Greater Bay Area: Asia’s New Nexus

In the first half of 2019, the People’s Republic of China central government released its Outline Development Plan for the Guangdong Hong Kong Macau Greater Bay Area as well as two Work Plan updates. The two Work Plans outline the process of regional collaboration on building a world class technology hub, encouraging the development of the education and services sector, improving ecological conservation and promoting a strong international business environment. The Work Plans also cover Belt and Road Initiative opportunities in the region.

 

Cross border RMB transactions

 

The Outline Development plan sets out initiatives for gradually increasing the use of the Renminbi in Guangdong-Hong Kong finance by supporting currency exchange reforms in Guangzhou and Shenzhen and developing specialized financial instruments. According to the Hong Kong government’s Constitutional and Mainland Affairs Bureau, Hong Kong’s Real Time Gross Settlement system averaged more than RMB 1000 billion per day in turnover during 2018.  Developing cross border financial services will expand Hong Kong’s profile as the world’s premier RMB offshore hub even further.

 

Green Finance and FinTech

 

In May 2019, the first green bond worth US$1 billion with a 5-year tenor was issued through the Government Green Bond program in Hong Kong. Guangdong businesses will be able to distribute Renminbi green bonds in Hong Kong and Macao, while Hong Kong banks and enterprises will be able to participate in developing green finance in Guangzhou. Government policies that support green finance, credit and leasing through optimized application processes will help banks in Hong Kong issue more green bonds at a faster pace.

 

The work plans also outline directions to promote Financial Technology in the Greater Bay Area by supporting innovation, developing infrastructure and issuing joint regulations across the border. This also includes adopting electronic payment systems for government utilities across the region and enabling Hong Kong residents to remotely open clearing accounts with banks in Mainland China. The Hong Kong Quality Assurance Agency launched a certification scheme for green funds in September 2019 in order to provide independent verifications and demonstrate the transparency of green finance investments in the region.

 

Interconnected Insurance Markets

 

Links between insurance markets will help Hong Kong insurance providers leverage the rising levels of wealth and investment among the general public in Mainland China’s urban areas, as well as excess risk from the insurance industry’s exponential increase in new premiums as real estate and infrastructure projects continue to develop. The Work Plans also call for an expedited approval process for Hong Kong Insurance Companies to set up service centers in the Greater Bay Area. By setting up branches in Greater Bay Area cities, Hong Kong insurers will be able to provide services to their customers who travel to the Mainland. The Hong Kong government has allowed insurers that enjoy the offshore risk profits tax concession (8.25% instead of 16.5%) to also cover their onshore risks. Meanwhile, the central government has announced that Hong Kong insurance service providers no longer face a minimum period of operations experience to set up insurance loss adjusting companies in China.

 

Hong Kong based finance companies and securities traders will also be permitted to operate more easily in Guangdong and enter the Pilot Free Trade Zone market more easily with reduced asset holding requirements and the removal of shareholding limits for Hong Kong financial services providers participating in Joint Ventures.

 

Bond market growth

 

Hong Kong’s bond market is set to benefit from increased listings as a result of incentive schemes such as the Pilot Bond Grant Scheme which awards grants to first time debt security issuers in Hong Kong, if they meet corporate eligibility requirements. As a result of insurance industry links, Mainland insurance providers will be able to issue catastrophe bonds in Hong Kong and Macao. Meanwhile, Hong Kong investors will be able to claim a profits tax exemption under the Qualifying Debt Instrument scheme.

 

Tax implications

 

Businesses should monitor policy developments and study the potential tax impact of increasing commercial links between Hong Kong, Macao and the Pearl River Delta. Companies in both Guangdong and Hong Kong should be aware of potential tax liabilities from cross border transactions.

 

Hong Kong enterprises should consider the potential assessment of withholding taxes on income sourced from Mainland China stocks and bonds. More generally, Hong Kong enterprises considering Greater Bay Area projects should study all available government tax incentives and eligible deductions.

 

As the Greater Bay Area network continues to take shape, both opportunities and challenges will arise. Having served the business community in Hong Kong since 1964, we are excited to guide our clients through a new decade of development.

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