Hong Kong – The Channel for Outbound Chinese Investments
A record number of Chinese mainland investors have set up companies in the Hong Kong Special Administrative Region (SAR). As per annual survey report by the Census and Statistics Department of Hong Kong SAR, the number of mainland Chinese subsidiaries in Hong Kong increased from 789 in 2010 to 957 in 2014. Mainland China companies accounted for the fourth largest number of regional head quarter companies established in Hong Kong. Among local offices established in Hong Kong, mainland China accounted for the second highest number.
The survey also revealed that in 2014 the number of Hong Kong subsidiary companies formed by mainland China companies increased by 6% against the preceding year. The spike in the number of Hong Kong subsidiaries of China enterprises corresponds with the growth in the volume of Chinese Outbound Investments.
With the recent relaxations to the outbound investment regime, more Chinese enterprises, especially private enterprises, will setup Hong Kong companies. Here we explore why Hong Kong is the preferred channel for enterprises and investors from the mainland.
What draws China’s outbound investments to Hong Kong?Chinese companies prefer to route their regional and international investment through Hong Kong. As much as the geographical proximity, low tax regime, simple taxation framework and corruption free governance are attractive, there are other key factors that attract mainland enterprises to Hong Kong.
1. Hong Kong is a mature fund raising platformRaising capital through IPO is a lucrative means to expand operations for Mainland Chinese companies. By the end of 2014, 642 companies from the mainland had floated their shares in Hong Kong, among which 97 were from Shanghai. Hong Kong ranks second in Asia in terms of market capitalisation. It is of interest to note that Hong Kong is increasingly becoming a key offshore Renminbi (RMB) centre, where Chinese companies can issue Dim Sum bonds to raise funds. With growth in RMB bonds, loans and equity products, Hong Kong’s significance as a RMB financing market is growing. There is no restriction of capital movement. It is an international financial centre offering diverse financing channels and comprehensive international financial expertise. This facilitates easy capital management for Chinese enterprises, which otherwise face tight regulatory barriers at home. As an international financial centre with many decades of experience servicing international businesses, service providers in Hong Kong have vast international experience in company structuring, IPO, taxation and financing.
2. Facilitates international partnershipsBeing located in a relatively more open economy like the Hong Kong SAR, there is an increased tendency for Chinese companies to strike partnerships with international companies. Restrictions in the mainland are prohibitive for the foreign companies, but a conduit in Hong Kong, in the form of a subsidiary, provides greater acceptance levels for the potential foreign partners. Potential foreign partners are able to comprehend the legal frameworks in the SAR and the conducive business environment that prevails in Hong Kong strengthens their confidence to forge partnership with the subsidiaries of mainland companies.
3. Greater IP protectionHong Kong has a strong IP protection regime and the SAR government is strictly committed to protecting the robust system. It has been allowed to keep its IP regime separate from that of the mainland. Unlike earlier periods, when outbound investments of Chinese companies were predominantly skewed towards energy and raw material resource sectors, they are now foraging into more diverse sectors such as technology, media and telecommunication. It becomes increasingly important for the companies to secure their IP assets. Besides protection, IP trading should also be seamlessly facilitated. Hong Kong ticks all the boxes for the Chinese enterprises that are operating in IP intensive sectors.
4. Free flow of informationInformation is becoming an asset and provides a competitive edge for companies operating in industries where information is a key resource. Free flow of information and lack of content censorship in Hong Kong serve as incentives for the mainland companies to have their subsidiaries here. As a free economy, Hong Kong facilitates access to global information through multiple channels. There are diverse international platforms available for mainland companies to link with the world. Unrestricted information flow empowers organisations with quality market information and market intelligence that are international in nature, and facilitates data processing and decision-making besides dissemination of undistorted information.
5. Free portHong Kong has remained a free port for more than a century. All imports and exports are exempted from tax or excise duty, except for controlled goods. This is great relief for mainland companies that are facing excessive custom controls. The customs procedure is simple and streamlined and this ensures efficiency both in terms of time and cost. Companies operating in technology sectors are finding it easier to import latest technologies without having to go through the hassles of customs restrictions. Closer Economic Partnership Arrangement (CEPA) offers Hong Kong’s products and services preferential access to the mainland’s market. This means Chinese companies can leverage Hong Kong’s free port facility and manufacture products more competitively when exporting to China, and their CEPA qualified status is also effective in securing international partnerships.
6. Access to international professional service
Hong Kong has a large pool of efficient, skilled and multi-lingual professionals. The immigration policies also facilitate professional expatriates from around the world to work here. This is considered an important value proposition for Chinese companies that are aspiring for international expansion. There are professional service providers with international expertise. Professionals such as lawyers, auditors, accountants, corporate secretarial service providers, financial experts and ICT professionals invariably have international networks. The cultural and linguistic familiarity makes it easy for Chinese enterprises to interact with Hong Kong service providers to organise their international business operations.