Is Hong Kong still a gateway to China?
Entering China market potentially enables reaching billions of consumers, which purchasing power steadily increases. Such perspective attracts all global consumer enterprises and a growing number of locally born projects. With China legal and regulatory framework on Foreign Direct Investments (“FDI”) constantly getting simplified, more and more foreign companies chose to establish a direct presence therein, without setting-up any intermediary structure in Hong Kong. However, given the complexity of China, is that such a strategic choice? Why using Hong Kong could still benefit your China strategy?
A Laboratory to Enter Mainland China
Doing business in China is not easy and local standards substantially differ from what Western companies are used to. Commercial practices and business mindset, together with the speed and scale of change in Asian consumers markets, can surprise even experienced executives. Successful business stories or foreign brands established in China rarely rely on a copy-paste of their Western business models. Instead, they took time to understand local specificities and adapted their offer accordingly.
Here is why Hong Kong is an interesting jurisdiction. Its Asian-Westernized environment offers a perfect laboratory to land in the region, get familiar with local practices, and test a business’ potential. Besides, setting-up a presence in Hong Kong is faster and cheaper than incorporating a company in mainland China. And if your test is conclusive, you will certainly target a regional reach in APAC, for which Hong Kong will be better positioned than China.
Easy Corporate Structuring and Restructuring
To establish a presence and sell your products or services in China, you will most likely need to set-up a Wholly Foreign Owned Enterprise (“WFOE”). For that purpose, having a holding company in Hong Kong can present several advantages:
- Procedure: Set-up procedures in mainland China will be faster with a Hong Kong parent company (than with a head quarter established elsewhere), for the simple reasons that all official documents will already be available in Chinese, that China Appointed Attesting Officers (CAAOs) present in Hong Kong can notarize documents in 5 working days without the need for diplomatic legalization, and that local authorities in China are more familiar with Hong Kong system than with that of other jurisdictions.
- Shareholders Agreement: If you invest in China with a partner (i.e. WFOE owned by several foreign shareholders), you will need to enter into a shareholders agreement. Given the restrictions of China Company Law, among which mandatory rules governing profits’ allocation and shares’ transfers, adopting a shareholders agreement subject to Hong Kong law will give you more flexibility.
- Dispute Resolution: If you ever need to resolve a commercial dispute with a Chinese third party, Hong Kong will offer you solid options. Its sound legal system, based on the Rule of Law and the independence of judiciary, will enable you to use local courts and obtain sentences enforceable in China. Alternatively, if you chose arbitration, Hong Kong International Arbitration Centre is certainly one of the best in Asia.
- Restructuring: In China, any corporate change (i.e. share capital increase, transfer of shares, appointment of new directors, etc.) triggers lengthy administrative procedures, which often require a couple of months to get your business license updated. Things are way simpler in Hong Kong and all corporate changes can be registered within a few days. This presents short-term advantages, as well as long term simplifications when selling the shares of a Hong Kong structure holding a WFOE in China.
Capture Belt & Road and Greater Bay Area Initiatives
The Belt and Road Initiative, introduced in 2013, is an ambitious strategy to promote economic co-operation with China along land and sea corridors spanning 65 countries; while the Greater Bay Area, which Outline Development Plan was issued in February 2019, is aimed at promoting closer cooperation and coordination between 11 cities of the Pearl River Delta.
Hong Kong solid infrastructures, great connectivity, financial expertise, exposure to foreign institutions and multi-national companies, make it the ideal fundraising and financial management hub for different kinds of mega projects across the region. Such positioning positions Hong Kong as an international promotion stage to capture Belt & Road and Greater Bay Area opportunities.
Stock Connect and Bond Connect
Hong Kong stock market is connected to two mainland stock exchanges: Shanghai since 2014, and Shenzen since 2016. It is also a key player of Bond Connect since 2017, which is a mutual market access scheme allowing investors from China and overseas to trade in each other’s bond markets through connection between related mainland and Hong Kong financial institutions. Synergies among China’s main markets hence covers stocks, mutual trust funds, bonds, and potentially derivative products.
Offshore RMB and FX Mitigation
While Mainland China’s economy becomes increasingly integrated with the rest of the world, the RMB has become more widely used in trade and investment activities. Hong Kong is the first offshore RMB market worldwide, serving both local and overseas banks and companies. It enables businesses to raise funds through a cost-effective platform relying on international practices, and gives greater flexibility in managing RMB funds raised in the offshore market.
Besides, managing cash from Hong Kong (at the level of a Hong Kong headquarter) also present advantages in case of FX fluctuations. Hong Kong being a free capital market , where the Hong Kong dollar is pegged the U.S. dollar, and where bank accounts can be held in multiple currencies, it may be strategic splitting extra liquidities between Hong Kong and China.
Far from losing its attractiveness, the “Fragrant Harbor” offers unique features and remains a strategic jurisdiction to invest in China. Considering the growing integration of Hong Kong into Southern China and the recent Greater Bay Area Initiative, you may not disregard Hong Kong when setting-up a presence in China.