Wednesday, October 21, 2009

Asia's tax haven rise - not so fast

TJN's John Christensen, recently in Luxembourg, heard the usual mantra of the "Macau threat" and its like - in other words, the argument that if we crack down too hard on nearby havens, all this money will flood to Asia. So it's useful to look at what's actually going on. From the Financial Task Force blog:

"A couple months ago there was a piece in Foreign Policy called Think Again: Asia’s Rise. The article questioned the almost conventional wisdom that Asia will soon dominate the world’s political and economic stage. The author argued that although China, India, and the Asian Tigers have enjoyed huge growth in influence, Asia is unlikely to “take over the world” any time soon. The piece made the cover of the magazine, which featured a picture of the Statue of Liberty with a single word above her head: BAMBOOZLED.

Like the assumption that Asia will one day “dominate the world,” there is a prevalent notion that Asian secrecy jurisdictions will soon dominate offshore finance. The recently published 2009 Asia-Pacific Wealth Report refers to these countries’ favorable business conditions and regulations, which include “reliable legal systems, highly efficient governments, and well-regulated financial sectors.” The report also notes that “With the European Union stepping up its scrutiny of European tax havens, wealthy Europeans are increasingly looking at Singapore and Hong Kong as offshore investment centers.” Other proponents of this argument agree, citing America’s crackdown on UBS and the current financial crisis as engines propelling depositors to Asia.

I’m not convinced. I certainly wouldn’t argue the Asian centers aren’t gaining ground and they will clearly benefit from the changing dynamic in offshore finance. But when you look at the cold, hard numbers—it’s obvious that Asia still isn’t close to the likes of Cayman and Switzerland. And it will be a long while before they get close.

According to a third party data collection agency, between 2002 and 2007 non-resident deposits in Hong Kong grew from US$69 billion to US$149 billion, averaging a remarkable 20% yearly growth rate. Singapore’s gain was even more impressive—the island enjoyed an average 24% yearly growth in deposits as they grew from US$7 billion to US$21 billion.

So why can’t we conclude that Asia will soon dominate the offshore business?

Not so fast, I say. Over the same period, Switzerland’s non-resident deposits averaged a respectable 15% growth, but the country’s total deposits were over US$665 billion by 2007. Even if Switzerland’s deposits stopped increasing tomorrow, it would take Hong Kong seventeen years to catch up with its current rate of expansion.

The comparison with the Cayman Islands is even more skewed; in 2007 Cayman held $1.7 trillion in non-resident deposits. That’s almost 12 times the amount in Hong Kong, which means that if Cayman stopped growing this afternoon, it would take the Asian center until 2064 to catch up. But that’s unlikely. Even with that mountain of deposits, the Caribbean island still managed to maintain a 12% growth rate between 2002 and 2007. That’s a total gain of US$750 billion in five years. Talk about impressive.

Likewise, the argument that the U.S.’s crackdown on UBS is indicative of an attack on tax evaders in only traditional offshore banks is a complete fantasy. The Department of Justice is no fool. As Kevin Downing, a senior trial counsel for the Justice Department’s Tax Division, has noted, “If they think this is just UBS, they’re mistaken, UBS is not an anomaly. This is just the beginning. We’re going after foreign banks and professionals.” He then notes the government is particular interested in…you got it…Hong Kong, Panama, and Singapore.

Looks like we’ve been bamboozled again. That’s okay. I’m used to it."

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