How extradition bill debacle hurts HK as a wealth hub
A contentious bill in Hong Kong that would allow the extradition of suspects to China has prompted some of the city's wealthy to shift assets out of Hong Kong.
It's a trend that is likely to continue, even though the offending bill has now been suspended, wealth managers tell AsianInvestor – to the benefit of Singapore.
The saga around the bill has made Hong Kong’s long-standing city rival a more appealing and competitive international wealth management centre as more local high-net-worth individuals (HNWIs) conclude that Hong Kong is destined to become just another Chinese city.
This is a question of confidence and the damage has already been done, said one veteran Hong Kong-based chief investment officer currently on gardening leave, who declined to be named due to the sensitivity of the issue.
And it will take a long time before that confidence can be restored, said the CIO, after a decade spent at a global wealth manager.
“I have both former clients and friends asking for offshore booking centres after expressing concerns over the extradition bill in Hong Kong. They are most interested in Singapore and Switzerland,” said the CIO.
Assets that are booked in a certain place are subject to the tax regulations and other relevant rules there.
“If you used to have $10 in Hong Kong, you’ll probably [now] put $5 here. It’s not a total retreat [of assets] but you’ll put part of it overseas to diversify … it’s a problem about confidence,” another Hong Kong-based CIO, this time at a family office, told AsianInvestor.
The asset shift from Hong Kong to Singapore is currently still only a trickle but the decay in confidence in Hong Kong as an international financial hub will be a long-lasting problem, a Singapore-based senior executive of a financial firm that offers wealth management service told AsianInvestor.
“Some people are probably preparing to shift [their assets out of Hong Kong] and most are, at a minimum, reconsidering their current exposure and thinking of relocating future assets somewhere else,” he said.
THE FEAR
The change to Hong Kong’s Fugitive Offenders Ordinance, which was first proposed by the government of chief executive Carrie Lam in February, would oblige Hong Kong to extradite individuals that are suspected to have committed crimes punishable by seven years or more in jail to China, Taiwan and Macau.
It subsequently led to mass protests in Hong Kong due to people’s deep distrust of China’s legal system. The government pressed ahead with the bill after a million protesters took to the streets on June 9, but decided to suspend the bill after severe clashes between police and demonstrators on June 12.
Even then, around two million protesters took to the streets a few days later to demand a complete withdrawal of the bill, fearing it would be tabled again in the future.
For any wealthy people with assets booked in Hong Kong, the concern from the bill is that the Chinese courts would be given the authority to freeze these assets if they ended up accused in Hong Kong of any serious crimes, the Singapore-based executive said.
The extradition bill has also triggered uncertainty about Hong Kong’s international status, with potential repercussions for Hong Kongers.
The legislative in the US has proposed to review the US-Hong Kong Policy Act should the bill be passed in Hong Kong. The policy act is the legal base for the US to treat Hong Kong differently from China and gives the territory special treatments on trade and travel matters.
The concerns linger on today. The US has a lot of investments in Hong Kong and it affects asset managers’ choice of headquarters in Asia. If the US changes the way it treats Hong Kong, the country's many allies may follow suit, Eva Law, chairwoman of Chartered Institute of Asia Family Firms and Offices, told AsianInvestor.
Protests against the bill have since continued and local activists have raised HK$5.5 million in a crowdfunding campaign to fund anti-extradition bill advertisements in global mainstream media ahead of the G20 summit on Thursday.
SINGAPORE'S BIG CHANCE
The fallout from the extradition bill may yet narrow the gap between Hong Kong and Singapore in the wealth management business.
With an estimated international market volume of $790 billion as of 2017, Hong Kong ranks fourth after Switzerland, the UK and the US in the international wealth management centre rankings. Singapore ranks sixth with an estimated volume of $470 billion, according to a Deloitte report released last year.
“Singapore must be most happy because of what has happened in Hong Kong,” the unnamed CIO of the global private wealth manager said.
It's not difficult to book assets in another country instead of Hong Kong, as there are no capital controls in the territory. Most global private banks have this service to help retain clients, he said.
And if more people book their assets in popular alternatives like Singapore, the wealth management industry in Hong Kong will most likely suffer since in most cases local relationship managers are responsible for managing the assets booked in their country, he added.
ONE COUNTRY, TWO SYSTEMS?
Political considerations are always a key factor for wealthy people when deciding where to put their money, Law said, and in that respect Hong Kong's wealth management industry has lost an edge.
“One country, two systems” is the constitutional principle upon which Hong Kong's reunification with China was founded following the departure of the city's former British colonial rulers in 1997. This was guaranteed for at least 50 years after reunification, although it was never clear what would happen after.
The nagging fear now is that Beijing may be looking to slowly bring that day of reckoning forward, so that Hong Kong is left with little say over its own decisions.
In contrast, Singapore is an autonomous country with policy continuity, which gives investors more confidence, Law said.
The controversial bill proposal has triggered widespread debate over the perceived erosion of autonomy granted to Hong Kong under the "one country, two systems" framework, Fitch said in a statement on June 11.
Fitch's rating on Hong Kong rests on the assumption that the territory's governance standards, rule of law, policy framework, and business and regulatory environments remain distinct from that of mainland China.
A move towards greater integration that diminishes the autonomy of Hong Kong would cause the rating differential to come under review, the rating agency said.
Jaycee Man contributed to this story.