Asia Focus – June 2017

Welcome to the first Asia Focus newsletter, which will complement our existing China Focus newsletter and will, we hope, help to keep Sovereign clients up-to-date with news and views from around this burgeoning region – Hong Kong and Singapore, in particular, where we have long-established offices.

Singapore boasts a highly competitive and beneficial business establishment and operation environment and promotes access to the region while featuring significant international linkages. Hong Kong offers valuable financial services and substantial business opportunities, and remains unparalleled in its ability to reach China.

In its latest Regional Economic Outlook for Asia and the Pacific, published in May, the International Monetary Fund raised its growth forecast for the Asia Pacific region to 5.5% in 2017 and said the region’s prospects “remains robust – the strongest in the world, in fact – and recent data point to a pickup in momentum.”

When entering Asia, consideration must be given to taxation, market access, international linkages, labour costs, industry focus and many other factors, if investors are to develop the optimal entry strategy to fit their particular goals and priorities. We hope this newsletter will offer some valuable insight into how that might best be achieved.

Hong Kong crowned world’s most competitive economy

Hong Kong has consolidated its dominance of the annual rankings compiled by the IMD World Competitiveness Centre, taking the top spot out of 63 economies worldwide for the second year running. Switzerland and Singapore came in second and third, with the US ranking fourth, its lowest position in five years and down from third last year. The Netherlands completed the top five, jumping from eighth last year.

The rankings are based on four indicators: economic performance; government efficiency; business efficiency; and infrastructure. Hong Kong topped the rankings on two indicators – government efficiency and business efficiency.

However, the city’s economic performance rankings – based on trade, investment and employment – fell from five to 11, while its infrastructure ranking, which includes an assessment of infrastructure in technology, science, education, health and the environment, improved slightly, moving up from 21 to 20.

The IMD has consistently ranked Hong Kong among the three most competitive economies since 2013, except in 2014, when the city placed fourth. Hong Kong Financial Secretary Paul Chan Mo-po said the report was a “clear recognition” of Hong Kong’s “favourable business environment and robust financial system”.

“In light of the fierce competition in the global economic arena, we must strive to uphold our prevailing competitive edge, including the open and free market principle, the fine tradition of the rule of law, an efficient public sector and a robust institutional framework,” he said.

In the Asian region, the Chinese mainland saw the biggest improvement, climbing seven places to rank 18, on its “dedication to international trade” and “improvement in its government and business efficiency”. It also topped the list of countries with per-capita gross domestic product of less than $20,000, followed by Asian peers Malaysia and Thailand.

Professor Arturo Bris, Director of the IMD World Competitiveness Centre, said the indicators that stood out among the most improved countries are related to government and business efficiency as well as productivity.

“These countries have maintained a business-friendly environment that encourages openness and productivity,” he said. “If you look at China, its improvement can be traced to its dedication to international trade. This continues to drive the economy and the improvement in government and business efficiency.”

For the first time this year, the IMD published a Digital Competitiveness Ranking, which aims to measure countries’ ability to adopt and explore digital technologies leading to transformation in government practices, business models and society in general. Singapore topped the ranking, followed by Sweden, the USA, Finland and Denmark.

“There is no doubt that supportive and inclusive government institutions help technological innovation,” said Bris. “Singapore and Sweden have developed regulation that takes advantage of the talent they have by adopting, for instance, regulation that facilitates the inflow of overseas talent which complements the locally available pool.

“The US invests more in developing its scientific concentration and generating ideas but the country has a history of government support for technological innovation. This shows that in digitally competitive countries, the government must facilitate the adoption of new technologies.”

The Swiss-based IMD has published the rankings every year since 1989. It compiles them using 260 indicators, about two thirds of which come from “hard” data such as national employment and trade statistics; and a third from more than 6,250 responses to an opinion survey that measures the business perception of issues such as corruption, environmental concerns and quality of life. This year 63 countries are ranked with Cyprus and Saudi Arabia making their first appearance.

Singapore: the Lion State goes global

The global economy may be facing great uncertainty and change but Singapore, in contrast to recent political developments in the US and Europe, is continuing to show its support for economic openness and globalisation.

Singapore is widely recognised as having one of the most open economies in the world – two-thirds of Singapore’s GDP is generated by external demand – and its political leaders recognise the importance developing international ties and offering the best opportunities to international companies.

To prepare for the the economic and social challenges ahead, the city-state recently set up a new Committee on the Future Economy (CFE). In its first report, co-chairs, Finance Minister, Heng Swee Keat and Minister for Trade and Industry, S. Iswaran, said: “The country should deepen its international connections and improve the capability of its people and companies to adapt to new geopolitical and economic realities.”

