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Insights Successfully investing in Hong Kong (S.A.R.)

Successfully investing in Hong Kong (S.A.R.)

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last updated on 16 June 2023 | reading time approx. 6 minutes


 

 

How do you assess the current economic situation in Hong Kong?

After relatively weak figures in 2022, the Hong Kong economy recovered visibly in the first quarter of 2023. The main reasons for this are primarily the strong increase in tourists and the recovery in domestic demand. Real GDP grew by 2.7 percent year-on-year, following a 4.1 percent decline in the previous quarter.

Despite some easing in trade with Mainland China, exports of goods continued to decline sharply, while ex­ports of services showed strong growth. Travel services for Mainland China played a particular role here fol­low­ing the removal of the Corona-related travel restrictions. Private consumption spending increased by 13.1 per­cent in the first quarter of the year. Again, one of the main reasons for the increased consumer sentiment is the lifting of Corona restrictions in both Hong Kong and Mainland China. Investment picks up again. The recovery of the economy was also accompanied by a drop in unemployment and in the number of underemployed per­sons. The figures are 3.1 percent and 1.2 percent respectively. Unemployment fell in all major sectors of the eco­nomy.

For the current year, a further increase in tourism and domestic demand is expected. Particularly visitor flows will continue to recover, which is also likely to be due to the further increase in transport and clearance ca­pa­ci­ty. The recovery of the economy and the associated improvements on the labor market, i.e. better prospects for the future for people, as well as stimulating government measures such as the issue of consumer vouchers will further boost private consumption.

By contrast, the export situation is likely to remain tense in the current year. The main reasons for this are slo­wer growth in the industrialized countries, which is likely to continue to weigh on foreign demand. Other factors include uncertainties such as the recent tensions in the US banking sector and political challenges. Regarding price developments, external cost pressures are expected to ease somewhat, but could increase slightly in the domestic market. Underlying and headline inflation are expected to range between 2.5 percent and 2.9 percent in the course of 2023 and thus remain moderate overall.

Based on the actual figures for the first quarter, GDP growth of 3.5 percent to 5.5 percent is expected for 2023 as a whole. If the momentum of the first quarter continues in the same form, growth should be close to the up­per end of the forecast.
 

How would you describe the investment climate in Hong Kong? Which sectors offer the largest potential?

Hong Kong remains one of the freest economies in the world. Investments in Hong Kong are uncomplicated and the legal framework for companies is favorable. The establishment of a company, for example in the form of a limited company, is simple and usually takes only a few days. Since English is an official language in addition to Chinese, there are hardly any language barriers, as all official correspondence can be conducted in English. Hong Kong has a very simple tax system. Corporate income tax is 8.25 percent up to profits of HKD 2 million and 16.5 percent for profits above that. Offshore profits, or profits earned outside the territory of Hong Kong, are exempt from taxation. There is no withholding tax on dividend or interest payments. The courts are in­de­pen­dent and there is legal certainty. Decisions of Hong Kong courts, as well as arbitration or mediation in­sti­tu­tions, are recognized and declared enforceable in most countries of the world (including the People's Republic of China for decisions in certain civil and commercial matters). As one of the most important international fi­nan­cial centers, Hong Kong has an excellent banking system. Labor law is clearly employer friendly. The infra­structure is excellently developed. Hong Kong is an outstanding transportation hub with its international airport as well as its free port and its rail and road connections to Mainland China.

With the recovery of the economic situation and in particular of domestic demand, stronger demand for im­por­ted products from Germany can also be expected. In particular, manufacturers of consumer goods such as food could benefit from this. Demand for upper mid-range and luxury cars is also likely to increase again. In the health­care sector, opportunities may arise for manufacturers of medical technology and pharmaceuticals, as substantial investments are pending in this area. In addition, Hong Kong is already planning or implementing a large number of construction projects, including several major projects, as part of the Belt and Road Initiative and the development of the Greater Bay Area (GBA). One example is the development of the "Northern Metro­po­lis" in the north of Hong Kong on the border with Shenzhen in Mainland China, which, once fully developed, is expected to offer around 900,000 new homes for up to 2.5 million people, as well as considerable space for industry, logistics and other sectors. Here, too, a wide range of opportunities may arise for German companies (e.g. infrastructure, building technology, environmental technology, engineering services, etc.).

