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Business
China focus - Gibraltar business looks east
By Alicia Bowry ACCA
Depending on whose statistics you believe, China is likely to be
the world’s largest economy within the next two to ten years. The precise year is uncertain, but the event itself is not.
This period will also be pivotal for Gibraltar, with Article 50 which was triggered on 29 March. Brexit now looks unstoppable, with a hard Brexit in 2019 a possibility. Of course Brexit will not mean an end to Gibraltar - EU business, any more than it will bring an end to UK - EU business, however it will place Gibraltar at a competitive disadvantage in terms of access to the EU market. On the positive side, an exit from the EU will allow Gibraltar to explore opportunities not readily available to it as an EU member. Brexit will enable Gibraltar to adapt its laws and enter international arrangements so as to attract business from new markets, unhindered by EU law. One of those new markets will
undoubtedly be China.
Hong Kong Elections
Hong Kong went to the polls on 26 March to elect its new Chief Executive, or rather an Election Committee of 1,200 members did so. The position of Chief Executive (Hong Kong’s highest political office) is particular- ly important as Hong Kong has an executive led system of government, with the Chief Executive having far more powers than the local parliament. There were 3 candidates in the running, Carrie Lam (former Chief Secretary of Administration) John Tsang (former Finance Secretary) and Woo Kwok-hing (a retired judge). This was the first such election since the ‘umbrella’ protests in Hong Kong in late 2014, a protest relating to the manner of electing the Chief Executive.
With 777 votes, the winner of the election and new Chief Executive is Carrie Lam. According to the local press, Carrie Lam is respected but not particularly popular with the Hong Kong public. Early in her campaign she indicated a desire to continue the policies of the former Chief
Executive, CY Leung, which had earned her the nickname of “CY Leung 2.0”. She then differentiated herself from CY Leung, proposing to abolish some of his policies. Highly articulate and talented, and having held the second most senior position in Hong Kong prior to the election, she will lead Hong Kong from 1 July for a five year term.
China Capital controls
China has placed new restrictions on capital outflows and outbound foreign investment, the extent of which has caught many in China and overseas by surprise. The restric- tions are an attempt to halt the draining of foreign exchange reserves and keep the ren- minbi from further falls bearing in mind its depreciation against the dollar of around 6 per cent in 2016.
It is understood that outbound mergers in excess of $10bn will be more closely scrutinised and enterprises will not be allowed to invest more than $1bn on property transactions. Individuals are generally limited to buying no more than $50,000 each year in foreign currency. It should be noted that all these thresholds are subject to change and could be tightened. China’s foreign reserves fell by around $300bn last year in part caused by selling reserves to support the renminbi. It is believed China is trying to maintain the renminbi’s value at above 7 to the dollar.
The restrictions are not directly applicable to Hong Kong (which has its own currency), such as MTR’s recently announced investment in the UK rail industry. In late March 2017, MTR, which runs the highly efficient Hong Kong underground system, was awarded the franchise to run South West Trains for the next seven years, in partnership with First Group. The new operators have committed to a £1.2 billion investment to improve the franchise.
China - South Korea relations
China - South Korea relations have histori- cally been good, however they have recently become strained following the deployment in South Korea of a powerful U.S. anti- missile system it says is designed to protect South Korea from North Korea, a country causing more anxiety than usual as a consequence of ballistic missile testing and
the murder of the half brother of Kim Jong Un at Kuala Lumpur airport. The missile system is known as the Terminal High Altitude Area Device (THAAD).
Tension is high, the US saying that military action against North Korea is possible. China however views THAAD as a threat to itself, bearing in mind its close proximity to the area. The Chinese public are expressing their anger by boycotting Korean products in huge numbers, threatening the South Korean economy. South Korean conglomerate Lotte Group became a particular focus of anger having agreed to an exchange of the land that will be used for the THAAD deployment, and now finds its Chinese shops the subject of popular protest.
Hong Kong’s new fund structure may challenge Cayman dominance Hong Kong is introducing a new mutual fund product that may win it back business from the Cayman Islands. Restrictions in its companies law make Hong Kong companies unattractive for use as investment funds, hence most Hong Kong funds being in unit trust format. Most funds in corporate format are incorporated in the Cayman Islands. Hong Kong is introducing a new Open Ended Fund Company (OFC) which remedies this position giving Hong Kong a corporate format that can compete with its offshore competitors. The OFC will likely be available during the course of this year.
Hong Kong : Switzerland mutual fund recognition In another development, Hong Kong and Switzerland have agreed mutual recognition of their mutual funds, a step that Switzerland in particular sees as very positive for its industry. Swiss funds, including equity funds, bond funds, ETFs, structured funds and derivative funds, can now be sold in Hong Kong, and Hong Kong funds in Switzerland. Hong Kong managers are equally excited at the possibility of exporting their products to Switzerland, tapping into its lucrative private wealth sector.
Switzerland of course is outside the European Union and so free to make such arrangements with Hong Kong. Gibraltar will no doubt take note of such developments, and the potential opportuni- ties that come with being outside of the EU.
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Gibraltar International
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