2nd September 2020 – (Hong Kong) After Hong Kong has been plagued by the anti-extradition protests for more than a year, the global COVID-19 pandemic has infiltrated the city since early this year. As a result, Hong Kong plummeted three slots to sixth place in the Global Financial Centres Index (GFCI 25) in March this year, overtaken by Tokyo, Shanghai and Singapore. Its position may fall further next year due to the deteriorating economic condition. The government announced in July that gross domestic product (GDP) in the second quarter of 2020 fell by 9% in real terms compared with the same period last year, which was far behind market expectations.

According to the Economist, the risk is growing for Hong Kong’s position as a financial centre, as tensions build over China’s interference in its government and legal system, which, under the formulation of “one country, two systems”, are supposed to be largely autonomous until at least 2047. On 28th May China commissioned a national-security law to prevent sedition and terrorism in the territory. In response, the White House has proposed removing some of the legal privileges that Hong Kong enjoys—privileges that help it connect seamlessly with the global economy. U.S. and many countries in Europe including U.K. and Germany have also terminated their bilateral agreements with the Hong Kong government. Among others, U.S. notified Hong Kong authorities on 19th August of its suspension or termination of three bilateral agreements. These agreements covered the surrender of fugitive offenders, the transfer of sentenced persons, and reciprocal tax exemptions on income derived from the international operation of ships.

The most likely scenario is that Hong Kong’s institutions face gradual decay and that it drifts away from being a globalised financial centre towards one that is more mainland Chinese. China would be left with more control over a less effective capital market, raising the cost of capital for its firms. The unlikely but not impossible worst case is that a miscalculation destabilises some of the $10trn edifice of cross-border financial claims that sits in Hong Kong, causing a shock that ripples across China and Asia. Local executives and officials often call this the nuclear outcome.

When Hong Kong returned to Chinese sovereignty in 1997, it was a lively entrepot known for its rags-to-riches magnates and well-oiled expatriate bankers, but not a global powerhouse. Since then it has been transformed. It is nine times bigger than in 2000, using the median of a panel of four capital-markets measures, and ranks third among global financial centres. It has learned new tricks, including how to sell derivatives, private banking, fintech and life insurance. Financiers have leapt to offer the services that mainland China cannot provide and tolerates being offered offshore. 

Strikingly, even as Hong Kong has become more Chinese, its financial infrastructure has remained similar to that of an advanced Western economy. The constitutional formulation of “one country, two systems” has a cascade of benefits going beyond the rule of law. A layer down from the courts are world-class, independent regulators, including the Hong Kong Monetary Authority (HKMA), the central bank, and the securities regulator. Their rules require companies and financial firms in Hong Kong, especially big ones, to achieve a reasonable standard of corporate governance, and have accurate accounts and timely disclosure. Freedom of speech means firms and securities are subject to scrutiny, an essential part of the price-formation process in well-run markets.

Of all Hong Kong’s privileges, the most important is its role as the dominant offshore dollar funding centre in Asia, a status that the Fed has tolerated, if not encouraged. Since 1983 its currency has been pegged to the greenback, underwritten by foreign reserves of about $440bn, over twice the value of the local money supply, narrowly defined. Firms dealing in Hong Kong’s currency assume that it is perfectly fungible with the greenback.

The ongoing civil unrest in Hong Kong has not yet triggered an exodus of expatriate banking professionals, although many would consider looking for jobs in Singapore, if the crisis were to escalate further. However, the recent passing of the National Security Law in Hong Kong and the increased tension between U.S. and many countries with China and Hong Kong may change the mindset of expats. According to  Simon Mortlock,  while expat bankers are often stereotyped as mercenaries, who are quick to uproot and are only in Hong Kong to enjoy low tax rates, the foreigners are all committed to their lives in the territory and said it would be hugely disheartening to move. “Many of us have been here for decades and have families here, so  it’s our home that’s affected by the unrest. This current situation doesn’t represent the Hong Kong we all love,” says one longtime UK expat, adding that most expats want both sides of the conflict to work closer together to find a peaceful resolution. However, it’s not just about safety, other expats cite different factors that would force them to abandon Hong Kong. “The general sentiment is that people will leave if there are severe changes in the status of Hong Kong, especially curbs on existing freedoms, particularly freedom of expression online,” says an expat from South Africa, adding that his personal tipping points would include government restrictions on air travel and transferring money abroad.

Simon Mortlock says that whether Hong Kong expats could find work in Singapore is another question. New Goldman Sachs research notes that up to US$4bn in Hong Kong dollar deposits flowed into Singapore in the year to end-August, although that’s a comparatively modest figure and GS didn’t directly link it to the protests. Moreover, not many jobs in finance are moving from Hong Kong to Singapore. You might find a few small fintech or buy-side firms relocating people, but large banks aren’t shifting hundreds of roles to the Republic just yet.

However, the scenario may change if the Western notion of ‘freedom’ is further eroded in Hong Kong. Beijing has repetitively told the world that the implementation of the National Security Law in Hong Kong is perfectly in line with the ‘One Country, two systems’ principle but the move has attracted massive retaliation from U.S. together with its allies. China seems to be losing the ‘perception war’ even though the passing of National Security Law in HKSAR appears to be perfectly legit within its own rights.

Being a major international financial hub, Hong Kong, has always been a very popular destination for expats (at least up to 2019) to work over the last two decades that it has been a Special Administrative Region of the People’s Republic of China. Also, lawyers and accountants with professional degrees mainly from US or UK have much higher chances of getting lucrative jobs here. Compared to Singapore, Hong Kong fairs higher for salaries of top expats especially in the financial industry which is close to 25% higher. In addition to this, the income tax to be paid is much lower at just 17% making Hong Kong a haven for expatriates.

