Data on the investment relationship between New Zealand and Hong Kong are, like most bilateral data, hard to come by. Statistics New Zealand provide the information shown in Table 1, which has been available only since 1994 and relates only to direct investment (investment where control is intended, as distinct from portfolio investment or debt).
It shows a record that is remarkable both for its inconsistency and for the frequently negative investment flows. The end result – the stock of investment of one country in the other – shows Hong Kong NZ$1.65 billion ahead of New Zealand at the end of March 2000. That is because Hong Kong had direct investments worth $1.067 billion in New Zealand, but New Zealand had a negative direct investment of $583 million in Hong Kong.
Table 1
|
|
1994 |
1995 |
1996 |
1997 |
1998 |
1999 |
2000 |
|
Net Flow of NZ Direct Investment to HK |
434 |
774 |
30 |
-488 |
-543 |
-706 |
117 |
|
Net Flow of HK Direct Investment to NZ |
-56 |
375 |
-512 |
-63 |
720 |
-95 |
179 |
|
Total NZ Direct Investment in HK |
-743 |
175 |
-112 |
-678 |
-1,086 |
-1,632 |
-583 |
|
Total HK Direct Investment in NZ |
1,153 |
1,612 |
1,439 |
1,355 |
1,117 |
875 |
1,067 |
(Source: Statistics New Zealand – Direct Investment Statistics by Country and Country Groupings, March 1998, March 1999; New Zealand's International Investment Position, and Balance of Payments, to 31 March 2000
The negative flows and stock are unusual: the only other country in which New Zealand has a significant negative investment stock is the Netherlands. Given that the negative position with Hong Kong seems to be long-term it must reflect the nature of the investment. It is largely because companies based in New Zealand (not necessarily New Zealand owned ones) are setting up Hong Kong subsidiaries and using them as a channel to borrow funds. We go into this in more detail in the next section.
New Zealand investment in Hong Kong
Statistics New Zealand provided the data in Table 2, which breaks down the direct investment data further for the years 1998-2000. Looking first at the investment stock (total New Zealand Direct Investment in Hong Kong), the latest data, for 31 March 2000, shows that New Zealand-based companies have an equity investment of $5.2 billion in Hong Kong, but owe those subsidiaries $5.8 billion in other long-term borrowing, resulting in the $583 million negative investment stock position. In 1998 and 1999, the position was similar, but in changing proportions. In 1998, New Zealand equity in Hong Kong amounted to only $3.1 billion and debt amounted to a liability of $4.0 billion; in 1999 equity had risen by almost $1 billion to $4.0 billion, but the debt had risen even faster, to $5.6 billion. Both equity and debt rose further in 2000, but all the debt was by then long-term.
Table 2
Net Flows of New Zealand Direct Investment into Hong Kong
|
|
1998 |
1999 |
2000 |
Equity Capital |
c |
c |
c |
Reinvested Earnings |
247 |
174 |
c |
Other Long-term Capital |
c |
c |
c |
Other Short-term Capital |
- |
-21 |
-2 |
Total Direct Investment Flow |
-543 |
-706 |
117 |
Years ended 31 March
NZ$million
Total New Zealand Direct Investment into Hong Kong
|
|
1998 |
1999 |
2000 |
Equity Capital |
3,087 |
4,004 |
5,216 |
Other Long-term Capital |
c |
c |
-5,799 |
Other Short-term Capital |
C |
c |
- |
Total Direct Investment Flow |
-1,086 |
-1832 |
-583 |
Symbols: C – confidential; “-” – nil, zero or too small to be expressed
Source: Statistics New Zealand, January 2001
Statistics New Zealand inform me that the majority of the (positive) $5.2 billion in equity does not belong to those owing the $5.8 billion. There are therefore two distinct types of investment taking place – one for more or less conventional investment purposes, and one simply to use Hong Kong as a base to borrow funds.
In regard to “conventional” investment, there is still much that is unexplained. $5.2 billion is a large amount of investment for New Zealand-based companies – equivalent to about half of the (net) investment in Australia, New Zealand's largest investment destination, for example (which was $10.4 billion at 31 March 20004 ), and considerably higher than the next largest, Canada ($2.8 billion at 31 March 2000). The main large “New Zealand” investments in Hong Kong are those owned by Brierley Investments Ltd (no longer a New Zealand company, but probably regarded as New Zealand based for at least some of these statistics), but these would not amount to $5.2 billion. It is therefore likely that, as will be seen below with much “investment in Hong Kong”, it is there only nominally, for tax and jurisdictional reasons, but in fact represents investment elsewhere, probably in China and elsewhere in Asia.
T
urning to those New Zealand-based investors using Hong Kong as a base to borrow funds, it seems likely from the pattern of data which Statistics New Zealand could not release because of confidentiality, that it is a very few companies that are involved in borrowing in this way from Hong Kong.
