centre over the last decade. Its market share of 9% overtook Panama and the Caribbean. Experts reckon that Hong Kong has benefited more than competitors like Singapore from the increase of millionaires in the region.
Hong Kong has had the largest inflow of net new assets since 2012, growing faster than Singapore, and benefiting from the growth in Chinese private wealth and the evolving behavior of Chinese HNWIs.
With a strategic geographical location for Chinese clients, Hong Kong has served as a nearby choice for China’s HNWI population, which increased by an average annual rate of 14% between 2013 and 2017. This has propelled Hong Kong, which features among the highest concentration of HNWIs in the world and is a stable business-friendly and low-tax environment, to become the fourth-largest wealth management centre in the world, according to Deloitte.
Since 2010, Hong Kong has attracted privately owned assets to the tune of a 12 percent increase.
Hong Kong’s Stability
But, this growth could stall. Riots in the streets of Hong Kong disrupted the airport –– the busiest hub for international passenger traffic in Asia with 427,725 flights in 2018. The riots and protests are not alone in undermining confidence in Hong Kong.
The Hong Kong Monetary Authority (HKMA) has been spending reserves to support the Hong Kong dollar peg and cut the capital requirement that banks must set aside by 50 basis points to 2 percent. The HKMA estimates the move, the first of its kind since 2015, should allow banks to inject as much as HK$300 billion (US$38 billion) into the financial system.
Still, the government has downgraded its 2019 growth forecast to between zero and 1 percent, from 2 to 3 percent. “The negative impact to the economy will not go away in the short term. Some people say it’s like a tsunami,” said Chief Executive Carrie Lam, who announced stimulus measures worth $2.4 billion, including subsidies for education and utilities and loan relief for small businesses. “Compared to the damage caused by SARS and the financial crisis, I am afraid the situation is worse this time.” She warned against a hike in unemployment as businesses are hurt by the protests.
“The fundamental problem is weakening business and consumer confidence,” said Natixis’ Mr. Ng. “Clearing [political] uncertainties is more essential than giving out cash.”
Bank of America economists aren’t convinced the stimulus package will stave off a downturn. “The Hong Kong economy is facing stiffer growth headwinds amid continued instability and risks have tilted to our bear-case scenario,” Bank of America Merrill Lynch economists Helen Qiao and Miao Ouyang said in a research note on Tuesday. “Although the government has announced stimulus packages to support the economy, a recession in [second half of 2019] seems unavoidable.”
The latest move comes after the central bank on Monday cut the amount of cash that banks must keep as reserves, releasing an extra HK$200-300 billion ($25.5-38.2 billion) into the broader economy.
“We understand that the operating environment of SMEs is very difficult amid the current economic downturn, said Mary Huen, chair of the Hong Kong Association of Banks, an industry group. “Therefore, banks have introduced various measures to support SMEs with the government.”
Some analysts expect a significant downturn. “When you have a boom for so many years, and now you get a bust, the bust is going to be quite massive also,” said Kevin Lai, chief economist for Asia ex-Japan at Daiwa Capital Markets. Plans are already being implemented to hedge against long-term instability in Hong Kong.
“Many investors have chosen to leave Hong Kong, and some banks and (multinationals) have started planning on moving their base to other nearby Asian cities,” Kaisun Holding said in a statement, adding that it may also begin to look for alternate markets for some of our service-based businesses.
The IHS Markit Hong Kong purchasing managers’ index (PMI) survey noted “the steepest deterioration in the health of the private sector since February 2009.” The spread of pessimism resulted in a record low in business confidence.
“The latest PMI data reveal a Hong Kong economy flirting with recession in the third quarter as business activity is increasingly aggravated by protest-related paralysis,” said Bernard Aw, principal economist at IHS Markit. The survey indicates the economy could contract at an annual rate of around 4.0-4.5%. The PMI survey recorded a steeper downturn during the global financial crisis in 2008-2009 and the Sars crisis in 2003.
At one time Asia’s manufacturing powerhouse, Hong Kong’s consumer and finance-led economy faces a decline in confidence. “I do not expect to see any strong measures that can instantaneously turn things around,” said Dong Chen, senior Asia economist with Pictet Wealth Management. “The best scenario is after this political unrest they can come up with longer-term planning or measures to solve structural problems.”
