Hong Kong: not just another Chinese city

Hong Kong’s global brand ranks high among those of other cities worldwide, making it a leading international business destination and Asia’s world city.

It has many enduring advantages and should not be regarded as just another Chinese city, says Simon Galpin, head of Invest Hong Kong (InvestHK) and guest speaker at the ninth Asia:NZ Business Leaders Seminar in Auckland in October 2010. 

Addressing a select audience of business people Mr Galpin explained that “one country, two systems” is probably the best way to encapsulate China’s relationship with Hong Kong. Before Hong Kong was reunited with mainland China in 1997, however, nobody knew for sure if this experiment would work.

The legal system of Hong Kong is completely different from that of China.

The independent judiciary is important for foreign investors as it provides peace of mind and sets Hong Kong apart not just from China, but also from many other Asian cities.

Low taxes

Hong Kong is close to the bottom of the world tax index. In this, it is similar to New Zealand with its comparatively low tax economy. By contrast, second from the top in the index is China, a high tax economy.

In Hong Kong the corporate tax rate is 16.5 percent. Salary tax is set at a maximum of 15 percent, which applies regardless of the extent of personal wealth. Multibillionaires often pay themselves in dividends, which are exempt from tax in Hong Kong. There is a simple pension scheme, the Mandatory Provident Fund, with the employer and employee each contributing 5 percent.. This is capped at HK$1000 per month.

There are many sources of income that are not taxed in Hong Kong. With no sales tax, the city is great place to shop. Capital gains tax does not exist either, so many people buy assets in mainland China from Hong Kong through special investment vehicles. There is no tax on investment income and no estate duty. There is a territorial tax system, which means income derived in Hong Kong is taxed, but income from other jurisdictions is not.

A very high tax on wine (80 percent) was subsequently cut to 40 percent and is now zero. In addition to there being no sales tax, there are no import tariffs on wine and beer either. As a result, the volume of wine imports grew by 80 percent on the first year and a further 40 percent since the rate was cut in early 2008. Consequently, Hong Kong has moved up in the rankings and has now overtaken New York as the number-one centre for wine auctions. These developments should present opportunities for New Zealand companies. 

Double Tax Agreements (DTAs)

Hong Kong does not have many double taxation agreements (DTA), but does now exchange information on taxation with countries that sign DTAs with it.

Most important is the DTA with mainland China, which has DTAs with other countries, “but not all are created equal,” according to Mr Galpin. “The DTA with Hong Kong is one of most attractive and far reaching.”

A company with a subsidiary in the mainland wanting to bring remittances to New Zealand, for example, will be taxed at 10 percent. But if the remittance is routed through Hong Kong the withholding tax rate is only 5 percent.

Any transfers from Hong Kong are tax-free - even if companies are only paper-holding structures - so there are very sound reasons to invest in Hong Kong. “From an InvestHK perspective,” stressed Mr Galpin, “we are, however, more interested in companies that employ people and are not just paper structures.”

Increase in visitors

There has recently been a significant upswing in visitor arrivals into Hong Kong. Last year there were 30 million visitors, most of whom were from mainland China. Most come to shop - many for luxury goods - and make a strong contribution to the Hong Kong economy. Financial services, such as insurance, are also of interest to mainland visitors, as are jewellery and cosmetics, which incur high taxes on the mainland.

There are therefore many opportunities for New Zealand companies in Hong Kong, not just among Hong Kong’s seven million affluent consumers, but also from high net worth individuals and middle class people from mainland China.

Inward investment

It is not just mainland consumers who present opportunities but investors, too. They come not because Hong Kong is a gateway to mainland China, but because it is fast emerging as a great launch pad for mainland companies to go global.

Mainland companies come to Hong Kong to raise capital.  There have been many record breaking IPOs from mainland banks which are dual-listed in Hong Kong and Shanghai. Many more come to Hong Kong to raise capital from banks and financial institutions, and to find people to advise them on recruiting personnel for making acquisitions around the world. This creates opportunities for service providers - including law, accounting, consulting, public relations, and design - who can provide services to mainland firms when they want to go international.

