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Offshore Company Formation Hong Kong: Professional offshore incorporations and offshore banking services

Offshore Company Formation Hong kong

Hong Kong Banking

Hong Kong has one of the largest representation of international banks in the world: 71 of the world's 100 largest banks have a presence there. Hong Kong is the world's 9th largest international banking centre in terms of the volume of external transactions, and the second largest in Asia after Japan. The banking sector plays a vital role in establishing Hong Kong as a major loan syndication centre in the region.

The banking sector, being the major participant of the Hong Kong foreign exchange market, contributes to Hong Hong's status as the world's 7th largest foreign exchange centre.

In December, 2007, there were 142 licensed banks, 29 restricted licence banks and 29 deposit-taking companies in business. These 200 authorised institutions operate a comprehensive network of local branches. In addition, there are 79 local representative offices of overseas banks in Hong Kong.

Total Employment in the sector is nearly 80,000. Banking assets amount to more than US$1 trillion.

The banking system in Hong Kong is characterized by its 3-tier system, which is formed by 3 types of banking institutions, namely licensed banks, restricted licensed banks and deposit-taking companies, which are authorised to take deposits from the general public. The 3-tier of deposit-taking institutions operate under different restrictions. Only licensed banks and restricted licensed banks can be called banks.

Hong Kong's banking sector is highly open, being the second largest international banking centre in Asia after Japan in terms of the volume of external transactions.

The success of the SAR's banking and financial services economy is largely a consequence of a non-discriminatory low tax regime. Business profits are taxed at a maximum rate of 16% whereas employees pay a maximum tax on salaries of 15%. Low tax rates are complemented by the absence of a number of types of taxation. Thus (save in very limited circumstances) there are no withholding taxes, no taxes on interest, no capital gains taxes, no sales tax or VAT; and income arising outside the jurisdiction is not taxable in Hong Kong under the "territorial principle". Deductible allowances are equally generous.

In December, 2006, eight foreign banks had applied for retail banking licenses in mainland China, as the country opened its banking market under WTO rules it agreed five years ago.

There are more than 70 foreign banks in China already, but until now most of them were limited to handling foreign currency business, and they hold just 2% of the country's banking assets. During the last few years the Chinese authorities have been racing to clean up major domestic banks, which were weighed down with bad debts and clunky administration.

The banks which have applied for retail licenses are Hong Kong's Bank of East Asia, Hang Seng Bank, Citigroup, Mizuho Corporate Bank, HSBC, ABN Amro and DBS Bank. Many of these banks had already taken stakes in mainland banks and created financial infrastructure to be ready for this moment.

There are still obstacles to the growth of foreign banks in China, however, including a 25% limit on foreign ownership of an existing Chinese bank. New entrants to the market have to incorporate in China as wholly-owned banks or joint venture banks. Few international banks have done this; to date, they have mostly operated through branches, which are not covered by the new regime, or through minority holdings in Chinese banks. It is not clear whether the requirement to incorporate wholly-owned subsidiaries is in conformity with China's WTO obligations, although the minimum capital requirement of USD10bn in assets does conform.

The new Regulations allow a fairly wide range of activities to wholly-owned and joint venture banks, but disallow bank card business for branches, something they were previously permitted to engage in under 2001 rules which have now been replaced.

2003 saw a number of moves towards greater banking integration between the SAR and the mainland. In August, the Hong Kong Monetary Authority (HKMA) and the China Banking Regulatory Commission (CBRC) signed a Memorandum of Understanding aimed at strengthening supervision of banks operating on both sides of the border. HKMA operates in effect as Hong Kong's Central Bank, while the CBRC was formed earlier in the year to to take over banking supervisory responsibility from the People's Bank of China. The 15-department CBRC says its major responsibilities include "formulating supervisory rules and regulations for banking institutions, (and) authorizing the establishment, changes, termination, branching out and business scope of banking institutions.'' It is also responsible for dealing with problem deposit-taking institutions. The MOU calls for the two regulators to share supervisory information for banks operating in China and Hong Kong and they will work together to ensure that a parent bank exercises "adequate and effective" control over the operations of cross-border branches and subsidiaries. They will also meet formally twice a year.

In 2007, the Hong Kong Securities and Futures Commission (SFC) also entered into a Memorandum of Understanding (MOU) with the China Banking Regulatory Commission (CBRC) for co-operation and information sharing with respect to Hong Kong licensed intermediaries who provide services to Mainland commercial banks conducting overseas wealth management business on behalf of their clients

“The MoU is conducive to further enhancement of the regulatory co-operation framework. It provides a solid foundation for the commencement of effective regulatory co-operation," stated Liu Mingkang, Chairman of the CBRC. "Through mutual assistance and information sharing, we can promptly identify risks, and take timely regulatory measures to protect the interests of investors.”