The overall pattern would therefore suggest that much New Zealand investment in Hong Kong is not productive for Hong Kong. Indeed, Hong Kong deliberately encourages such behaviour.
It should also be borne in mind that “New Zealand” investment represents investment by companies with a legal presence in New Zealand. They are not necessarily New Zealand owned, and the proceeds of those investments may never be remitted to New Zealand. Brierley Investments Ltd (BIL) has already been cited as an example. It is largely overseas owned (83% overseas owned as of October 2000 according to the Overseas Investment Commission, registered in Bermuda, headquartered in Singapore, and controlled by Singapore/Malaysian/Indonesian interests) and has significant Hong Kong investments. However those investments would have been counted as “New Zealand” investments in Hong Kong at least until it moved its registration to Bermuda in 1999, and perhaps beyond that if they were held by one of the BIL's large number of New Zealand-registered shelf companies.
Hong Kong investment in New Zealand
According to Statistics New Zealand, total Hong Kong investment in New Zealand reached a peak in 1996 at $1.6 billion and reduced to not much more than half that in 1999: $857 million. It rose again by $192 million in 2000, but is still only two-thirds (66%) of its peak. The flows indicate disinvestment in 1996 (over half a billion dollars), 1997, and 1999. Some of this is presumably due to the 1997 financial crisis in Asia, but the trend began before that.
However a startlingly different picture is given by the Hong Kong Government's Census and Statistics Department (HKCSD). In March 2000, it published statistics which show Hong Kong's full investment position for the first time. Only those for 1998 are available. Those relating to New Zealand are summarized in Table 3. Note that data on outward investment only (that is, outward from Hong Kong) are available, for reasons discussed below.
Notable is the huge discrepancy between the Hong Kong and New Zealand official data for Hong Kong investment stock in New Zealand in 1998: NZ$9.2 billion versus NZ$1.1 billion respectively. Statistics New Zealand queried the discrepancy with HKCSD when I drew it to their attention because it is almost inconceivable that an investment of $8 billion (equivalent to about half the market value of Telecom at the time) could be missed if it had been invested in companies or real assets. HKCSD pointed out that many companies in Hong Kong spend considerable effort on gaining “tax advantages” (read: tax avoidance). Table 4 below illustrates the point. It is common to have several accountants devoted to the task, despite Hong Kong's low tax rates. To accomplish this, transfers are frequently made between Hong Kong and the tax havens intensively used for both inward and outward investment. In total, these transfers amount to many times the value of the assets owned and represent in reality only paper transactions rather than real transfers of assets.
The large discrepancy in the data probably represented a few large sums moved to New Zealand for some purpose related to tax advantages, which were very likely moved back out again within a short period. The Hong Kong data is measured as at 31 December (whereas New Zealand data is at 31 March). The large sum could well have been related to a wish to show a particular result on paper at end-of-year.
Table 3
Hong Kong Investment in New Zealand, 1998
Beginning of year End of year
HK$b US$b NZ$b HK$b US$b NZ$b
Net Flow of HK Direct Investment to NZ NA NA NA 4.6 0.6 1.1
Total HK Direct Investment in NZ 32.3 4.2 7.3 36.8 4.8 9.2
Data in bold are supplied by the Census and Statistics Department of Hong Kong, “External Direct Investment Statistics of Hong Kong in 1998”, released 21/3/00. The other data are calculated using US-NZ exchange rates from the Reserve Bank of New Zealand and a Hong Kong-U.S. exchange rate of HK$7.7/$US. (NA = Not Available)
Some of the difference could also be due to the definitions used, as described above in relation to “New Zealand” investment in Hong Kong. “Hong Kong” investors are those with a legal presence in Hong Kong. They are not necessarily Hong Kong owned. It is likely that the $9.2 billion represents ownership from a variety of countries, by companies which use a Hong Kong subsidiary as the formal owner of the New Zealand investment. However they may declare themselves to Statistics New Zealand as being owned in their ultimate country of ownership rather than Hong Kong. This issue is of major significance in relation to investment rules under both the IPPA between Hong Kong and New Zealand, and the likely terms of a FTIA. It will be discussed in more detail below.