InvestHK measures the amounts of foreign direct investment (FDI) flowing into Hong Kong. In 2009, because of the global economic downturn, there was a sharp decrease in FDI, noted Mr Galpin.. However, because other centres have faired so poorly, Hong Kong’s rankings have risen. Only the United States, China and France received more inward FDI, and in the Asian region, only China received more than Hong Kong.

Hong Kong receives more than Taiwan, Japan and South Korea added together, which is a significant achievement for an economy of only seven million people. But is not merely a recipient; the city is also a major source of investment. It is a base for investing into mainland China by Hong Kong companies  and international firms alike.

InvestHK measures the number of firms investing in Hong Kong and last year it found that Hong Kong was second only to Japan in Asia as an origin of outward investment. In 2009 around 3500 companies were using Hong Kong as regional hub.

China-New Zealand FTA

For New Zealand companies the existence of a free trade agreement (FTA) with China is good for trade flows between mainland China and New Zealand. It helps to facilitate trade and investment flows in both directions, and is good for Hong Kong as well.

Hong Kong can play a very important part in maximising the value of the China-New Zealand FTA, pointed out Simon Galpin. For companies wanting to access mainland China, it still makes sense to use Hong Kong for basing a command and control centre for managing the relationship with the rest of China.

Hong Kong-New Zealand CEP

Hong Kong also has a Closer Economic Partnership (CEP) agreement with New Zealand – the only foreign country and OECD member with which Hong Kong has a CEP.

Hong Kong’s only other CEP is with mainland China. With its open economy and a duty free port, it is very easy to bring goods into Hong Kong from New Zealand. “From a presentation perspective, it is very important and something InvestHK wants to build on.”

Hong Kong and New Zealand are now looking to expand the CEP with a bilateral investment treaty to safeguard investments into Hong Kong - but also into New Zealand.  The CEP will evolve to promote a significant increase in two-way trade and investment into both countries.

The partnership is important for Hong Kong because it will attract both larger and smaller New Zealand companies. For New Zealand it is important because mainland China companies will choose to invest in New Zealand through their subsidiaries in Hong Kong. It makes sound sense from a tax perspective for them to have such an arrangement and because they have access to foreign capital in Hong Kong, which they can invest in Hong Kong. It is without question a significant agreement that will help both economies.

Attracting inward investment into Hong Kong

InvestHK’s role is to attract and assist companies from around the globe. It is also important to ensure firms already in Hong Kong are satisfied, and to encourage them to upgrade and expand their presence in Hong Kong.

InvestHK focuses on identifying high-growth companies that could benefit from having a base in Hong Kong. “We listen to what they want to do and provide information and advice. When a firm decides it wants to put part of its business functions in Hong Kong, our job is to provide practical help. As long as the company has at least one person based in Hong Kong, InvestHK can provide a range of assistance, all offered free of charge,” explained Simon Galpin. InvestHK can assist with identifying international schools, business service providers, obtaining visas, and securing office locations and media coverage of the decision to establish a presence in Hong Kong.

Some of the companies InvestHK helps are very small. The Internet has led to a drop in communication costs, enabling smaller companies to go global at an earlier stage of their development than ever. Nowadays, going global means going into China.

“InvestHK does not hard sell Hong Kong, or pressure people to go through Hong Kong if they want to get to mainland China,” said Mr Galpin. “Instead, we present Hong Kong as an option for basing some of a firm’s activity there, as well as in other parts of Asia.” Thus, InvestHK helps foreign firms to make an informed choice so that they can put the right part of their business in Hong Kong and possibly build other parts of their business elsewhere. If it is labour or land-intensive, they are probably better off on the mainland or other parts of the region. InvestHK is able to help any companies interested in looking at the Asian region and doing business in and through Hong Kong.