In September, 2003, China's central bank chief Zhou Xioachuan was in Hong Hong to discuss the possibility of the territory's financial institutions formally accepting yuan deposits, though it appears that the establishment of a fully fledged yuan trading exchange is still some way off. In November it was announced that banks in Hong Kong will soon be permitted to offer certain renminbi-denominated services, as part of the ongoing initiative to deepen economic ties between the territory and the Chinese mainland. Banks will be allowed to accept deposits, arrange remittances, issue credit and debit cards, and make foreign exchange transactions. However, they will not, initially at least, be able to offer corporate banking services. Although recent estimates have suggested that there is between Rmb20 billion and Rmb 70 billion circulating in Hong Kong, the jurisdiction's banks have thus far been unable to access the cash due to foreign exchange restrictions and capital controls imposed by the mainland authorities. Hong Kong's chief executive, Tung Chee-hwa welcomed the move, hailing it as a "very important step to consolidate our position as an international financial centre".

Analysts consider this an important first step towards Hong Kong becoming an offshore yuan trading centre. "The integration between the two places will be closer and closer, so that means that renminbi will co-circulate with the Hong Kong dollar in Hong Kong going forward," said Chris Leung, senior economist at DBS Bank, "Obviously, if that's the case, there's sort of a demand for renminbi storage with the banks. So it's a natural development, but the problem is there are many technicalities and contradictions in order for this to become a reality," Leung added.

In February 2004, the eagerly anticipated move to liberalise trading and exchange of the yuan in Hong Kong took its first step forward after the city’s banks were given the go-ahead to begin taking deposits in the Chinese currency.

It is estimated that there is the equivalent of $8 billion in yuan notes floating around in the city, and Hong Kong banks are using a variety of incentives to potential customers in a bid to suck in some of this (previously illegal) surplus cash. They will be helped by the fact that interest rates on yuan deposits will be higher than those on the HK dollar, reflecting the rate of interest on the mainland.

Under the relaxed rules, banks were able to exchange up to 20,000 yuan a day ($2,400) per individual provided the transaction is conducted through a deposit account. Meanwhile, cash transactions were limited to 6,000 yuan, and individuals may remit up to 50,000 yuan per day back to their accounts in China.

However, the changes are far from representing a fully liberalised exchange system, and tight restrictions will remain on the Chinese currency in the city. For instance, the new rules will only allow Hong Kong residents and those with a Hong Kong ID card to make yuan bank deposits, whilst companies will remain barred from banking the currency.

In April, 2004, the Bank of China Hong Kong announced that it would begin issuing credit cards and bank cards for use with the yuan. The yuan-based credit and ATM cards were the first to be issued in the city since restrictions on the circulation of the Chinese currency in Hong Kong were relaxed earlier in the year. However, it is reported that several other banks are also preparing to launch their own cards in the near future.

BOC Hong Kong, chosen by the Chinese authorities to act as the central clearing bank for all yuan services in the SAR, additionally revealed that the new cards will be connected to China’s UnionPay payment network, used by some 400,000 merchants and 50,000 ATMs on the mainland.

Alongside liberalisation of the yuan market, the Hong Kong Monetary Authority (HKMA) urged banks in the jurisdiction to be alert to the possibility of money laundering as they gear up to offer yuan-denominated banking services. "Participating banks are requested to heighten the awareness of their staff involved in such business to possible money laundering transactions," the regulator announced. In order to reduce the possibility of money laundering activity taking place, the HKMA ordered banks to record whether yuan deposits are made in cash, or via the conversion of other currencies.

It also urged the financial institutions to keep track of multiple accounts opened by the same customer, and to ensure that the 20,000 yuan per day exchange limit is not breached by spreading the transactions across several accounts.

Two new accounting standards came into force in Hong Kong in January 2005. At more than 320 pages with an additional 214 pages of implementation guidance, Hong Kong Accounting Standards 32 and 39 are detailed and prescriptive in nature.

The new accounting standards require banks to estimate loan provisions based on future cash flows rather than the previous guidelines issued by the Hong Kong Monetary Authority, and review the basis for general provisioning. Most banks hold a general provision of around 1% of total advances, as required by the Hong Kong Monetary Authority. The new standard requires this to be based on an analysis of historical loss experience and may lead to a significant write back of general provisions. The standards are the Hong Kong Society of Accountants' final step in achieving full convergence with International Financial Reporting Standards. In achieving full compliance Hong Kong banks will be more comparable with their international peers, facilitating easier access to cross border capital markets.

Hong Kong's Deposit Protection Scheme launched on September 25, 2006, with a coverage limit of $100,000 per depositor per bank.

Enacted on May 5, 2004, the Deposit Protection Scheme Ordinance governs the setting up and operation of the scheme. After two years of intensive preparation,the scheme will provide deposit protection and collect contributions from members from the 25th.

All licensed banks, unless otherwise exempted by the board, are required to participate as members.

