A three-pronged approach to fostering Hong Kong’s new quality productive forces

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Hong Kong, 27 September 2024 – Amidst a backdrop of significant economic shifts and challenges, despite a moderate year-on-year growth of 3.3% and resilient exports of goods in the second quarter of 2024, Hong Kong faces a multitude of obstacles. These include issues stemming from a global economic slowdown, uncertain evolution of interest rates, and shifting consumption patterns. Hong Kong has arrived at a pivotal juncture and must look to reinforce its global competitiveness and financial strength through new strategic initiatives.

Peter Ng, PwC Asia Pacific and China Vice Chairman, said, "In the past year alone, Hong Kong has undergone drastic changes, unprecedented in both scale and scope, making the path to recovery longer than most anticipated; how quickly and effectively the HKSAR government manages to adjust its sails in response to changing winds will determine the city’s future economic health and competitiveness. The path to recovery entails coordinated efforts among different stakeholders to navigate the economic headwinds and harness the potential of the development of new quality productive forces and closer integration with Chinese Mainland and regional partnerships. This will enable a robust economic environment that fosters growth, innovation, and sustainability, ultimately positioning Hong Kong to revitalise as a city of hope and opportunities.”

PwC recommends a strategic three-pronged approach to bolster Hong Kong's global competitiveness and financial resilience, with a focus on recouping capital, enhancing enterprise and talent attraction, while optimising opportunities in the digital economy.

PwC’s recommendations

1. Recouping capital: Reinforcing Hong Kong’s global competitiveness

Hong Kong's capital markets, the cornerstone of the city’s economic strength, have experienced stiff challenges in the past year, prompting urgent calls for revitalisation measures. Addressing these challenges will be essential to restoring market confidence and enhancing the overall competitiveness of Hong Kong's capital markets.

Eddie Wong, PwC Hong Kong Capital Market Services Partner, noted, “In order to revitalise Hong Kong’s capital markets, it is essential to focus on improving the liquidity and competitiveness of the capital markets through targeted measures. These include establishing alternative funding platforms for small and medium-sized enterprises (SMEs) to enable SMEs to raise funds and trade at lower cost and without the stringent requirements, extending trading hours on the HKEX to attract investors from different time zones to trade in Hong Kong stock market, implementing the Primary Equity Connect to enhance connectivity between the capital markets in Chinese Mainland and Hong Kong for IPOs, waiving the buy-side stamp duty to lower the transaction costs of trading and encourage long-term investments in Hong Kong capital market, as well as providing tax neutrality for securitisation.”

Further, diversifying the investor base would be an important step for sourcing investment capital beyond traditional markets. Strengthening ties with regions such as the Middle East and Southeast Asia will enhance relationship capital and attract new investment options.

Josephine Kwan, PwC Hong Kong Asset & Wealth Management Partner, stated, “Hong Kong should look beyond traditional markets and court other regions, such as the Middle East and Southeast Asia for investment, as a diversified investor base will ensure the city is insulated from potentially abrupt changes in the global macroeconomic environment. Another opportunity for institutional investors is to participate in large-scale investment projects through Public-Private Partnerships (PPPs). Hong Kong policymakers could establish a clear and transparent pipeline of projects that provides a platform for long-term investment by international capital. While Hong Kong is already widely regarded as an all-encompassing International Finance Centre (IFC), the city should continue to enhance its financial market infrastructure and building blocks which have paved the way for its current success, including catering for innovations such as fund tokenisation and the 'retailisation' of alternative assets. Safeguarding and improving the conducive regulatory and tax settings already in place for private market assets is also crucial to attracting new players to operate in the city."

2. Enhancing enterprise and talent attraction: revitalising a vibrant business environment

The 2023 Annual Survey of Companies reveals a positive resurgence. Findings showed that 9,039 companies under overseas or Chinese Mainland parent organisations are operating in the city, reflecting a recovery back to 2019 levels. To build on this momentum, the HKSAR government should implement strategic initiatives that facilitate the integration of enterprises into the local ecosystem, introduce regional headquarters tax incentives, and strengthen the tax treaty network.

