Hong Kong Deepens Ties with Middle Eastern Investors, Faces Crypto Challenges

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The year 2023 witnessed a growing partnership between Middle Eastern investors and Hong Kong, propelled by strategic visits and increased interest in the SAR as a gateway to mainland Chinese opportunities. While the Belt and Road Summit underscored investment ties between Hong Kong and the Middle East, challenges persist, notably in the crypto realm.

Despite early turbulence for the Hong Kong Stock Exchange’s Hang Seng Index, Middle Eastern funds are expected to play a more active role in Hong Kong’s stock market in 2024. Sovereign wealth funds from Saudi Arabia, Abu Dhabi, and Qatar have notably invested in high-quality Chinese companies’ listings. Sectors like renewable energy and advanced manufacturing are drawing increased attention, with technology-focused industries like semiconductors and AI also on the radar.

The shift towards Hong Kong by Middle Eastern investors is seen as a response to uncertainties in the US market, making Greater China an appealing alternative. The departure of traditional US investors, driven by ongoing geopolitical tensions, positions Middle Eastern funds as crucial funding sources for Chinese companies.

In the crypto space, Hong Kong has become a focal point for Middle Eastern investors. The progressive regulatory environment in the SAR has attracted funds seeking a secure and regulated space for crypto-related activities. The city’s “one country, two systems” model, providing clear digital asset regulatory frameworks, stands out.

The Securities and Futures Commission’s (SFC) licensing regime for crypto exchanges, implemented in June, has contributed to institutional investors’ confidence. The regime ensures a regulated environment for investment activities related to digital assets. The absence of such regulation in mainland China adds to Hong Kong’s appeal.

However, challenges persist in the crypto regulatory landscape. The SFC’s 2018 standards categorized virtual assets’ management under its regulatory scope based on their classification as securities or futures contracts. Bitcoin and Ethereum, considered commodities in the US, fall into a regulatory gray area in Hong Kong.

Taxation further complicates the situation. Cryptocurrencies, excluded from Hong Kong’s tax regime as an exempted asset class, pose hurdles to the city’s development as a preferred jurisdiction for crypto funds. The current Unified Fund Exemption (UFE) regime, introduced in 2019, favors funds investing in traditional assets, putting crypto funds at a disadvantage.

Interest in establishing Hong Kong-incorporated crypto funds remains low, as offshore structures are preferred due to tax considerations. Ongoing discussions with regulators and the tax authority aim to revamp the tax regime around the asset management industry, with consultations expected in 2024.

A crucial factor for Hong Kong’s attractiveness in the crypto space lies in clarifications from the tax department on whether crypto qualifies for tax exemptions. Establishing a licensing regime for crypto exchanges in Hong Kong could further enhance the city’s appeal, making it an attractive hub for both fund structures and fund management activities in the crypto sector.