The main features of the scheme are that:

  • Depositors are not required to apply for protection or compensation, eligible deposits held with scheme members will automatically come under the protection of the scheme;
  • Both Hong Kong dollar and foreign currency deposits are protected;
  • The scheme protects eligible deposits held in scheme members, it does notprotect term deposits with a maturity longer than five years, structured deposits, secured deposits, bearer instruments, off-shore deposits and non-deposit products such as bonds, stocks, warrants, mutual funds, unit trusts and insurance policies;
  • A Deposit Protection Scheme Fund with a target fund size of 0.3% of the total amount of relevant deposits (translating into a fund size of approximately $1.3 billion) will be built through the collection of contributions from scheme members; and
  • Differential contributions will be assessed based on the supervisory ratings of individual scheme members.

Members are also required to notify their customers if a financial product described as a deposit is not protected by the scheme.

In November 2007, Hong Kong's Secretary for Financial Services and the Treasury, Prof KC Chan announced that the Deposit Protection Scheme has been operating smoothly since its inception last year, and needs no adjustment.

He told legislators that the scheme fund reached $374 million in March, and is expected to reach the targeted HKD1.3 billion as scheduled in three years. He stated that it has enhanced public confidence in placing deposits with small and medium-sized banks.

Prof Chan revealed that although competition in the local banking industry is intense, the board has received no comment on, or complaint about, banks passing the cost of the scheme on to depositors.

New Banking (Capital) Rules came into effect in January, 2007, and are the implementing Rules for Basel II, the new international standard for banks' capital adequacy.

They set out in detail the different approaches that can be adopted for calculating the capital charge for credit, market and operational risks.

They were issued under a new rule-making power provided under the Banking (Amendment) Ordinance 2005, and replaced the previous regulatory capital regime set out in the third schedule to the Banking Ordinance.

A consultation will soon be undertaken on the Banking (Disclosure) Rules.

The Hong Kong Securities and Futures Commission (SFC) has entered into a Memorandum of Understanding (MOU) with the China Banking Regulatory Commission (CBRC) for co-operation and information sharing with respect to Hong Kong licensed intermediaries who provide services to Mainland commercial banks conducting overseas wealth management business on behalf of their clients

The MoU was signed on April 10, 2007, in Hong Kong by Eddy Fong, Chairman of the SFC and Liu Mingkang, Chairman of the CBRC and has taken immediate effect.

“The MoU is conducive to further enhancement of the regulatory co-operation framework. It provides a solid foundation for the commencement of effective regulatory co-operation," stated Liu. "Through mutual assistance and information sharing, we can promptly identify risks, and take timely regulatory measures to protect the interests of investors.”

The Hong Kong Security Bureau has said that from January 26th, 2007, remittance agents and money changers must verify customers' identities, and record transactions of HKD8,000 (USD1,024) or more.They must also verify the identity of anyone who receives a remittance of HKD8,000 or more.

The requirements aim to meet the new international standards with regard to combating money laundering and terrorist financing.

Customers must produce their Hong Kong identity cards - or certificate of identity, document of identity or travel document - for verification, and provide their addresses and telephone numbers.

Agents and money changers must also record and retain the particulars of the sender and the instructor of any transaction if the two are not the same person.

The Hong Kong Monetary Authority (HKMA) announced in December 2007, that it will review its work in the area of banking stability, and has appointed former Jersey banking regulator, David Carse as consultant to conduct the review.

The aim of the review is to make recommendations on how the HKMA can best discharge its functions in promoting the general stability and effective working of the banking system, taking into account recent and likely future developments in Hong Kong’s banking system, and the changing nature of the risks facing it.

The review, which will start this month, is expected to be completed in about five months. It will take into account developments including the globalisation of finance and banking business, the increasing integration of the financial systems of Hong Kong and Mainland China, the growing complexity of banking products, the increasing reliance of banks on information technology, the increasing need to combat financial crime, the changing nature of supervision, and the expectations of the community. Carse will make recommendations on the focus and priorities of the HKMA’s banking supervisory functions over the next 5 years.

After Chinese Premier Wen Jiabao announced in Singapore, in November 2007, that he did not agree with the cash withdrawal limits placed on Shenzhen banks, they were hastily withdrawn, leaving the underground pipeline that has been sustaining Hong Kong's booming stockmarket in full flood.

"The Shenzhen banks' motives are good but they could employ better methods," said Wen. "We should have taken measures that were more effective and that were acceptable to the public."

The Chinese authorities are of course fully aware of the flow of illegitimate cash to Hong Kong, caused by Chinese exchange controls, and they are under heavy pressure to liberalize the renminbi. It was this that had led to the now-abandoned 'through-train' proposal to allow investment in Hong Kong stocks through defined channels.

Shenzhen banks had set a daily withdrawal limit of Renminbi 30,000 on personal accounts. "If the illegal fund flow is not controlled, it will affect the financial stability in the country, including Hong Kong," Wen said, but it's not clear what action Beijing will now take.

It's not just the official banks that operate the pipeline: the local equivalent of hawali money-exchange networks are involved, and there are many parallel unofficial links between individuals. In fact the border is so porous that it's difficult to see how some form of liberalization can be avoided. Local estimates are that the daily flow of cash between Hong Kong and Shenzhen amounts to several billion renminbi.

 

 
 
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