Hong Kong - Business Hub for Asia
By Klaus Koehler, Managing Director, Klako Group

When Hong Kong was handed over to China and changed from a British colony into the 'one country - two systems' principle with the Mainland, many wondered how this would effect one of the most important business hubs in Asia.

After it's expected political ups and downs of settling into it's new role, Hong Kong has proven again, for the 12th consecutive year, its status as one of the most important key locations for trade, finance and regional headquarters - and yet again named as the world's freest economy by the US based 'Heritage Foundation'.

Hand in Hand with China

Not only has the geographical closeness with China given Hong Kong an advantage over other Asian rival cities like Singapore, but also due to the establishment of Closer Economic Partnership Agreements (CEPA's) Hong Kong has had a head start in the opening Chinese Economy.

The Pearl River Delta, neighboring Hong Kong, developed into one of China's most important export regions. The synergy between original manufacturing orientated Hong Kong with the Peartl River Delta that could offer cheaper labor and more space for expansions for production sites has developed into a fruitful partnership. Companies are utilizing Hong Kong's logistical network, tax benefits and numerous service providers in the financial sectors and moving the production to the close by Pearl River Delta.

Without a doubt, Hong Kong's continuous growth is closely linked with the immensely booming export orientated manufacturing base in China, first by moving production sites from Hong Kong into China and now by continuing to use Hong Kong as the financial centre.

Easier China Market Entry

Hong Kong is the second largest recipient of Foreign Direct Investment (FDI) in Asia, after China, and also the second largest source of outward FDI in Asia. China continued to be the largest source of Hong Kong's income inflow and outflow, followed in both cases by the British Virgin Islands (reflecting also many holding companies).

Nowhere in the world is the economy more free and liberal than Hong Kong. Foreign companies are also attracted to Hong Kong due to its low tax rates, uncomplicated regulations for company formations, transparent finance and service sector. It comes to no surprise, that many multinational companies choose Hong Kong for their regional headquarters for Asia. With no trade barriers, low level of government intervention and in addition, an expansion and encouragement in it's service sector, Hong Kong's position is strengthened even further. In 2005, Hong Kong's total exports and imports of goods grew by 11.4% and 10.3% respectively.

Based on a government survey, as of mid last year, nearly 3800 companies had their regional headquarter or office in Hong Kong. As per the Trade Development Council, the city was the first choice of location for 1033 companies from the EU, followed by 868 from the US, 741 from Japan and 267 from Mainland China. Over 100 mainland backed and state owned enterprises are listed on the main board of the Stock Exchange and its growth enterprise market (GEM). One of the reasons for Hong Kong success is that it is one of the world's most service orientated economies. Various service sectors account for 90% of the GDP.

Foreign companies looking at establishing a sales and distribution network in China is expensive and time consuming. That said, China's rising income continues to create a larger market for international companies looking to sell their goods. Hong Kong provides especially small and medium sized companies looking to sell into the China market with a good starting point with cost effective solutions, without having to invest with fixed costs at the beginning. For example, foreign companies can control their China customer base through staff on the ground in China while their Hong Kong company acts as an invoicing and payment centre. Additionally functions such as customs clearance in China and local distribution can be outsourced. Other reasons to start from Hong Kong include lower capital investment, less risk, tax advantages, more a cost effective and a well developed trading structure.

Logistic Centre

Even though sea and airports in China are expanding and the infrastructure is improving, a large number of imported and exported goods which are bought in or sold to China, are transported and distributed through Hong Kong. For 2005, the total port cargo throughput recorded an increase of 4% to 230.1 million tones, as per The Census and Statistics Department. Overall, Hong Kong handled 22.6 million TEU (=Twenty-foot equivalent unit) in 2005, representing an increase of 3% over 2004.

Hong Kong is remaining one of the most important entrepots and trading partner for China. About 22% of the mainland's foreign trade, including re-exports to and from China, was handled via Hong Kong. If one would include transhipments of goods to and from the mainland via Hong Kong, this figure would even be higher. In 2005 45% of Hong Kong's exports went to Mainland China, 16% to the US, 15% to the EU and 5% to Japan. As per the merchandise trade statistics, 62% of Hong Kong's 2005 re-exports were of Chinese origin. Surveys indicate that standards and the delivery of service is still more efficient in Hong Kong, even though China is catching up.

Tourism & Luxury Brands

China has developed a middle and upper class, who, especially in the booming coastal cities, start to spend their income on luxury items and branded goods. However, luxury goods are sometimes 20-30% more expensive in China than in Hong Kong. Hong Kong when compared to China does not have any import duties or VAT. This, in addition to the Mainland chinese interest in regular shopping trips to Hong Kong causes the sales volume of luxury brands in the Pearl River Delta to be extremely low compared to any other regions in China.

Hong Kong's booming tourism industry benefits from these shopping trips and from the establishment of flagship stores of international luxury brands. In 2005, a total of 23.4 million visitors, or 3.4 times the size of the local population visited Hong Kong, which is an increase of 7.4% to the number of arrivals from 2004. Visitors from Mainland China rose in 2005 to 13.4 million, nearly half of all tourist arrivals. No doubt, with the growth of the Chinese economy and market, Hong Kong will continue to benefit and prosper with the mainland. In return, the Chinese Government knows, Hong Kong needs to remain free for the synergy to work.

Why choose Hong Kong if the business is in China?

This is a question many companies ask themselves when planning their strategy for China. In addition to more transparent regulations and less requirements for capital investment for company formations, Hong Kong also offers a better legal security than China.

Joint Ventures in China
For example, instead of setting up a Joint Venture in China, the Joint Venture could be set up with a Hong Kong company which would then hold a 100% subsidiary in China. All legal aspects would be according to Hong Kong law versus China law. The Hong Kong Holding Company which would receive dividends from the Joint Venture would be tax free. So are Royalties, license fees, rent etc. received by the Hong Kong Holding Company.

Manufacturing Operations in China
If the China entity is a manufacturing operation and the goods are invoiced and sold through a Hong Kong Holding Company, only 50% of the profits are assessed as sourced in Hong Kong and therefore taxable. Profits then build up in the Hong Kong company and can be used for re-investment.

Sourcing in China
Many multinational companies as well as small to medium enterprises have chosen Hong Kong as either their headquarter for their sourcing activities or the sale of their goods. Managing a China sourcing operation with a base in Hong Kong does not necessarily mean a large physical presence. If a foreign company has an existing sales structure overseas and professional quality control in China, either through a service provider or own staff on the ground, all the administration of the Hong Kong company can be outsourced to a Hong Kong service provider. The merchandise made in China or Asia, are then sold FOB from an Asian port and this opens up new markets.

Many retailers will only buy on open account from a domestic supplier but will agree to open an L/C to an Asian supplier. A Hong Kong company as the Asian supplier means that it is more likely to get an L/C for the order. This will reduce the companies overall credit risk and will free up capital. Products can also be marketed internationally from a Hong Kong company to a complete new client base.

If you require assistance with the above subject, please contact us at info@klako.com with your detailed questions.

All information in this report is verified to the best of our ability and is assumed to be correct at time of release; however, Klako Group does not accept responsibility for any losses arising from reliance on the information provided within.