September 28, 2020

Letter from Hong Kong – A Tale of Two Cities

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“For a city without any natural resources, a non competitive immigration policy is a policy which contributes to our economic non competitiveness.  This is a fight we can ill afford to lose”.

This was not, as it well might have been, a quote by the Chief Immigration Officer of the Immigration Department of the Cayman Islands, rather an article in the South China Morning Post which caught my eye written by Mr Tien Puk-Sin, a Hong Kong deputy of the National People’s Congress and Vice Chairman of the New People’s Party. Comment is often made by leading Cayman politicians of the desire to emulate in the Cayman Islands the evident and meteoric success of the financial service industries in Hong Kong and Singapore. Indeed, as I sit here in Hong Kong observing the flow of businessmen heading to 8am meetings, and reflect that all of the dozens of flights to and from London daily are booked solid for the next two weeks, what is evident is the alarming disconnect in the mind of the Cayman Islands policy makers between that which is actually required to support a vibrant financial services industry that generates both employment opportunity and public and private sector revenues on the one hand and, on the other hand, what the Cayman Islands actually offers. The gap in this essential understanding is laid bare by a brief analysis of the Hong Kong immigration regime. Mr Tien Puk-Sin severely criticises the fact that the under the Hong Kong preferred investor scheme, immigrants are required to invest as much as US$1 million before being granted an automatic 7 year visa after which, application may by made for permanent residence. This, he says, is too high a bar and argues for a lower threshold of around US$250,000 provided the investor creates 5 jobs. Further, he says, the Singapore immigration model is far more attractive than the Hong Kong model. Any foreigner in Singapore who holds a work visa for a professional or managerial job may automatically apply for permanent residency. Mr Tien Puk-Sin continues by suggesting that tax free incentives be offered and analyses the Canadian model, by way of comparison, where assets paid into a trust enjoy tax free status for a five year period. Whilst tax free incentives are not of direct relevance in the Cayman Islands, given our indirect tax model, what screams off the page is the intense scrutiny and debate on the subject of improving incentives for professional and high net worth investors to become resident in Hong Kong and that is not withstanding that Hong Kong boasts a population of over 7 million people in an area of 426 square miles. The Vice Premier too referred recently to “human talent” being the most important resource for Hong Kong at a recent speech at the University of Hong Kong.

In Hong Kong, a mandatory seven year residence is required before application can be made for permanent residence. “After all” says Mr Tien Puk-Sin, “we are looking for people who are committed to Hong Kong for the long term, not those who are looking to obtain a permanent identity card and then leave.” Nothing could be further from the approach of the Cayman Islands immigration regime with its delays, uncertainties and the intransigence of the process and the threatened expulsion after a seven-year period.

Two points are undeniable. Firstly, by virtue of a restrictive roll over policy and uncertain implementation, the Cayman financial services industry remains bonded to the high transactional volume low profit model of the ‘90s, which did and does nothing to create sufficient job opportunity in the Islands to generate adequate substantial presence. Worse yet, that financial model is no longer relevant. Transactional volume is and will continue to be lower which means that public and adding value to each and every transaction can only boost private sector revenues. Adding value in this manner requires a higher quality financial service professional but one who would find the current Cayman Islands policy with respect to immigration wholly unattractive.

Secondly, whilst politicians and leaders talk of modeling the Cayman Islands on the Hong Kong and Singapore financial services model, there is not the slightest understanding demonstrated of the fundamental changes needed in the Cayman Islands to achieve that outcome. The time when a financial services industry could be developed on hot air is long past, if it existed at all. Specific and radical surgery is required to the Cayman Islands immigration regime and its implementation if substantial presence is to be improved and job opportunities created.

But nor can the Cayman Islands financial industry hope to maintain the status quo. It is in the nature of all economies that they will either develop and expand, or contract. The trends here are concerning. In addition to the loss of 800 jobs in the fund administration industry, one major local law firm has nearly as many attorneys sitting in its Dublin office as they do in the Cayman Islands with a further resulting loss of job opportunities for young Caymanian professionals and a further loss of revenues in the public and private sector as a consequence. Nor do the references to the Singapore and Hong Kong economic models make sense on the metrics. Hong Kong has 7650 skyscrapers; more than New York. But you could take the entire financial services industry in the Cayman Islands and put it inside 30 floors of one 118-storey skyscraper office building in Hong Kong. Hardly a thought that supports the suggestion that the Cayman Islands is the fifth largest financial centre in the world.

Further, the negative publicity that continues to attach to the Cayman Islands financial services industry and the lack of any effective response has taken its toll on Cayman’s desirability as an offshore financial centre, as has the self inflicted damage occasioned by failing to respond to the FT survey. If we add to that, the self inflicted damage caused by an inappropriate immigration policy, we arrive at a situation in which Government revenues cannot be bolstered by further fee increases, will not be boosted by higher transactional volume and cannot be improved by adding value. If comparisons are to be made to the Hong Kong and Singapore model, some fundamental understanding for the reasons for the success of those jurisdictions needs to be arrived at and implemented in the Cayman Islands sooner rather than later.

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