Hong Kong's bustling, ever-vibrant lifestyle more than matches the essence of the Asian offshore hub's market. Currently simmering with opportunities despite downturns, the world's freest economy remains at boiling point, reports Peggy Wong
Hong Kong is forever on the boil. The vibrant territory is a complex blend of shiny new surfaces, ancient culture and exotic flavour all bound together in an area of just 424 square miles. While the jurisdiction has had a few economic stumbles along the way, Hong Kong's market continues to simmer during market downturns before rising back up to nearly bubble over in times of growth.
Since the 1950s Hong Kong has been regarded as one of the world's leading financial centres, often said to be on par with centres such as London and New York. Despite intensive competition from nearby rivals such as Singapore and Shanghai, Hong Kong, it could be argued, is the hub of East Asia's offshore financial centres, attracting a diverse range of local and expatriate investors.
Recently named by the 2007 Index of Economic Freedom and the European Commission as the world's freest economy, Hong Kong benefits from strong onshore and offshore investment inflows. Hong Kong's low taxation system, a highly developed banking sector, simple business regulations, flexible labour market and open investment rules form an appealing market for investors from all walks of life.
One country, two systems
Hong Kong today is governed under the principle of 'one country, two systems', through which China has agreed to give the region a high degree of autonomy and to preserve its economic and social systems for 50 years from the date of the handover.
China controls Hong Kong's foreign and defence policies, but the territory has its own currency and customs, and more political freedom than China.The economy has moved away from manufacturing - a central focus for mainland China - and, like many other developed economies, is now predominantly based on the service industry.
Hong Kong was granted independence from Great Britain in 1997, and the market has evolved over the past 15 years, responding to lessons learned in times of economic downturn. When Hong Kong's independence was granted, there were local anxieties that China's influence could lead to Hong Kong's economic decline. These anxieties proved to be unfounded as independence brought a positive upturn, with the jurisdiction continuing to attract foreign investment.
This considerable growth has been paired with several fallouts over the past 10 years. Hong Kong has been on a rollercoaster of economic growth, peaking through periods of strong economic development and a booming stockmarket, then declining with long periods of deflation, rising interest rates and most recently with a fluctuating stockmarket, high inflation and low interest rates.
Hong Kong's local market suffered during three periods of decline in 1997/98, 2001/02 and 2003. These downturns mirrored events in the global economy as well as local conditions with the Asian economic crisis, the global market downturn and the Severe Acute Respiratory Syndrome (Sars) outbreak all respectively influencing the state of the market.
The Asian economic crisis in 1997 marked the darkest period in Hong Kong's financial history, with growth (previously at about 4%) taking a severe and sudden downturn - declining by 5.5%. Before 1997, most people in Hong Kong put their money into either the property market or stock speculation, not into mutual funds.
In the lead-up to the crash, people who invested in property saw their profits soar, but few spread their investments, basing their entire retirement plans on making enough in one sector. These investors suffered the greatest losses, highlighting the importance of systematic financial planning, investment diversification and risk management.
The global market downturn of late 1999 into 2000 also impacted Hong Kong's market; however, despite a global slowdown, the local economy picked up slightly in 2001 and 2002. This growth was followed by the Sars outbreak across Eastern Asia, which once again slowed the economy. As the disease spread, people were forced to stay at home or quarantined if travelling from other highly contagious countries to keep the disease from spreading.
The need for financial advice
Since the 1997 economic crisis, there has been a growing need for financial advice as investors seek to diversify their portfolios and, as a result, financial planning has become a booming service industry in Hong Kong. Since the launch of the Mandatory Provident Fund - a required retirement savings policy introduced by the Hong Kong government in 2000 - investors have begun to realise the importance of long-term savings and financial planning.
Over time, investors have seen the shortfall of putting all their eggs in one basket, and have begun to appreciate the enhanced value of long-term financial planning - thus they are now more willing to seek expert advice from professional financial advisers.
Recent growth and stability
The market has recovered slowly from 2004 onwards, with gross domestic product (GDP) posting an increase of 8.6% in 2004 alone. This was followed by the stockmarket reaching its record high in October 2007 when the Chinese government was expected to announce the launch of Qualified Domestic Institutional Investor (QDII) and 'through train' policies, which would have allowed domestic Chinese institutional investors to invest outside mainland China.
The expectation was that this would result in more money going into the Hong Kong stockmarket, thus having a positive impact on the market. Speculation about the launch of QDII pushed the stockmarket up to its record high; however, the Chinese government has since clarified its position and the investment surge has levelled.
Over the past 10 years, the size of Hong Kong's retail savings and investments - including deposits, mutual funds, direct equity investment and direct bond investment - has grown strongly at a rate of 14.4%.
Expat vs local investors
As a former British colony, it is no surprise that Hong Kong is home to a large number of British expatriates, who make up the majority of an expat community that also sees nationals from Asia, Europe, the US, Australia and Canada.
Traditionally, Hong Kong's expat investors tend to be more sophisticated and conservative in their investment strategy than local investors. As a result, they tend to use offshore personal portfolio bonds more than local residents, and these products offer a considerably wider choice of global assets.
In addition, the needs of expat investors are typically different to the needs of local investors. For example, tax issues are more important - especially if the expat is hoping to return to their country of origin - while wealth preservation through trusts also plays a key role in financial planning for many expats.
Hong Kong appeals to expat investors for several reasons. Although expatriates may no longer enjoy the prestigious relocation packages offered in previous years, they still prefer to work in Hong Kong due to the low tax regime and better career prospects.
Local investors seem to be very aggressive, with a higher tolerance for risk, and have always enjoyed investing in the booming Asia market. With the wealth of information and advanced technology, local investors can easily access first-hand information about the financial opportunities in any of Asia's emerging markets. China and other emerging markets in Asia are expected to lead the future of world economic growth, and many local investors have invested into Chinese corporations publicly listed on the Hong Kong Stock Exchange.
Today, senior management is made up of both local resident Chinese and expatriates. Expats who were first benefited by the education policies in the 1940s and the booming economy in the 1970s have established a high net worth and have become part of Hong Kong's influential wealthy class. Investors with a high net worth are now looking for different lump sum investment vehicles - other than regular savings, stocks and property investments - to diversify their portfolio.
The future of Hong Kong's market looks positive. With China and other Asian markets expected to have a growing impact on the world economy, we can be sure that Hong Kong will retain its presence both as an expat market and as a hub of Asian economic activity. Without doubt, Hong Kong will continue to simmer well into the future.
- Peggy Wong is Skandia's marketing manager for Hong Kong and the Far East.
Two global vehicles
'Further plug advice gap'
Must appoint separate CEOs and boards
Advisers do come out well
Will report to Mark Till