Financial Secretary Henry Tang is keen to see Hong Kong maintain its status as an international financial centre. His 2005-06 Budget includes several proposals aimed at helping it hone its competitive edge - including abolishing estate duty.

"One of our major tasks is to provide an effective, transparent and fair regulatory regime on a par with international standards," Mr Tang said in his Budget address to the Legislative Council today.

He noted the Legislative Council had enacted the Deposit Protection Scheme Ordinance last year. It will improve the protection of deposits in Hong Kong and is expected to start in 2006.

A bill to be introduced in LegCo next month would implement new capital adequacy standards for banks issued by the Basel Committee on Banking Supervision, known as Basel II.

"These standards will strengthen the risk-management capability and stability of our banking sector and stand it in good stead for the further liberalisation of the Mainland's financial markets," Mr Tang said.

Corporate governance will also be enhanced to attract more local and international investors.

"Later this year, we will introduce two bills which will give statutory backing to major listing requirements and establish the Financial Reporting Council to strengthen the supervision of auditors and raise the quality of financial reporting by listed companies," he said. 

Hong Kong Exchanges & Clearing Limited in January introduced a new Code on Corporate Governance Practices aimed at implementing improvement measures in the three areas of directors' and board practices, protection of shareholders' rights and corporate reporting and disclosures.

The Government also consulted interested parties and the public on the abolition of estate duty, and the majority view tends to support abolition.

"Those who oppose abolition consider that estate duty, which is imposed on the better-off in society, is in line with the principle of affordability. They are also of the view that this duty is not an important consideration in investment decisions. Some are even concerned about the possible impact of abolition on certain professions. They have pointed out that, if the duty is abolished, the Government will lose a stable source of income and suffer a reduction in revenue, and the fiscal deficit will be aggravated," he said.

Those in support of abolition take the view that, although the tax is targeted at the better-off, in practice they may avoid it through legal means. Of the dutiable cases the Inland Revenue Department processed last year, about 70% involved assets with an estate value, after exemptions, below $20 million. 

Assessing estate duty takes time, and assets may be frozen during the assessment period, causing cash-flow problems. In settling estate duty, some enterprises may have to sell their assets to raise cash and as a result encounter operating difficulties.

While Hong Kong is looking at unprecedented opportunities in the global financial services sector, it faces increasing competition, Mr Tang said.

"A number of countries in the region - including India, Malaysia, New Zealand and Australia - have abolished estate duty over the past 20 years. In Europe, Italy and Sweden have also abolished the tax. One of the main reasons some countries abolish estate duty is the adverse impact it has on SMEs."

Abolishing the estate duty will make Hong Kong more attractive to investors, he said.

"Many industry members believe abolition will encourage more people to hold assets in Hong Kong through a corporate vehicle or trust. More overseas companies and professionals will come here, and this will help develop our asset management services, create more employment opportunities, and in turn make Hong Kong more competitive as an international financial centre."

As a result, trading in the financial market will also become more active, and contribute additional government revenue from stamp duty and other taxes. After weighing these factors, he proposes to abolish the tax and will introduce the relevant bill into LegCo as soon as possible.

"The financial services industry is a high value-added industry and very important to our economy: its direct contribution is 13% of GDP. The industry also fosters growth in a number of professional services, and this in turn becomes a strong driving force for other sectors, such as real estate and the consumer market," he said.

 Bond market poised for growth

Because most fund-raising activities in Hong Kong are now carried out through banking facilities and the stock market, Mr Tang said the bond market has ample room to develop.

"Last May, we issued a $6 billion securitisation bond for the government toll tunnels and bridges - the largest-ever securitisation bond offering in Hong Kong, and the first made available to retail investors. It also ranked among the largest in the region and received 17 financial services awards," he said.

Last July, the Government launched its $20 billion global bond offering, the largest dual-currency and multi-tranche offering from the region, available to both retail and institutional investors.

"It also generated the largest subscription and issue amounts for a retail bond offering in Hong Kong, and was oversubscribed by local and international investors alike. This opened a new chapter for Hong Kong in the international capital markets and also won awards," he said.

"We will consider whether to issue additional bonds in future, having regard to our objective of promoting the local bond market and the Government's financial position. I hope that, as our bond market develops, more corporations and investors from the Mainland and overseas will make use of our market to meet their funding and investment needs. I also look forward to the issuance in Hong Kong of more bonds denominated in various currencies."

Last year, Hong Kong became the first place outside the Mainland to conduct personal renminbi business, including deposit-taking, currency exchange, remittances and credit cards, Mr Tang said. Now, 38 Hong Kong retail banks - nearly all of them - provide the first three of these services.

At the end of January, total renminbi deposits in Hong Kong exceeded RMB13.1 billion, he said. The cumulative value of transactions by Mainland visitors using renminbi cards to spend and make cash withdrawals in Hong Kong exceeds $2.9 billion, or $3,000 per transaction on average. Some Hong Kong banks also started issuing renminbi cards in late April 2004 to foster Hong Kong residents' cross-boundary spending.

Though the range of renminbi services now available in Hong Kong is limited, Mr Tang outlined three strategic directions to bolster the development of renminbi business:

* exploring the diversification of the renminbi assets and liabilities of Hong Kong banks,  particularly on the liability side, through diversification to non-residents and non-individuals of deposits now restricted to resident individuals;

* exploring the provision of appropriate renminbi banking services for trade and other current account transactions between Hong Kong and the Mainland; and

* exploring the feasibility of establishing a renminbi debt-issuance mechanism in Hong Kong. 

"These proposals, if implemented, will facilitate the channelling of renminbi back to the Mainland and the diversification of renminbi assets. The further development of renminbi business in Hong Kong needs to be compatible with the process of financial liberalisation in the Mainland," he said.

In 2003, total assets of our Hong Kong's fund management business amounted to $2.95 trillion, of which $1.86 trillion was sourced from overseas investors and accounted for 63% of the total.

"The potential to expand our asset-management business remains considerable, given the vast pension scheme assets held by banks, fund managers and insurance companies in Asia, coupled with the continued growth of personal savings in the Mainland," Mr Tang said.

The Government recently consulted the industry on proposals to exempt offshore funds from profits tax and will shortly introduce the necessary legislative amendments into LegCo, he said.

Hong Kong's development as an international financial centre during the past year was most encouraging. It ranked first in Asia and third in the world last year in terms of capital raised, with total Initial Public Offering and post-IPO equity funds reaching $265 billion, outperforming the London and Tokyo Stock Exchanges.

Market capitalisation also hit a new high of about $6.65 trillion, nearly 50% above the pre-1997 level. In Hong Kong, Mainland enterprises have raised more than $900 billion since the introduction of H-shares in 1993.

As at the end of last year, 304 Mainland enterprises had listed here, 22% cent more than in 2003. They represent more than a quarter of the total number of listed companies in Hong Kong, and accounted for about 30% of our total stock market capitalisation. 

Trading in their shares last year constituted half of our total market turnover. In 2004 alone, 44 Mainland enterprises raised funds through listing in Hong Kong. The vast majority of Mainland enterprises listed outside the Mainland are quoted on our stock exchange. Of those listed in Hong Kong, only a minority are also listed in other overseas markets, and more than 70% of their trading is conducted in Hong Kong.