Despite Social Issues, Hong Kong is Still a Vibrant China Business … – China Briefing

US-based lawyers saying Hong Kong is finished do not understand the differences between business infrastructure and social issues.
Op/Ed by Chris Devonshire-Ellis 
Hong Kong has attracted plenty of negative publicity this year, mainly due to the disconnect between the people of Hong Kong and the local government, who for many years now have mismanaged the expectations and needs of the local residents. Dissatisfaction runs deep, with huge amounts of mainland visitors and money essentially relegating Hongkongers to secondary citizens, often having to queue for products sold in bulk to mainland buyers and unable to get on the property ladder in the city that they call home and have done so for generations.
The fault is less an issue over Beijing’s leadership than it is the greedy alliance between the local government, local businessmen, property developers, and owners of utilities that should never have ended up in the hands of the private sector. Dezan Shira & Associates has called Hong Kong home since 1992, while our office employs numerous Hongkongers with long family ties in the territory.
We wrote about the situation back in July when the social unrest first began to intensify – The Current Business Environment In Hong Kong – where we explained the background to the issues and outlined the underlying grievances that needed to be addressed. They ranged from problems within the education, immigration, housing, regulatory, investment, and tax sectors, which local politicians had failed to address. What we didn’t discuss is the overall business environment for foreign investors in Hong Kong.
That theme however has been taken up by Dan Harris over at China Law Blog, who in a recent article writes “Hong Kong For International Business: Stick A Fork Into It,” which manages to totally dismiss Hong Kong as a viable business hub and be both inaccurate and utterly biased all at the same time. Harris labels Hong Kong as “Over. Kaput. Fini. Terminado. 完. законченный. Done. No more.”
Harris and China Law Blog go on to say, “As for Hong Kong, we are now suggesting our clients (1) consider places like Singapore and Bangkok as your Hong Kong replacement, (2) implement plans for evacuating your Hong Kong personnel, (3) cease using Hong Kong arbitration clauses (except with Hong Kong companies), and (4) avoid going there unless truly necessary.”
Companies should evacuate personnel from Hong Kong?
Harris then says he has “Sat next to someone on an airplane with major Hong Kong connections and I had hours to talk to them about Hong Kong,” upon which he bases his understanding of what is going on there and adequately describes the typical research he listens to when forming opinions about China: that is, not very much, and based on hearsay. While Dan pontificates and portrays both himself and his firm as China savvy and knowledgeable, I should point out – because he doesn’t – that neither Harris nor his firm are registered in Hong Kong or mainland China, and never have been. Both he and they are based out of Seattle. Accordingly, there is little to no actual on-the-ground business experience to hang these opinions on – just a few chats with people he meets on aircraft. Is that fair when penning articles about an entire, and somewhat unique, Asian trade and financial center with a commercial history stretching back over 300 years? People are entitled to their opinions, all we ask is that they are properly researched and fair. The issue with Harris and China Law Blog in general is that when it comes to China, it is not well researched, balanced, or fair. They are biased, opinionated and base their opinions on hearsay.
This extends to the piece about Hong Kong, in which Harris states that HSBC stock “hit its lowest 52 week low today” (the article was posted on October 22nd). In fact, HSBC stocks have been recovering from a low in August and have recovered now to about 610 points against that low of 580. He also takes aim at Cathay Pacific and states their stock too has “hit a 52 week low today”. Actually the stock is trading at 9.88 up from a low, again in August, of 9.8. It must be stated that the performance of neither is great, but neither are they at “52 week lows”.  We can also take a look at the Hong Kong Stock Exchange – it is up over 1,500 points as of today from the beginning of the year.
Harris and China Law Blog need to get past making up stories and statistics to fit their own agenda. They are both guilty of publishing “fake news” – and in this case, using it to dissuade investors from using Hong Kong as a China services hub. Why? Because I suspect that as they do not have an office in Hong Kong but do according to their website, have an associate in Bangkok, it makes sense for them to talk up one at the expense of the other.
But what is the real situation as concerns Hong Kong and its current ability to service foreign investors?
To look at the real business situation on the ground I asked Alberto Vettoretti, our China Managing Partner, who is based in our Hong Kong office and lives there with his wife and two children. Alberto has also lived in mainland China for 20 plus years and knows the region’s Greater Bay Area very well indeed – to the point of being an International Adviser to the Guangzhou Government.
Our Hong Kong office has provided company registration, banking, and other related services to foreign investors, most of them wishing to access the mainland China market, for nearly 30 years. We have serviced several hundred foreign invested clients over on the mainland, including many from the EU and US.
These are the questions I asked him, together with his replies:
We are working hard to deliver similar and maybe slightly better results than last year. Many potential leads are obviously considering other options but at the same time, as most of our clients do not do business in Hong Kong but elsewhere in the region, we are still receiving corporate establishment inquiries. It remains an Asian hub with a distinct focus on China.
Obviously the tourism, food and beverage, hotel, etc. sectors have been affected but we do not have many clients in these sectors. There remain problems in opening bank accounts in Hong Kong and this is a major hindrance to new setups in the city, which is why we have referred some clients to Singapore where it is a bit easier. We are now working on the digitization processes for incorporation, accounting, and HR for Singapore and Hong Kong so everything soon will be paperless. This requires investment on the part of the firm. Consequently, many Hong Kong firms are adapting in this area in order to provide a better and faster way to incorporate local companies. The level of compliance requirements, after the banking issue, is also somehow affecting business here. The ‘Know Your Client’ process in Hong Kong is tedious, as is the processing of work visa applications.