Many economists see growth for all of 2019 sliding well below 1%. For instance, JPMorgan Chase & Co.’s latest prediction is 0.3%, its weakest reading since 2009. “In the short term, we see the economy falling into a recession as growth pillars including trade, tourism, and finance are all under stress,” said Qian Wan of Bloomberg Economics. “The more significant risk, though, would be the city losing its reputation as a global business and financial centre, which significantly undercuts long-term growth prospects.”
The unrest is “longer and more violent than I had expected,” said Steven Leung, executive director at Uob Kay Hian (Hong Kong) Ltd., adding that as long riots and protests persist, investors will lose interest in buying assets in Hong Kong.
“We expect Hong Kong will go into recession,” said Iris Pang, an economist at ING Bank NV.
The protests are one of the more serious threats to Hong Kong’s economy in recent decades, according to Brock Silvers, managing director at a Kaiyuan Capital. “Ongoing unrest will surely soon start to make other destinations, and certainly Singapore, look better by comparison,” he said.
According to the official data, Hong Kong’s economy grew at its slowest annual pace since the financial crisis in the second quarter. Economists at Capital Economics wrote this week that there is a risk of capital flight that could threaten the Hong Kong dollar peg to the US dollar. “In the extreme case of military intervention by the mainland, Hong Kong’s economy would face a deep contraction,” the economists wrote.
Optimists believe the turbulence will subside, resembling the city’s Umbrella Movement five years ago, which did not have long-lasting economic effects. “Those who purchased Hong Kong stocks during the 2014 protests triumphed,” said Zhuang Jiapeng, a fund manager at Shenzhen JM Capital Co.
Rating agencies have raised long-term questions over the quality of Hong Kong’s governance. But, according to Moody’s Investors Services, Hong Kong’s banks are likely to remain “resilient.”
Stephen Long, managing director for global banking at Moody’s, said the credit rating agency currently does not anticipate downgrades for Hong Kong lenders. There could, however, be some weakening within their “current rating bounds,” he said.
For now, Hong Kong banks have a strong balance sheet.”Their liquidity and asset quality going into this weakening operating environment caused by the protests – and to some extent the trade issues have affected Hong Kong as well,” Long said. “We’ll see worsening asset quality and weaker profits, but still very resilient in terms of the entire banking system.”
Sonny Hsu, a senior credit officer at Moody’s, said the ratings agency expects the tougher macro environment to translate into weaker asset quality at banks. “There will be some time between the weaker macro picture and that being reflected in banks’ asset quality.”
The events could threaten Hong Kong’s global status as a financial centre. “Longer term, this poses fundamental challenges to Hong Kong’s status as an international financial centre,” said Rory Green, a London-based economist at TS Lombard.
While Hong Kong ranks well for wealth management competitiveness, though with a slight weakness in ‘provider capability’ and stability even before this turbulent year, its status as a global financial centre could be under threat.
Hong Kong HNWIs Already Moving Funds
Hong Kong High-Net-Worth Individuals are moving personal wealth offshore. According to reports, on HNWI moved $100 million from a Hong Kong-based Citibank to a Singapore-based Citibank account.
The head of private banking at an international bank in Hong Kong said it’s wealthy people who are moving their money.
Kevin Lam, a prominent commercial lawyer, is aware of Hong Kong-based HNWIs moving assets to Singapore. “At this point I would say it is a steady trickle rather than stampede but is most definitely happening,” he said.
The EQIBank Advantage
EQIBank has kept a close eye on the situation in Hong Kong, as these global events increase interest in offshore banking. Our clients enjoy legally leveraging Dominica’s favorable laws for free capital flows, banking privacy and fiscal obligations for non-residents. Opening a tax-neutral bank account with EQIBank is a legal way to minimize risk from the political and financial fallout anywhere else in the world.
There are many advantages to opening an offshore bank account with EQIBank:
- Savings on tax on deposits, savings and investments
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- Global management of all finance, investment and transactions
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