Particularly with the increase in tourist travel from Mainland China, opportunities may also arise in the luxury segment. It is true that there are strong preferences here for the "classic" luxury brands. However, in various product areas such as watches and other niches, there are also good opportunities for established German pro­du­cers, but also for market entrants in other areas, if the market entry is tailored to the corresponding needs of the potential clientele, as German products continue to enjoy a very good reputation.

Hong Kong continues to be an attractive location for procurement and purchasing in East Asia. Although pro­cure­ment from China directly has decreased, it has increased from other East Asian countries such as Vietnam. The advantage of Hong Kong here is that even those countries to which, for example, labor-intensive production has been relocated away from China due to lower labor costs, are still very easy to reach and can be managed from Hong Kong.

What challenges does a German entrepreneur face when engaging in Hong Kong?

Hong Kong is one of the most expensive cities in the world. In particular, the cost of living and rents are very high. This has an impact on the salary level, especially for foreign employees, and companies have to expect significantly higher costs for wages and salaries. In addition, the labor market for specialists is currently tight. Many specialists have left Hong Kong in the wake of the Corona pandemic. On the other hand, Hong Kong offers a very good school and university education. Many Hong Kongers speak both Cantonese and Mandarin as well as English, which is a great advantage for foreign companies. As with any foreign investment, there are differences in mentality and cultural contrasts in Hong Kong. Expatriate professionals and executives should be sensitive to this and have the appropriate social skills.

 

What is the concrete impact of Peking's influence on Hong Kong?

In particular, the enactment of the Security Law and the changes to the electoral legislation have caused a stir internationally and have had a lasting impact on Hong Kong's reputation. In addition, Hong Kong has re­pea­ted­ly hit the headlines with convictions of Hong Kong citizens under the Security Law. Here, disillusionment has indeed set in. As far as domestic policy is concerned, Beijing can still be expected to exert a strong influence, and political activity by citizens will continue to be hindered or prevented. In this context, however, it should be noted that Beijing's measures have so far been limited primarily to Hong Kong's political regime, although fur­ther influence can be expected in the school system as well as in civil society (associations, organizations, etc.) through increased indoctrination and stronger regulation.

In broad areas, however, Hong Kong continues to enjoy a variety of autonomous rights. These include member­ship in international organizations (such as the WTO and the IMF) and the possibility of joining or concluding further international agreements. Hong Kong also continues to regulate entry and exit autonomously. The legal system is based on common law, a high degree of legal security, and a large number of civil rights continue to exist, and any interference by Beijing is not apparent, at least not so far. The Internet is freely accessible and is not regulated, although restrictions have been imposed on freedom of the press. In economic terms, there are hardly any restrictions on the movement of goods and capital, and information can continue to flow freely. Hong Kong continues to have its own freely convertible currency, which is tied to the U.S. dollar. Hong Kong is also not subject to directives from Beijing in tax and duty law, and rates are very low.

Compared to the metropolises of Mainland China, Hong Kong thus still has a special position and the dif­fer­ences remain extraordinary. Hong Kong's citizens and economy continue to enjoy significantly greater freedoms than in Mainland China.
 

Are Beijing's increased influence and new regulations in Hong Kong affecting economic activity?

At present, there are no indications that Hong Kong's special status will be subject to further restrictions apart from the interference with political leadership. On the other hand, the enactment of the Security Law and its application have done lasting damage to Hong Kong's reputation. It remains to be seen whether a recovery will occur here. Hong Kong will play an important role in the development of the Greater Bay Area, which will re­quire the retention of its status as a Special Administrative Region and the exercise of autonomous rights. Hong Kong, particularly, is expected to be strengthened as an international financial, shipping and trading center and an international aviation hub, and act as a global offshore RMB trading center, an international asset manage­ment center and a risk management center. In addition, Hong Kong's position as an international dispute reso­lution center and intellectual property trading center will be strengthened and expanded. The development of the service sector in the direction of high-quality and value-added services is to be particularly promoted.

We therefore continue to see Hong Kong as an open bridgehead to Mainland China, welcoming investment and offering investors excellent business conditions and opportunities.

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