According to a report by Bloomberg, the Chinese government is assembling a series of specialized teams to track wealthy individuals and collect tax from them. These teams reportedly comprise local officials, tax audit specialists, and regulators, with the aim of countering the increasingly sophisticated use of lawyers, tax advisers, and consultants by the ultra rich. 1101
At the same time, China's tax authorities have revised rules governing offshore trusts and launched their largest tax recovery campaign against Hong Kong businesses in years, turning their attention to more than US$1.7 trillion (HK$13.26 trillion) in assets held in Hong Kong by Chinese residents.
The report has been largely overlooked by many Hong Kong analysts. Yet its implications for the city's financial markets could be significant and potentially negative. Actions by China's tax authorities could lead to a substantial reduction in funds held in Hong Kong, with potential repercussions for the Hong Kong dollar, interest rates, and the stock market.
Consider the situation from the perspective of Chinese residents who hold assets in Hong Kong and are now facing increased scrutiny from the Chinese authorities. Would they consider moving some of these assets out? This is a question the market should not ignore.
Over the past decade, Hong Kong's banking-system balance has already declined sharply for a variety of reasons, falling from more than HK$400 billion at its peak in 2016 to less than HK$60 billion today. Among the major factors was the social unrest in 2019 and the series of events that followed, which contributed to sustained capital outflows and a significant reduction in the banking-system balance.
Moreover, it is not only the banking-system balance that has fallen substantially over the past decade. The Hang Seng Index also appears to have been affected by persistent capital outflows. It remains almost 10,000 points below its 2018 peak, while major global markets have continued to reach new highs, and has therefore significantly underperformed among global equity markets in recent years.
Against this backdrop, if China's tax recovery campaign ultimately causes Chinese wealthy individuals to move assets elsewhere, or to repatriate them to the mainland, Hong Kong's banking-system balance could come under further downward pressure. If the balance were to fall below HK$20 billion, Hong Kong dollar interest rates would inevitably face upward pressure, potentially adding further pressure to both the Hong Kong stock market and the property market.
It would be prudent for investors to not underestimate the potential impact of China's tax-enforcement campaign on Hong Kong's financial markets.
Andrew Wong is a veteran independent commentator
