Recently, the government of the Hong Kong Special Administrative Region and the Qianhai Authority of Shenzhen jointly promulgated the “18 measures for supporting the linked development of Shenzhen and Hong Kong venture capital investments in Qianhai”.
These measures demonstrate the determination of the two governments to support the development of private equity (PE) and venture capital (VC) funds and to make the two cities serve as dual engines of the Guangdong-Hong Kong-Macao Greater Bay Area, while enabling Hong Kong to further sharpen its edge as an international asset-management center.
At the meeting celebrating the 25th anniversary of Hong Kong’s return to the motherland and the inaugural ceremony of the sixth-term government of the HKSAR, President Xi Jinping delivered an important speech in which he laid down “four proposals” for the newly inaugurated government, including continuing to create a strong impetus for growth. The fast-growing asset-and-wealth-management business has undoubtedly become a new engine for development in the financial services sector in recent years. PE funds, in particular, have become an increasingly important financing channel for enterprises in addition to the traditional way of financing through initial public offerings and banks, and are expected to provide an impetus for the development of the real economy. According to statistics provided in an industry research report, the amount of unspent capital (known as “dry powder” in the industry) raised in respect of Asian PE and VC funds has reached a new high of US$650 billion.
Hong Kong’s asset and wealth management business has always been conducive to the pooling of capital from around the world. Assets under management in Hong Kong amount to HK$35.5 trillion (US$4.52 trillion, about 12 times the city’s GDP), over 65 percent of which comes from non-Hong Kong investors. Hong Kong is truly a place where global capital converges. In terms of the size of assets under management, Hong Kong is currently Asia’s second-largest PE market (with over US$190 billion worth of assets under management), coming only after the Chinese mainland. The government of the HKSAR has been committed to enhancing Hong Kong’s position as an international asset and wealth management center. To this end, a three-step strategy has been employed in recent years to strengthen the overall support for Hong Kong’s PE industry; namely, the introduction of the limited partnership fund (LPF) regime, tax concessions for carried interest distributed by PE funds operating in Hong Kong, and establishment of a fund re-domiciliation mechanism to attract foreign funds to Hong Kong. Well received by the industry, these measures have further enhanced Hong Kong’s investment-fund regimes. As of July 2022, over 510 LPFs have been set up, paving the way for Hong Kong to develop into a world-class base for PE fund registration and operation as well as to grasp the enormous opportunities in the PE industry.
As President Xi said, “Hong Kong’s close connection with the world market and strong support from the motherland are its distinctive advantages.” With its unique advantage under “one country, two systems”, Hong Kong can bring into play its function and position as an international asset management center under the national 14th Five-Year Plan (2021-25). Acting as a gateway between the mainland and international markets, Hong Kong can attract investment funds from all over the world and promote GBA development by leveraging PE capital. The Outline Development Plan for the Guangdong-Hong Kong-Macao Greater Bay Area has also expressly proposed the following: “To support Hong Kong’s institutional investors in raising RMB funds in accordance with the relevant regulations in the Greater Bay Area for investment in the capital markets of Hong Kong, and in participating in the investment of domestic private equity funds and venture capital funds.”
Published in May 2020, the “Opinions on Financial Support for the Construction of the Guangdong-Hong Kong-Macao Greater Bay Area” expressly proposed promoting cooperation and facilitation policies between Hong Kong and Qianhai in the area of qualified foreign limited partnerships (QFLPs), including a pilot program on cross-boundary investment in PE funds, which allows institutional investors from Hong Kong and Macao to invest in mainland PE investment funds and VC enterprises in the GBA through QFLPs. As of the end of 2021, there were 122 Hong Kong-funded QFLP enterprises in the Qianhai Cooperation Zone, managing funds totaling 40 billion yuan (US$5.8 billion). The “Plan for Comprehensive Deepening Reform and Opening Up of the Qianhai Shenzhen-Hong Kong Modern Service Industry Cooperation Zone (Qianhai Plan)” was also introduced in September last year to support the implementation of our country’s policy initiative of further opening up its financial industry in the Qianhai Cooperation Zone.
Given Hong Kong’s position as an international financial center and the cluster of I&T resources in Shenzhen, as well as Qianhai’s policy of early and pilot implementation in the area of cross-boundary finance, the joint development of and mutual access to the PE markets of the two places will achieve great synergy
Against the favorable backdrop mentioned above, the “Eighteen Measures” recently promulgated have come as a groundbreaking and innovative “joint policy package” for achieving cooperation between Hong Kong and Qianhai in the area of QFLPs and hence developing Qianhai into a Shenzhen-Hong Kong international VC cluster. As regards mutual cooperation in facilitating Shenzhen-Hong Kong cross-boundary investment, a host of multipronged measures will be taken, including expanding the investment scope, streamlining the application process, and allowing greater flexibility in cross-boundary funds transfers. The interface between Hong Kong’s LPF regime and Qianhai’s QFLP pilot program will also be enhanced. Moreover, we will explore the idea of promoting linked development of the PE investment markets of Shenzhen and Hong Kong through a regulatory “sandbox” mechanism for cross-boundary financial innovation. It is believed that with the wide-ranging measures in place, more PE and VC funds will use Hong Kong as a base for investing in the mainland. Furthermore, the measures, which come under an innovative policy for propelling the development of the PE industry in Hong Kong and Qianhai, are expected to foster the free flow of capital between the two places and channel funds from all over the world to the GBA for investment in its innovation and technology (I&T) industry, thereby allowing financial services to serve the real economy. The fact that the GBA is a major investment target of a considerable number of LPFs in Hong Kong shows that the policy is founded on substantial market demand.
Given Hong Kong’s position as an international financial center and the cluster of I&T resources in Shenzhen, as well as Qianhai’s policy of early and pilot implementation in the area of cross-boundary finance, the joint development of and mutual access to the PE markets of the two places will achieve great synergy. This can in turn attract capital investment to the GBA for development of frontier technologies, thereby contributing to the creation of an international I&T hub in the GBA, and facilitating our country’s progressive realization of the strategy of scientific and technological self-reliance and self-strengthening. As for the enterprises in the two places, a buoyant PE and VC market, together with innovative cross-boundary financial policies, has opened up more financing channels, which help attract both domestic and international capital.
To attract talent with relevant experience, the government of the HKSAR has added “experienced management professionals in asset management” and “experienced professionals in compliance in asset management” to the Talent List, thereby enriching its talent pool. A considerable number of fund management professionals have been granted approval to come to Hong Kong to pursue their careers. The newly announced “Eighteen Measures” also cover provision of facilitation for Hong Kong professionals specializing in such fields as accounting, taxation and law to work across the boundary in Qianhai, with a view to further enhancing the flow of talent between the two places.
Looking ahead, Hong Kong will continue to consolidate its role as an international asset management center and seize the opportunities arising from the GBA development and the Qianhai Plan. Hong Kong will also strengthen financial cooperation with Shenzhen and Qianhai by working together with them to contribute to the high-quality GBA development as well as the deepening of financial-market reforms of our country, and at the same time open up a broader market for Hong Kong’s financial industry to foster its sustainable development.
The author is the secretary for financial services and the treasury of the Hong Kong Special Administrative Region.
The views do not necessarily reflect those of China Daily.