Stuttering SAR

By Global Tax Weekly

Although Hong Kong’s liberal economic system is regularly praised here, this Special Administrative Region of China, as it is officially known, has not been shown in the best of lights on the world’s television screens over recent weeks as the authorities, both in the SAR and in Beijing, struggle to square China’s One Party mode of government with the democratic demands of Hong Kong’s citizens. Another worrying, but little-reported development came in the form of figures from the Inland Revenue Department last week, which showed tax revenue growth slowing to a virtual standstill thanks to lacklustre economic growth in 2013/14. So, Hong Kong could do with a timely boost, and perhaps it has just got two: the launch of the Shanghai-Hong Kong Stock Connect scheme, which will allow eligible Mainland investors to trade stocks listed on the Stock Exchange of Hong Kong (SEHK) directly through the Shanghai Stock Exchange (SSE) while also allowing Hong Kong and overseas investors to trade stocks listed on the SSE directly through the SEHK; and the removal of the daily limit for conversions by Hong Kong residents of currency into and out of the Chinese renminbi. Hong Kong’s standing as China’s “offshore” financial centre gives it a natural head start in the race to become the preferred place for RMB trading as China slowly liberalizes its currency. But it’s not without its rivals. As the world’s largest foreign exchange centre, London is inevitably playing its part, and the UK Government has launched initiatives to facilitate growth in RMB trade. But earlier this year, Singapore, with its strong cultural ties to China, overtook the Square Mile to become the largest offshore RMB exchange platform outside of the SAR. As Hong Kong’s Financial Secretary, John C Tsang, observed, the Stock Connect scheme should help to propel the development of offshore RMB business in Hong Kong, adding another string to the finance centre’s bow and cementing its place as the premier offshore RMB centre. He also likened Hong Kong to a “laboratory” for new Chinese reform measures. However, this was not an entirely flattering description of Hong Kong’s role in the world, hinting at its subservience to China. And experiments can also go wrong of course. The One Country, Two Systems experiment has probably exceeded expectations so far, but it is to be hoped that Beijing doesn’t allow the democracy issue to become incendiary.

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