Agnes Wong, PwC South Private Clients and Family Office Tax Leader, stated, “Facilitating the integration of strategic enterprises into Hong Kong's ecosystem will boost their commitment, while benefiting local economy. Offering regional headquarters tax incentives will further entice multinational enterprises to establish operations in Hong Kong. Expediting the implementation of the proposed company re-domiciliation regime alongside extending the streamlined Certificate of Residence issuance process to redomiciled companies will attract foreign companies seeking favourable business conditions. Talent attraction and retention is equally vital. Improving one-stop facilitation services for businesses and their international executives will streamline processes related to visa applications, housing, education, and healthcare. A more conducive environment for talent retention can be created by providing financial support for childcare services and extending tax deductions for elderly care expenses. Also, improving flexibility in the New Capital Investment Entrant Scheme and expanding eligibility for the Top Talent Pass Scheme in combination with implementing effective tax measures would help to attract a broader pool of skilled individuals necessary for driving innovation.”

In addition to these measures, creating an ecosystem for ultra-high-net-worth (UHNW) families and single-family offices (SFOs) would be impactful. This could include enhancing the existing tax concessions for SFO-managed investment vehicles by expanding the scope of qualifying assets to include virtual currencies and collectibles and relaxing the restrictions on incidental income, granting residency status to principals and immediate family members of qualified SFOs, and granting two employment visas per qualified SFO. By providing tax concessions to SFOs similar to Singapore’s 10% rate, Hong Kong can attract more UHNW families. Additionally, regularly assessing the concessions will ensure ongoing competitiveness.

Chris Chan, PwC Financial Services Markets Leader, GBA Services, remarked, “To address a growing demand in the captive insurance market, the Hong Kong government can continue to play a pivotal role in facilitating the establishment of captives. This can be achieved by targeting Chinese Mainland organisations with a global footprint, whether state-owned enterprises (SOEs) or private firms, and encouraging them to set up captives in Hong Kong, with an efficient licensing process and tailored license requirements designed for their global needs. In addition to captive insurance, the promotion of insurance-linked securities (ILS) is another important focus for Hong Kong. Not only do ILS provide additional product options to meet the evolving demands of insurance policyholders in the market, they also serve as a growth catalyst for the local asset management industry.”

3. Embracing digital economy: optimising opportunities for growth

In an era of rapid technological advancement, Hong Kong should strategically position itself as a trailblazer in smart city development and digital innovation. The approach to optimising opportunities in the digital economy can be streamlined by focusing on two critical components: the development of robust digital assets and virtual asset platforms, and the reinforcement of the digital economy infrastructure.

Albert Wong, PwC Hong Kong Public Sector Consulting Partner, highlighted, “Hong Kong's commitment to digital transformation is evident in its global rankings across various smart city, innovation, and digital competitiveness indices. One way to reinforce this backbone of the digital economy could involve integrating the CorpID platform with key data infrastructure to facilitate a seamless data exchange. This complements the ambition of Hong Kong to become a trusted data trading hub for commercialisation and trading of data including cross-border data from the Greater Bay Area (GBA) by collaborating on the GBA Standard Contract. To enhance the competitiveness of Hong Kong in the digital economy, the government can continue driving the use of GenAI in public sector transformation and consider expanding the Digital Transformation Support Pilot Programme for local businesses.”

Peter Brewin, PwC Hong Kong Digital Assets Leader, added, “As Hong Kong prepares for the next phase of digitisation in financial markets, it is essential to establish a clear strategy for integrating digital assets and distributed ledger technology into Hong Kong’s financial services sector. We should be bold and market leading in our initiatives to scale fund and financial product tokenisation – such as by exploring the creation of blockchain native fund vehicles that can truly take advantage of the efficiency gains that this technology promises. On virtual assets regulation, we would propose an expansion of the Virtual Asset Trading Platform (VATP) regime to include broader product offerings so that the HK regulated venues can meet investor demands, consider practical steps to reducing compliance costs without sacrificing investor protection, and for Hong Kong to develop a comprehensive virtual assets custody regime and a separate regulated OTC markets for virtual assets.”

Notes

Download the report: A three-pronged approach to fostering Hong Kong’s new quality productive forces

Download the executive summary: PwC’s recommendations for 2024 HKSAR Government Policy Address – Executive Summary