Is Hong Kong still a gateway to China?

A lot of foreign investors used to choose Hong Kong as an entry point to enter the Chinese market. Is this today still a strategic choice? This article provides enterprises who wish to expand business in China with five reasons why using Hong Kong could benefit their China strategy.

Entering the Chinese market potentially enables reaching billions of consumers whose purchasing power steadily increases. Such perspective attracts all global consumer enterprises and a growing number of locally born projects.

With China's 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, you cannot underestimate the role of Hong Kong as a gateway to China.

Hong Kong landscape night

An Entrance to 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 consumer 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.

This is why Hong Kong is an interesting jurisdiction:

  • Environment: its Asian-Westernised style offers a perfect runway to land in the region, get familiar with local practices, and test a business’ potential.
  • Availability: setting-up a presence in Hong Kong is faster and cheaper than incorporating a company in mainland China.

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: Setting-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; China Appointed Attesting Officers (CAAOs) present in Hong Kong can notarise documents in five working days without the need for diplomatic legalisation, and local authorities in China are more familiar with the 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 profit allocation and share 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 choose 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 much more simple 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 the 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's 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 places Hong Kong as an international promotion stage to capture Belt & Road and Greater Bay Area opportunities.

Stock Connect and Bond Connect

Hong Kong's stock market is connected to two mainland stock exchanges: Shanghai (since 2014), and Shenzhen (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 connections between related mainland and Hong Kong's financial institutions. 

Synergies among China’s main markets 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.

Managing cash from Hong Kong (at the level of a Hong Kong headquarter) also presents advantages in the event of FX fluctuations.

With Hong Kong being a free capital market, where the Hong Kong dollar is pegged to 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 Mainland 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, Hong Kong should not be disregarded when setting-up a presence in China.

 

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