Yes, we still have incoming leads and we are, both, processing these or referring them to Singapore unless they need to be in Hong Kong. But for many companies Hong Kong is still first choice, both, to access the local stock market and because of the Closer Economic Partnership with mainland China (CEPA). Further, Hong Kong’s excellent infrastructure as well as China business knowledge and support still remains superior to that elsewhere.
No. Foreign investors already incorporated in Hong Kong are staying in Hong Kong.
Hong Kong remains popular, but the question is whether you still need an interposed company or not. Many clients would invest directly into China – unless the Hong Kong (or Singapore) company plays a larger role in the client’s overall Asia strategy. Realizing China dividends in Hong Kong, where no additional tax is due, is still a popular gateway between mainland China and the foreign investor.
No. Hong Kong retains the British rule of law and the legal system works fine. Suggestions of this nature are geared I suspect at unscrupulous lawyers frightening clients to get them to redraft their contracts and bill them for that. But it is totally unnecessary.  
So, there we have the real view from the ground. Yes, things could be better and some business sectors as Alberto mentioned are suffering. But this still does not detract from Hong Kong’s ability to service foreign investors wanting to access markets in mainland China. There are well established reasons for this:
We can compare this with the situation in Thailand, where China Law Blog have been stating Bangkok is an alternative to setting up a company in Hong Kong. Actually, we also know Thailand well, and have been servicing clients there for many years. But despite the fact that Thailand is a great local, and to some extent ASEAN and even China play, it is no Hong Kong.
The incentives for creating a foreign invested company in Bangkok or elsewhere in Thailand are that it is a member of the ASEAN trade bloc of countries and has free trade between the other members on most products and services. This includes Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, and Vietnam. Collectively, ASEAN also has Free Trade Agreements with both India and China, meaning that under certain categories and regulations, goods can be produced in Thailand and sold on the mainland China market, duty free. It is a subject we have covered extensively, with the latest in market access regulations between the two just being announced last month. Thailand has also announced a new stimulus package for foreign investors, which we covered recently in the article Thailand Plus: New Stimulus Package For Foreign Investment.
Thailand is great for accessing opportunities in-country and to some extent, ASEAN. But setting up an international company in Bangkok as an alternative to a Hong Kong incorporation? Thailand has an individual income tax rate at a high of 35 percent, and a corporate income tax rate of 20 percent. Both are higher than Hong Kong, although like Hong Kong, it does not impose taxes on dividends realized from external business operations.
There are other drawbacks. Legal documentation is in Thai, whereas Hong Kong legal documentation is in Chinese and English. This means that for Thai companies, extensive translations are needed at all times, both, for foreign investors to understand what is going on as well as for additional translations required in Chinese for business in mainland China or Hong Kong.
However, it is in the banking services arena that Thai incorporations start to become problematic when compared to Hong Kong. The Thai baht is not a commonly internationally traded currency like the Hong Kong dollar, and a complex system is required to transfer money out of the country. Due to the US-China trade war, the baht has also been in demand and this has pushed its value up against the US dollar, making it expensive to the point where the Thai Central Bank is now having to intervene. This illustrates that unlike the Hong Kong dollar, the baht is subject to fluctuations and these can be hard to manage. Thailand’s rule of law is not based on the British system and is subject to written laws passed by the legislature, which can prove problematic if there are cases of some uniqueness – such as dealing with new technologies. Thailand’s ease of doing business ranking is 27 and is on a par with that of Kazakhstan.
None of this should prevent foreign investors from setting up or doing business in Thailand. But it makes no sense to establish a company in Thailand as an alternative to Hong Kong. That also doesn’t mean there isn’t an alternative to Hong Kong, because there is, in the form of Singapore, and as stated above we will refer clients to Singapore (where we also have an office) when appropriate. We wrote about the differences between establishing in Hong Kong and Singapore recently in the article Hong Kong Vs. Singapore: What’s Next For Foreign Investors.
Clearly, US-based lawyers suggesting setting up an international business in Bangkok is preferable to Hong Kong have not properly thought the situation through. Unless you intend on doing business in Thailand, the country business administration and taxes are higher and more time consuming than in Hong Kong. Is suggesting Bangkok as preferable to Hong Kong really practical advice?
Meanwhile, it is fair to say that Hong Kong is of course going through some difficult social times at present. While that is gaining a great deal of media attention (and our local staff tell us much of that has been overblown and exaggerated), the city remains a viable hub, and especially for foreign businesses needing an international trade and financial hub from which they can distribute capital, goods, and services to and from China at competitive rates. The infrastructure and the attached services industry remains in place and it still works extremely well: nothing in that respect has changed. Add to that Hong Kong’s position at the center of the Greater Bay Area and to some extent, China’s Belt and Road maritime routes, and common sense tells us that the city will not just find a way through its current political situation but given time and understanding, will both recover and prosper. As for China Law Blog – its trash talking op-eds deserve their real place – in the bin.
About Us
China Briefing is written by Dezan Shira & Associates. Chris Devonshire-Ellis is the practice Chairman. The firm assists foreign investors throughout Asia, has done since 1992, and maintains offices in Hong Kong, Singapore, and throughout ASEAN, India, and China. Please email us at asia@dezshira.com or visit us at www.dezshira.com for assistance.    
 
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