The education system here has a lot of British influence and initially was as high quality as that in the UK, however later over the years it has adopted more local curriculum. Yet the schooling in Hong Kong is considered high class, with state-of-the-art technology and infrastructure, and international teaching practices that makes Hong Kong’s education system at par with many global schools. For expats, this is a great plus as these international schools are globally recognized and their certificates valid world-wide.

In order to retain foreign professional and talents who may slowly turn away from Hong Kong, perhaps it’s high time that the government should consider shortening the period of time required for foreign expats to reside in the city to qualify for Permanent Residency.

The current 7-year period should be reduced to at least 5 years or less instead to offer incentives to make Hong Kong their permanent home. Most developed nations worldwide only require foreigners to live in the respective cities for a period of 5 years or less in order to qualify for permanent residency.

Under the existing Immigration law in Hong Kong, a person (21 years and above) not of Chinese nationality who has entered Hong Kong with a valid travel document, has ordinarily resided in Hong Kong for a continuous period of not less than seven years and has taken Hong Kong as his/her place of permanent residence before or after the establishment of the HKSAR can apply to the Director of Immigration for the status of a permanent resident of the HKSAR.

Meanwhile, the Hong Kong Government suspended the Capital Investment Entrant Scheme from 15th January 2015 until further notice. Under the original scheme, the applicant needed to prove that he/she has net assets of not less than HK$10 million* to which he/she is absolutely beneficially entitled throughout the two years preceding his application. This move was welcomed as it helped to curtail the speculative buying of properties in Hong Kong.

In comparison, Singapore is one of the easiest countries in which to establish permanent residency. To apply, you must be the spouse or child of a Singapore citizen or permanent resident, the aged parent of a Singapore citizen, the holder of an employment pass or “S” pass for mid-range skilled workers, a student studying in Singapore, or a foreign investor. In most cases, permanent residents can apply for Singapore citizenship after two years. Students applying for citizenship must have three years of residency in the city-state (of which at least one as a permanent resident).

In China, the Ministry of Justice released the Regulations of the People’s Republic of China on the Management of Permanent Residence of Foreigners (Exposure Draft) (2020) to gather public opinions on 27th February, 2020. This exposure draft relaxes the standards for foreign citizens to apply for permanent residency in China – also known as China’s ‘green-card’ – which is notoriously hard to obtain, even for foreigners who have been in the country for many years. From this exposure draft and this broadened eligibility criteria, we see the intent of the Chinese government to attract more foreign talents through a long-term working period in China.

Under Article 15 of the exposure draft is the newly added provision that stipulates that a foreign citizen may apply for permanent residency if they are working in China, have good tax and credit records, and fulfill one of the following situations:

  • Having a doctorate degree or graduated from a well-known international university, and having worked in China for at least three successive years, during which the accumulated actual residence period is not less than one year;
  • Working in one of the key industries or regions developed by the State for three successive years, during which the accumulated actual residence period is not less than one year, and the annual wage income is not less than four times the city average of the previous year;
  • Having worked in China for successive four years, during which the accumulated actual residence period is not less than two years, and the annual wage income is not less than six times of the average city wage of the previous year, or;
  • Having worked in China for eight successive years, during which his accumulated actual residence period is not less than four years, and the annual wage income is not less than three times of the city average in the previous year.

A foreigner who has assumed the posts of deputy general manager or deputy director of plants or higher-level posts or posts of associate professors or associate research fellows and similar posts for more than four years in a row, and the period of stay in accumulation being no shorter than three years and having sound taxation record may apply for a Permanent Residency status. Also, foreign citizens who have achieved internationally recognised outstanding achievements in the fields of economy, science and technology, education, culture, health, and sports can directly apply for permanent residency. This category does not require a minimum residence period in China, nor does the article specify that the achievements are to have been made in China.

Meanwhile, a person must live in France for five years to apply for the residence permit. Five years of residence also qualifies you for French citizenship. Both residency and citizenship provide access to education, healthcare, and other benefits. However, only citizens can vote. As a French citizen, you would also become a citizen of the European Union and would enjoy the ability to move about freely through other EU states. As a non-EU citizen, you will need to have lived in Belgium for at least five years before qualifying for permanent residency. Citizens of EU countries, Iceland, Lichtenstein, Norway, and Switzerland are given permanent residency automatically after five years. But non-EU citizens must submit an application, which includes proving you haven’t left Belgium for more than six months during your qualifying five-year period.

If you have the budget, for example, you could make a 250,000-euro donation to the arts in Portugal and receive residency and, eventually, citizenship in that country in return. On the other hand, you could also qualify for residency in Portugal simply by showing you meet the country’s minimum income requirement of about 1,200 euros per month per person. If you actually want to live in Portugal, this is the option to pursue. Qualifying this way, you are expected to be physically present in the country at least 183 days each year. Qualifying with an investment in the arts (via a government donation), your physical presence requirement is but seven days per year.

The perception that Hong Kong is converging towards China could lead counterparties to apply a higher risk score to the territory. Stigma may become a problem. According to the Economist, in the back of some minds is the nuclear scenario, in which Hong Kong’s role as a financial hub is destabilised. By accident or design the American authorities could clog or cut the payments arteries by imposing more sanctions, additional administrative requirements or penalties on individuals, firms or banks operating in Hong Kong. Any of these measures could seed concern that money parked in Hong Kong is no longer perfectly interchangeable with that in the West.

Even if China may not win the perception war in the short term, at least the easing of the application for Permanent Residency status will help to retain talents and professionals before Hong Kong continues to lose out to other cities like Singapore.