Amongst the CFE’s recommendations were to:

• Deepen and diversify global connections by strengthening trade cooperation in the ASEAN region and solidifying ties with big markets such as India and China;
• Support the Singapore Stock Exchange in becoming a globally favoured listing venue for technology, pharmaceutical and life science companies;
• Strengthen companies’ ability to scale up and innovate by simplifying regulatory frameworks, promoting private financing and encouraging the use of the jurisdiction as a base for private equity firms;
• Review regulatory and tax frameworks to ensure they remain progressive, fair and pro-growth;
• Build digital capabilities to make Singapore a global leader in FinTech.

Singapore Prime Minister, Lee Hsien Loong confirmed that the government has accepted the proposals from the CFE and noted: “The global economy is facing great uncertainty and change. But amidst the disruption there will be opportunities.To take advantage of these, Singapore must remain open to trade, people and ideas, innovate and strengthen our capabilities. We need a pragmatic approach to implementing these strategies. Some hard decisions will be necessary, but I am confident we will take Singapore to the next level.”

In an immediate follow-up to the CFE report, the Monetary Authority of Singapore (MAS) has issued a public consultation paper on easing the regulatory regime for venture capital fund managers. It is proposing that VC managers should no longer be subject to general capital requirements that apply to fund managers, should no longer be required to lodge audited financial statements with MAS and that the directors of VC managers should no longer be required to have five years’ experience in fund management.

MAS has also confirmed that it will look to deepen the pool of private equity (PE) managers in Singapore in order to attract more capital for late-stage start-ups. Proposals could include loosening regulation and further tax incentives.

Sovereign’s corporate services expertise can assist VC and PE managers to establish business operations successfully in Singapore using the most beneficial structures. We also provide the administrative support to maximise opportunities and achieve long-term sustainability.

Hong Kong as a base for regional corporate headquarters

With over 4.3 billion people, Asia accounts for 60% of the world’s population. The demand for significant investment to develop emerging Asian economies and the potential of the burgeoning purchasing power of Asian consumers make it a critical market for growth-oriented businesses. The shift towards Asia is further necessitated by saturation and economic slowdown in developed markets.

However, Asia is not a homogenous market. It is a highly diverse region and multinationals face greater challenges in markets where they must deal with vastly different systems of government, uneven levels of development, disparate cultures, languages and time zones, highly variable infrastructure, inconsistent fiscal and legal systems and varying foreign ownership restrictions.

All this represents a significant challenge but according to a study by global advisory firm Willis Towers Watson, the percentage of Asia Pacific-headquartered companies in the Fortune Global 500 outnumbered those headquartered in Europe and North America the first time in 2012. In 2015, Asia Pacific headquartered companies accounted for 40% of the Fortune Global 500, while Europe- and North America-headquartered firms account for only 30% and 28% respectively.

Many multinationals expanding in the region choose to set up their regional headquarters in either Hong Kong or Singapore to manage and oversee their Asian operations. Both offer business-friendly governments, excellent infrastructure, highly skilled workforces, a high standard of living and relatively low taxes. Both occupy top five rankings in the World Bank’s ease of doing business rankings out of 190 countries worldwide.

Hong Kong is one of the world’s leading business and financial centres and has long served as a major commercial hub in the Asian region. As of 2016, the Census and Statistics Department recorded 1,379 multinationals that have established regional headquarters in the special administrative region (SAR). Of these, some 20% (286) have a US parent company, 17% Japanese and 9% are from the UK.

This is a well-trodden path with many good reasons for doing so. In the World Bank ranking Hong Kong rates especially highly in the ‘Starting a Business’, ‘Protecting Minority Investors’ and ‘Paying Taxes’ categories. Also noted are the comparative speed and cost of legal proceedings in the territory versus the average for the region. Likewise, the World Justice Project ranks Hong Kong at 16 for rule of law out of 113 countries worldwide, rating it especially well for ‘Absence of Corruption’, ‘Order & Security’ and ‘Regulatory Enforcement’.

These strengths, when combined with HK’s territorial source of taxation (income earned from outside Hong Kong is not subject to local taxation) and its growing network of tax treaties, make it a highly advantageous base for companies with operations in the Asia region. However, one of HK’s greatest assets as a regional headquarters’ platform is often completely overlooked – its corporate pensions’ infrastructure.

Employee benefit packages are a vital consideration for any employer that wishes to attract and retain the best talent, as well as maintain a loyal and committed workforce. One of the main components of any employee benefit package is corporate pensions or savings provision. Employees from most backgrounds now consider retirement provision to be a key part of their remuneration package.

Companies undertaking specialist activities or operating from regions such as Asia invariably recruit a high proportion of their workforce from overseas. The relocation, orientation and training of expatriate employees require considerable investment from the employer, making staff retention all the more important.

Hong Kong-sited ORSO Exempted schemes can therefore be highly beneficial for non-resident companies. They can also be beneficial for those using Hong Kong as a platform for regional operations because companies that are part of the same group may apply to become “Participating Employers”. This extends the potential membership to all the eligible employees and directors of these group companies and can be particularly important for groups with operations or employees based in less stable countries.