Weighing Hong Kong’s Offerings

Hong Kong is connected to the mainland, with its border at the southern Chinese boomtown of Shenzhen in Guangdong province. Hong Kong used to be the business and investment gateway to China, often serving as a transit point for mainland-made goods. As China has opened up to foreign direct investment (FDI), Hong Kong’s role has evolved.

Today, Hong Kong is a major financial and services hub for China as well as all of East Asia. It’s also the single largest foreign direct investor on the mainland. Hong Kong has its own vibrant economy, with real estate, banking, and retail, among other industries, playing major roles. Luckily for you, Hong Kong may be able to save you time and hassle.

Hong Kong’s special status: The SAR (it’s not something you catch)

Until 1997, Hong Kong was a British colony. In 1997, the British returned Hong Kong to China but only after China pledged to retain Hong Kong’s capitalist system for at least 50 years. Hong Kong is now officially called the Hong Kong Special Administrative Region (SAR) of the People’s Republic of China.

Hong Kong has its own quasi-constitution called the Basic Law. Basic Law provides for a legal system that’s different and much more open than the mainland’s. Hong Kong has its own laws and courts, currency (the Hong Kong dollar — see Chapter 10), and customs and immigration policies.

Decolonization: The Brits give back to China Hong Kong consists of two main land masses: the Kowloon Peninsula, which connects to the mainland at Shenzhen, and Hong Kong Island, which is just across Victoria Harbor from the Kowloon Peninsula. Great Britain received Hong Kong Island by treaty in 1842 at the end of the First Opium War. At the conclusion of the Second Opium War in 1860, China ceded to Great Britain the part of the Kowloon Peninsula closest to Hong Kong Island. In 1898, Great Britain leased the remainder of the Kowloon Peninsula (called the New Territories), for 99 years. The Brits were not exactly keen to return Hong Kong to China. By the 1970s, Hong Kong had developed a large manufacturing industry, most of which was based in the New Territories. Many of Hong Kong’s banks made loans to finance those businesses and other projects in the New Territories. By the 1980s, people started to realize a looming problem with Britain’s lease on the New Territories, which was to run out in 1997. The Chinese clearly weren’t willing to release or cede the New Territories, and Great Britain realized that partitioning Hong Kong would be disastrous. The two sides compromised in 1984, with Great Britain agreeing to return all of Hong Kong and the Chinese agreeing to preserve the capitalist system for 50 years after the handover. The handover officially took place at midnight on July 1, 1997.

Although Hong Kong has a lot of autonomy, China is still in charge of all foreign affairs and selects part of Hong Kong’s government. Hence, China is one country with two systems.

In 1999, China also reclaimed Macau, a former Portuguese colony. Macau is a short ferry ride away from Hong Kong, and it also has a more open system than the mainland. We don’t otherwise discuss Macau in this book because aside from a booming gaming industry, it’s not a major business destination.

Perks of investing in Hong Kong

Depending on your business, Hong Kong can be a better base than somewhere on the mainland (see the earlier “Touring the Mainland Regions” section). This section explains some of the perks Hong Kong offers.

Open economy, low taxes, and free trade agreements

The biggest advantage is Hong Kong’s open economy. It usually ranks at the top of the Economic Freedom in the World Report and the Index of Economic Freedom. In other words, Hong Kong has strong rule of law with little corruption, low barriers to trade and business, and a strong market-based economy. Business is undoubtedly more efficient and transparent in Hong Kong than on the mainland.

CEPA stands for the Closer Economic Partnership Agreement between Hong Kong, Macau, and the mainland. It’s a free trade agreement between those three parts of China. Under CEPA, China doesn’t impose duties on imports from Hong Kong (and vice versa if the products are made in China). This idea is important if you’re considering an international trading business. Also, CEPA allows Hong Kong–based companies better and sooner access to some restricted industries.

Before you rush to incorporate a company in Hong Kong to get around the mainland’s restrictions on foreign investment, keep in mind that in most cases, the company has to really be a Hong Kong company. In other words, Hong Kong residents own a certain minimum percentage of the company or you have certain minimum levels of Hong Kong residents as employees. It may also require some operating history in Hong Kong. The bottom line is that CEPA is one useful way to get around mainland restrictions, but you should work with an experienced attorney to understand how it can help you.

Hong Kong also has very low corporate and individual tax rates. Its tax agreement with the mainland may also give you creative ways to structure a hybrid mainland/Hong Kong business to save taxes (see Chapter 10 for more info on taxes).

English language and workforce training

Hong Kong has a fairly high English proficiency. You can do business with the government in English — and in much less time than you’d need on the mainland. And much of Hong Kong’s white-collar workforce is likewise fluent in English. Hong Kong’s workforce is also better trained in many services, including marketing, finance, and information technology.

Quality of life

Hong Kong may be easier for most Westerners to live in. The city’s very clean, modern, and easy to get around. Western goods, services, food, and entertainment are everywhere. Hong Kong also has a lively social and arts scene. However, in recent years, many expatriates have been complaining about the increasing levels of air pollution.

Location

Hong Kong has a great location, especially for regional businesses. Getting into the heart of China’s southern manufacturing heartland takes only one to two hours by car, bus, train, or ferry (see Chapter 5). A lot of people commute daily to the mainland from Hong Kong.

Hong Kong also has one of the best (if not the best) airports in the world, with numerous flights to different parts of the mainland, as well as all over Asia (and the world). Shanghai is about two and a half hours away by plane, and Beijing is about three and a half hours. Most Asian countries are within a five-hour flight of Hong Kong.

Currency

The Hong Kong dollar, usually pegged to the U.S. dollar, is convertible into foreign currency, and unlike the Chinese renminbi, there are no restrictions on remitting money overseas from Hong Kong (see Chapter 10 for details). Of course, if you have a rep office in China, your bank account may be in Hong Kong, anyway, which would provide you with most of these benefits.

Hong Kong hang-ups

Hong Kong has some disadvantages, too. This section goes over some of the most significant drawbacks.

Cost

The biggest issue with setting up in Hong Kong is cost. Make no mistake: Hong Kong is expensive! Your Hong Kong employee may have more skills than your mainland worker, but you have to pay up — white-collar employees in Hong Kong earn roughly the same salaries that their counterparts in Western countries do. In most cases, you’d be crazy to manufacture in Hong Kong instead of the mainland.

Real estate prices are also quite high in Hong Kong — sometimes they’re comparable to those of New York City. Hong Kong is also one of the world’s most expensive cities to live in.

Bad Mandarin

Hong Kong’s main language is Cantonese, a dialect spoken in Hong Kong and Guangdong province. It shares the same written language as Mandarin, but the two sound nothing alike. Most Hong Kong Chinese speak at least a little Mandarin, but in many cases, their Mandarin isn’t good enough to do business on the mainland (aside from in Guangdong, where they can slide by with Cantonese). Also, people from Hong Kong and the mainland have some cultural differences that can occasionally create tensions between the two.