Hong Kong’s de facto central bank will begin choosing the private equity funds that will help manage the city’s unprecedented new HK$22 billion (US$2.8 billion) investment vehicle by the second half of the year, the financial secretary has told the Post.
In an exclusive interview, Paul Chan Mo-po updated the progress in setting up the Hong Kong Growth Portfolio, which will see government-formed committees oversee the fund’s investments and governance and the Hong Kong Monetary Authority select fund managers.
“Instead of having the government evaluating projects one by one, we will partner with private equity funds as general partners and we will be a limited partner,” he said on Thursday. “The selection process will be open and transparent.”
He added that it was still unknown how many fund managers would be selected.
Floated in his February budget speech, the unprecedented investment vehicle will use 10 per cent of the government’s HK$224.5 billion Future Fund to sow the seed for future growth.
The new portfolio, similar in nature to Singapore’s sovereign wealth fund Temasek, will invest in Hong Kong-specific projects aimed at lifting the city’s competitiveness in financial services, commerce, aviation, logistics and innovation.
“We will set the direction of investments, which is about more than making a return,” he said. “It has to help invest in Hong Kong’s economic future.”
This is the first time the government has formed a private equity fund within its reserve system.
The Future Fund, which was set up in 2016 to invest the city’s fiscal reserves, is managed under the monetary authority’s Exchange Fund, which exists primarily to defend the Hong Kong-US dollar peg against short-sellers and does not invest in local assets.
In its initial mandate, the Hong Kong Growth Portfolio will refrain from investing in real estate companies or projects but include innovation and technology investments with potential high growth and returns.
The portfolio’s investment returns, like those of the Future Fund, are required to be higher than that of the Exchange Fund. The Future Fund’s composite rate of return stood at 4.5 per cent in 2017, 9.6 per cent in 2018 and 6.1 per cent in 2019.
In the same interview, Chan also revealed that the government had formed a 14-member advisory panel to review the city’s tax regime in relation to the digital economy.
The move ties into the so-called BEPS 2.0 initiative, an attempt by the 37-member Organisation for Economic Co-operation and Development (OECD) to create a global minimum tax that would address the issue of multinational digital firms “shifting” profits to jurisdictions with lower tax rates, thus avoiding tax at home.
Chan said the rapid development of the digital economy presented unique taxation challenges.
“Overseas markets are competing with lower taxes and are talking about a minimum effective tax,” he said. “This will affect Hong Kong’s attractiveness, because our tax rates are low and we are based on territorial taxes.”
The OECD proposal would grant jurisdictions the right to tax the profits of certain businesses even if those companies had no physical presence there, forcing digital firms, including giants like Amazon and Facebook, to pay taxes in the countries where they make their money.
The OECD is hoping to reach a consensus solution by the end of 2020.
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