Foreign Direct Investment In Hong Kong Topped $64bn In 2000

Mary Swire, Tax-News.com, Hong Kong

02 April 2001

The Hong Kong government released figures at the end of last week showing that the SAR received an amazing $64bn of foreign direct investment (FDI) in 2000, up from $15bn in 1998 and $35bn in 1999. To put the figure in context, the city-state has a GDP of $132bn.

There is no doubt that Hong Kong is doing well, after a crisis of confidence during the Asian recession three years ago, but the FDI figure is not what it seems. First of all, it includes the proceeds of capital raising activity by Chinese companies on Hong Kong's stock exchange insofar as that money was received from outside Hong Kong, and was left there in the form of foreign currency balances. It also includes additions to the foreign currency balances of Chinese nationals, which are likely to have been considerable during a period in which they were running up their ownership of Chinese companies' A shares.

A further mechanism which tends to inflate the 'foreign' element of investment in the SAR is that fact that many Chinese and Hong Kong companies keep large balances offshore, in havens such as Bermuda and the Cayman Islands. The British Virgin Islands is another popular location - much Hong Kong money found its way there while the one-time colony was being returned to China: now that the future seems stable, some of it is probably returning. This money should perhaps be considered as domestic investment.

So one can argue about the labelling of some of this money, but that doesn't alter the fact that it arrived, by whatever route, and this demonstrates that Hong Kong is in rude health. This confidence in Hong Kong's future parallels the optimism among western companies about China's prospects after it enters the World Trade Organisation. It's this that probably accounts for a 20% rise in the number of regional headquarters established in Hong Kong in the last year. (In a survey made privately available to subscribers to the Lowtax Online Newswire in December, Hong Kong was rated the top worldwide location for headquarters offices.)

The city has also become a telecommunications hub in recent years with US companies using it as a landing point for undersea transpacific fibre-optic cable projects. The government has worked hard to establish Hong Kong as a leading e-commerce jurisdiction, in contrast to mainland China's authoritative and restrictive treatment of the Internet, and and this will be a powerful reason for Chinese as well as international companies to maintain their local administrative centres in the ex-colony.

Hong Kong's bankers must be sitting on vastly increased balance sheets - don't expect to see disappointing results from them this year!

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