At the HKMA, we have set a goal to promote the growth of CTCs in Hong Kong because their activities, such as foreign exchange and rate hedging, financing, and cash management, will help deepen our capital markets and create additional users of our financial and professional services industries. As you know, in many cases multinational corporates will co-locate their CTCs with their regional headquarters. By attracting more CTCs to Hong Kong, we hope this will hasten the process and further consolidate our status as an international financial centre. 19. Ladies and gentlemen, Hong Kong already provides a conducive environment in which CTCs can operate, but we are doing more, particularly on the all-important tax front. Through the work done by the Inland Revenue Department, Hong Kong’s Comprehensive Double Tax Agreements network has expanded from just five in 2009 to currently 35 agreements. These DTAs are important to multinational corporates as they help reduce the withholding tax rate on interests of cross-border loans. The Government has also announced major changes to the tax regime that will make Hong Kong an even more attractive destination for setting up CTCs. 20. With the changes, the interest deduction rules under the Inland Revenue Ordinance will be amended so that interest expenses arising from genuine cross-border intragroup financing activities, under specified conditions, will be deductible. This will lower the overall tax cost and resolve the “tax asymmetry” issue currently perceived by some MNCs as an impediment to their establishing or expanding CTC operations in Hong Kong.
In OECD countries, population growth averaged over 1 percent back in the 1950s and 1960s, but it is now running at half a percent per year, and is expected to gradually fall before dipping into negative figures by 2070.1 Slowing birth rates mean fewer consumers and fewer workers. People planning on longer retirements will tend to save more. And while this is undoubtedly good news in many respects, an abundance in the supply of savings also has a big effect on the global economic picture. When it comes to productivity, there has also been a stark step-down in growth. Rapid changes in the kinds of technology we use in our daily lives—robotic vacuum cleaners, self-driving cars, and facial recognition technology in our phones—may make this seem counterintuitive or plain wrong.2 But the data are clear. In OECD economies, growth in labor productivity—the amount produced per worker hour—has averaged a little over 1 percent per year since 2005, about half the pace seen over the prior decade. Falling R-star So what does all this mean for the future? Two things: First, slower population and productivity growth translate directly into slower trend economic growth. Second, an abundance of savings, and a decline in demand for savings resulting from slower trend growth, together lead to lower interest rates. All of these factors combined have contributed to dramatic declines in the longer-term neutral rate of interest, or rstar. While a central bank like the Fed sets short-term interest rates, r-star is a result of longer-term economic factors.