Questions and answers

Here are some highlights from the Q&A session with Simon Galpin.

Is there a time limit for “one country two systems”?
The current model was put in place for 50 years from 1997 to 2047, but there is no reason why it should not be continued as it is working very well for both mainland China and Hong Kong.

Does Hong Kong face much competition from Shanghai for investors?
Shanghai is a major competitor for InvestHK, as are other investment agencies in the region. Shanghai is a tough competitor as it has grown at a phenomenal speed. However, you must not forget the enduring advantages of Hong Kong. To set up a company in Hong Kong you only need one director, one shareholder and one dollar. It takes one week to establish company, which is soon to become one hour when carried out online. But in Shanghai, it could take you a month.

Do China’s investments in ports such as Tianjing and Shanghai put pressure on Hong Kong?
Hong Kong is still a major container port, but growth is much faster in Chinese ports. Ninety-five percent of GDP comes from services. InvestHK is concerned about making sure Hong Kong plays an important role in that trade. Some companies have their global buying operations in Hong Kong and use their Hong Kong office for non-food trading. We must ensure that the financial aspects of trade do not leave Hong Kong, but for market reasons the ports of Tianjing and Shanghai will grow much faster.

Are New Zealand companies generally too small to establish a meaningful presence in Hong Kong?
Some have 100 employees upon establishment, but the average size of the 300 companies that have set up this year is around 10 people. The challenge for InvestHK is perception: because Hong Kong is not a cheap city, it is thought of as being only suitable for big multinationals. Although not cheap, there is a range of options that includes low cost office accommodation, serviced offices and residential accommodation. You can go just a few blocks away and find prices are 30 percent cheaper. You do not have to start big. Most companies start with a serviced apartment, or with a business centre or a virtual office, which means they can easily enter and exit if things do not go as planned. You can be sure that although costs might not be low, they are not going to change dramatically. Predictability is very important for foreign investors, and in Hong Kong, the goal posts do not move.

What are the benefits of listing on the Hong Kong stock exchange?
The real benefits of listing in Hong Kong are not simply raising capital to invest in New Zealand. Those that will succeed are those that have a “China play” - in many cases this involves raising capital to expand into the mainland to enter into a joint venture with a Chinese entity. There has to be a China dimension to what you are trying to do in Hong Kong, especially in the short-term.

For New Zealand companies wanting to invest in China, is there a brokerage role played by Hong Kong for firms frightened of getting their fingers burnt?
Hong Kong firms went through that 30 years ago and can share that experience with new investors. They have been doing business with the mainland for 30 years. Lawyers can advise on how to structure the deals. Consultants can advise on where to start in China. China is a series of discreet markets within a nation. This difficulty lies in knowing where to start, how to start in one market, tweak the operation and move on. Smaller companies need to address this when they move into China.

Local presence

Here are some other advantages of establishing a presence in Hong Kong:

• In many ways, a Hong Kong passport is more useful than a British one, for example, because employees of firms in Hong Kong can travel freely throughout the region.

• Hong Kong is located at the centre of Asia, which has certain practical implications. If you use Hong Kong as your regional HQ you can fly up to Beijing and back in one day, but if you fly from Singapore it takes a whole day to get there and another to get back.

• Hong Kong offers tremendous contrasts in terms of quality of life. In addition to the built-up urban environment, there are easily accessible beaches and parks. Three of the world’s cheapest Michelin star restaurants are in Hong Kong. Many people choose Hong Kong for subjective reasons and then find the hard macroeconomic data to justify the decision.

Asia:NZ is grateful to Minter Ellison Rudd Watts Lawyers for hosting this event.

Images:
1. Simon Galpin of Invest HK
2. Simon Galpin talks to Tony White of Beca
3. The heavily built-up and fashionable area of Causeway Bay, Wan Chai, Hong Kong
4. Asia:NZ trustee Tony Nowell and John Blackham of XSOL
5. Guests at the ninth Action Asia Business Leaders Seminar