Money: Investing in Hong Kong

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HONG KONG—This city-state at Communist China's doorstep didn't get to be one of the world's fastest-growing financial centers by accident. Everyone from the humblest mainland refugee to the world's largest companies and banks has been attracted to this British island colony because of its investment opportunities.

Hong Kong's reputation as an outpost of laissez-faire is no longer fully deserved, as the government insinuates itself more and more into the economy. But the markets here are still far freer than almost anywhere else in the world. What's more, its lack of trade restrictions and foreign exchange controls and its low personal taxes, taken together with its good communications, energetic outlook, and excellent harbor, make Hong Kong a natural magnet for commerce, finance, and investment.

As the world grows smaller and investing becomes, by necessity, less provincial, Hong Kong has a lot to offer the internationally oriented American investor. Whether you're interested in gold, agricultural commodity futures, foreign securities, gemstones, real estate, or just a high-yielding foreign bank account, Hong Kong can fill the bill. It has 115 banks, scores of "finance companies," four stock exchanges, two gold exchanges, futures contracts in three other commodities (cotton, sugar, and soybeans), and, starting soon, a diamond exchange.

Though gold is in the doldrums at the moment, it is in the precious metals that Hong Kong has most clearly made its mark, becoming the world's third most important gold-trading center. And for good reason. For one thing, the Chinese have always had a healthy respect for the yellow metal, as indicated by the fact that the Hong Kong Gold and Silver Exchange Society has been trading gold taels (gold wafers of 1.193 ounces) for 70 years.

More important is Hong Kong's fortuitous spot on the world's time clock. Aside from Sydney, Australia, whose market is strictly local, no market begins trading earlier than Hong Kong's. When it's 10:00 A.M. in Hong Kong, it's 3:00 A.M. in London and 10:00 P.M. in New York.

But that's not all. In addition to the traditional ethnic "society," where 5-tael bars are traded in terms of Hong Kong dollars, there are now the westernized gold futures contracts of the Hong Kong Commodity Exchange. In addition, Hong Kong's brokers have invented contracts based on both the New York Comex and the London Metal Exchange. These "loco-Comex" and "loco-London" contracts can be traded for a slight premium after those two foreign exchanges are closed or before they open.

None of these markets have limit price moves. If a trader gets locked in to a short or long position on New York because the price has moved up or down "the limit," he can almost always take an offsetting position in Hong Kong, where trading takes place virtually around the clock. Finally, taxes on profits hit a maximum of 15 percent, at least as far as the Hong Kong government is concerned.

Hong Kong's stock exchanges, which are soon to merge, under a government scheme, into one large exchange, have been a rollercoaster of excitement. Anyone who followed the market, picked out a half-dozen of the leading stocks, bought in at a low point, and then sold when they again reached the top of their trading range could have done very well in the past few months.

The Hang Seng Index (the Hong Kong equivalent of the Dow Jones) has soared over the past few years, reaching a peak of around 1600. Recently, in a matter of a few days, it rose 130 points and then fell back 85 points.

Most of the major US brokers have offices in Hong Kong, as do most of the rest of the world's leading brokers. So taking a position is no problem.

You probably wouldn't want to do so through a US broker, but trading through a nominee is a common and accepted practice. The adventurous American can easily establish a company in Hong Kong or have someone act as his nominee and trade shares in Hong Kong anonymously through a broker, says Tom O'Donnel, partner in First Financial Services, a firm that helps foreigners place funds in Asia.

Doing that would probably entail having a bank account in Hong Kong to avoid problems with transferring funds. Even if you're not interested in that gambit, though, there are other advantages to having a bank account in Hong Kong. There are limitations, too. Basically, only accounts in US dollars and Hong Kong dollars (roughly five Hong Kong per one US dollar) are available. And banks are restricted, as in the United States, from performing brokerage services themselves—unlike, say, Swiss banks.

It is often possible, however, to earn higher rates of interest in Hong Kong. There are no Regulation Q interest ceilings or Fed reserve requirements. So even a simple "statement account," a kind of interest-paying checking account like the new NOW accounts, outstrips the allowable earnings on most US certificates of deposit.

And the Hong Kong certificates of deposit are even more competitive, fully in line with Eurodollar rates. The "finance companies," or "deposit-taking companies," which are barred from offering checking accounts, pay even more than the banks. To take a recent example, while the three-month Eurocurrency deposit rate was 16 15/16, the Hong Kong office of Chase Manhattan was paying, for much smaller deposits, 15.375 percent; Bancom International, Ltd., a finance company, was paying a full 17 percent; and another finance company, Asia Alliance, was paying 17.75 percent. But, advises O'Donnel, "You have to look at the strength of the company. Some companies pay extremely high rates and I wouldn't touch them with a 10-foot pole." He suggests using foreign banks' branches in Hong Kong, such as the Bank of Nova Scotia or Banc Nacional du Paris.

The Hong Kong government has a 15 percent withholding tax on interest, but it does not apply to US dollar accounts. Any US citizen's foreign bank account is supposed to be reported to the US Treasury, but "if you don't want to report the interest, the Hong Kong banks won't," notes O'Donnel.

In July, the Hong Kong Diamond Exchange will take its place alongside the colony's other markets and services. Already a major diamond-trading center, Hong Kong can be expected to grow in status with this new exchange.

Although the exchange will not be open to public participation, it will be simple enough for investors to broker their stones on the exchange via a diamond dealer. Diamond dealers and principals in the forthcoming exchange claim that Hong Kong is a much cheaper place to buy diamonds. Not only are there no import or export duties, they point out, but there is no sales tax and a lower rate of income taxes upon resale.

Furthermore, according to exchange president Warren Leung, Hong Kong dealers (typically stores that sell unset investment-grade stones along with jewelry) operate on smaller profit margins. Leung estimates that the typical dealer's profit margin would be "three percent, more or less. In other countries I don't think they trade on such narrow margins." Even after the retailer tacks on his profit, Leung estimates that the final buyer would pay "below 10 percent above the manufacturing (cutting) cost."

Such claims should be taken with a grain of salt, but they are worth further checking out, especially if you plan to make a trip to this fascinating, curiously beautiful city.

Steve Beckner is a free-lance financial writer, the editor of Deaknews, and the author of The Hard Money Book.

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