Discrepancies could also be caused by “indirect” investment where for example an Australian subsidiary of a Hong Kong-based company reports to HKCSD that it has investment in New Zealand. That indirect investment would then be counted by HKCSD as Hong Kong investment, but by Statistics New Zealand as Australian investment. Further discrepancies could arise from the different definitions of direct investment used by the two authorities: Statistics New Zealand defines direct investment as being where non-residents own 25% or more of the equity of an enterprise, whereas HKCSD uses a 10% threshold (the international standard, which Statistics New Zealand is now adopting). However the HKCSD explanation implies these other discrepancies are relatively minor.5 The reason only Hong Kong investment in New Zealand (and not the reverse) is available is interesting. The HKCSD release lists the top ten countries which are sources of investment in Hong Kong and the top ten investment destinations for “Hong Kong” investment. Unsurprisingly, New Zealand is not among the top ten investing countries in Hong Kong. Surprisingly, it is number six among the top destinations for “Hong Kong” investment – apparently ahead of the U.S.A., and Singapore (8 and 9 on the ranking) and many others such as Japan and Australia, which do not even rank. The top ten in each direction are listed in Table 4.
Table 4
Rank HK investment abroad US$b Rank Foreign Investment in HK US$b
1 British Virgin Islands 93.0 1 British Virgin Islands 70.0
2 The mainland of China 70.7 2 The mainland of China 27.6
3 Cayman Islands 12.6 3 Bermuda 26.1
4 Bermuda 11.9 4 The United Kingdom 19.8
5 The United Kingdom 7.3 5 Netherlands 16.1
6 New Zealand 4.8 6 The United States 14.9
7 Panama 2.9 7 Japan 14.0
8 The United States 2.6 8 Cayman Islands 11.1
9 Singapore 2.0 9 Singapore 5.6
10 Philippines 1.4 10 Panama 2.1
Others 14.7 Others 17.8
Total 223.9 Total 225.1
Source: Census and Statistics Department of Hong Kong,
“External Direct Investment Statistics of Hong Kong in 1998”, released 21/3/00.
Note: in December 1998, NZ$1 was US$0.52
What stands out from the rankings is that, with the exceptions of China, of which it is a part, and its former colonial master, the U.K., the top-ranked sources and destinations of Hong Kong investment are the tax havens of the British Virgin Islands, the Cayman Islands, and Bermuda. The ownership of this investment is certainly elsewhere, including the U.S., Europe, Hong Kong itself, and China. HKCSD says:
“A distinct feature of Hong Kong's outward direct investment is that a considerable proportion of outward investment are directed to non-operating companies in tax haven economies (offshore financial centres) such as British Virgin Islands, Bermuda and Cayman Islands, for channeling funds mainly to the mainland of China and back to Hong Kong. These arrangements are commonly used by Hong Kong companies for strategic reasons. A majority of such investment was made by Hong Kong companies engaged in investment holding, real estate development and various business services.”
Further,
Of the total stock of inward direct investment at HK$1,744 billion at end-1998, HK$726 billion was related to investment originated from Hong Kong but channeled through non-operating companies in tax haven economies back to Hong Kong.”
It is apparent that Hong Kong is a major port of convenience for investment, particularly to and from China. HKCSD comments that “apart from the tax haven economies, the Mainland featured prominently both as a source of Hong Kong's inward investment and as a destination for Hong Kong's outward investment. This signified the close economic links between the Mainland and Hong Kong.” The Mainland accounted for 31.6% of the total stock of Hong Kong's outward direct investment and 12.3% of the stock of inward direct investment.
Hong Kong's outward investment is heavily dominated by the services sector. It is led by investment companies, real estate and business services. Other more productive services follow a long way behind, leaving manufacturing only a minor part. HKCSD says: “43.6% of the stock of outward direct investment at end-1998 was originated from companies engaged in investment holding, real estate and various business services, followed by those engaged in the wholesale, retail and import/export trades, at 11.9%; manufacturing, at 8.7%; transport and related services, at 6.1%; restaurants and hotels, at 4.2%; and non-banking finance, at 4.1%.” While HKCSD gives no sector breakdown for New Zealand individually, as will be seen, this picture probably fits Hong Kong investment here well. The dominance of tax havens in Hong Kong's investment also raises the question whether New Zealand is similarly being used for some form of avoidance.
NZ$million
|
|
1998 |
1999 |
2000 |
Equity Capital |
c |
-4 |
-15 |
Reinvested Earnings |
-67 |
-67 |
-43 |
Other Long-term Capital |
65 |
c |
c |
Other Short-term Capital |
c |
c |
c |
Total Direct Investment Flow |
720 |
-95 |
179 |
|
|
1998 |
1999 |
2000 |
Equity Capital |
781 |
580 |
539 |
Other Long-term Capital |
297 |
265 |
490 |
Other Short-term Capital |
39 |
30 |
37 |
Total Direct Investment Flow |
1,117 |
875 |
1,067 |
Symbols: C – confidential; “-” – nil, zero or too small to be expressed
Source: Statistics New Zealand, January 2001
The breakdown of Hong Kong investment in New Zealand reported by Statistics New Zealand (corresponding to Table 2) is in Table 5. It is currently approximately half in the form of equity ownership and half in other forms of capital such as intra-company loans.