2023 marked a year of increasing ties between Middle Eastern investors and the Hong Kong market.
Following John Lee, chief executive of the Special Administrative Region (SAR), and his delegation’s month-long visit to the Gulf region in February 2023, more corporates and investors have shown interest in the city, in part as a gateway to mainland Chinese opportunities.
The Belt and Road Summit, held by Hong Kong’s government and Trade and Development Council in September, for the first time incorporated a dedicated session to the Middle East, detailing investment ties and opportunities between the two markets.
Capital markets
Despite Hong Kong Stock Exchange’s (HKEX) benchmarking Hang Seng Index having a very bumpy ride at the beginning of the year, Middle Eastern funds are expected to show heightened activity in the SAR’s stock market this year, said George Chan, global initial public offering (IPO) leader at EY based in Shanghai.
“Sovereign wealth funds (SWFs) hailing from Saudi Arabia, Abu Dhabi, and Qatar have notably taken part as seed or cornerstone investors in the listings of some high-quality Chinese companies on the Hong Kong market in 2023,” he told FinanceAsia.
Renewable energy and advanced manufacturing are among the sectors Middle Eastern investors are increasingly looking at, he added. The country’s high-tech sectors, especially semiconductors, new energy vehicles, and artificial intelligence (AI), are also on their target lists.
“Traditionally, Middle Eastern investors have been focusing more on the US market, but in view of growing uncertainties, they would like to also explore other markets, for instance Greater China, which they believe there are good investment targets,” said Yang Xu, partner at Tiger Brokers.
Xu explained that the increasing interests come mainly from SWFs and other institutional investors in areas such as healthcare, technology, renewable energy, logistics and digital infrastructure. Their investment strategies tend to be diversified in terms of allocation.
With the exit of traditional US investors, largely due to the ongoing political tension between the world’s two great powers, Middle Eastern funds emerged as a key source of funding for Chinese companies.
A stronger influx of funds from the Middle East into China’s onshore market is anticipated, said Chan. With stock connect schemes and the Chinese government stepping up measures to restore its capital markets, Middle Eastern money would provide great funding sources through Hong Kong.
“Middle Eastern investors, recognising the lower valuations and potential benefits from the Chinese government's stimulus efforts, are keen to allocate more resources to China,” he noted.
“It’s a long-term strategy of Middle East investors to increase their exposure to non-dollar assets.”
The ties also work the other way. In November 2023, the HKEX announced Apac’s first Saudi Arabian ETF offering, the CSOP Saudi Arabia ETF, allowing Apac’s investors access to Saudi Arabia’s capital markets.
Crypto ties
The crypto world has also witnessed a wave of attention from Middle Eastern investors.
Matt Long, Apac general manager at crypto platform FalconX, told FA that the team has seen a trend of Middle Eastern funds flowing back to Hong Kong in the past year, attributing this to a “progressive regulatory regime” in the SAR.
“Feedback from fund managers is that this will be a thematic trend that will last at least throughout this year,” he said.
He added that from a crypto perspective, what Hong Kong has to offer is a strong demonstration of “one country, two systems”, as the city is home to a clear digital asset regulatory framework, while such investment activities are strictly banned in the mainland.
He cited the Securities and Futures Commission’s (SFC) licensing regime for crypto exchanges that was put in place last June, noting that any positive evolution would boost institutional investors’ confidence, as “they want the certainty of being able to invest through regulated funds in regulated markets”.
Crypto regulation
Cryptocurrencies, including Bitcoin and Ethereum, are regulated as commodities by the Securities and Exchange Commission (SEC) in the US, while in Hong Kong, there remains controversies around the nature of what the regulators called “virtual assets”.
In a set of 2018 standards, the SFC ruled out that the management of portfolios that invest in virtual assets “may or may not” fall under its regulatory scope, depending on whether the assets could be classified as securities’ or futures’ contracts under the Securities and Futures Ordinance (SFO).
Under the SFO, the SFC states that it regulates corporations licensed either for Type 9 regulated activity, which covers asset management, or Type 1 regulated activity, dealing in securities.
It raised Bitcoin and Ethereum as examples, saying that as these don’t amount to either securities or futures contracts, a registration for Type 9 activities is therefore not required for fund managers.
Adding to the uncertainty in licensing processes is tax. Gaven Cheong, head of investment funds at PwC legal, Tiang & Partners, told FA the fact that crypto is excluded from Hong Kong’s tax regime as an exempted asset class remains a hurdle to the development of the city as a jurisdiction of choice for crypto funds and crypto fund management.
“To qualify for Hong Kong’s current Unified Fund Exemption (UFE) regime, a fund’s portfolio needs to include assets amounting to securities as defined by the SFC,” he explained.
The UFE Regime was introduced in 2019 and exempted the Hong Kong profits tax regardless of a fund’s domicile or jurisdiction of incorporation, as long as the transactions are carried out by a SFC regulated or registered organisation. This puts funds investing in crypto assets in an unfavourable position, as it is subject to taxations.
Consequently, interest in setting up Hong Kong-incorporated crypto funds remains low, while offshore structures are preferred by Hong Kong-based managers through offshore management arms.
Discussions are ongoing, Cheong said. Several consultations with regulators and the tax authority in regard to revamping the tax regime around the asset management industry, are expected in 2024.
The key still lies in a clarification by the tax department on whether crypto qualifies for tax exemptions, tracing back to an official definition of such assets.
Cheong cited the possibility of an established licensing regime for crypto exchanges in Hong Kong, saying that if the tax regime could be revised to cover crypto assets, the city would become a more attractive hub for both fund structures as well as fund management activity.
