You
may have seen the film National Treasure, in which Nicolas Cage has to
unlock a multi-layered puzzle to find a vast treasure. China is like that
for many investors - a virtually limitless treasure chest with an enormous
number of investment opportunities, if only you can find the darned
key.
It’s certainly worth the effort.
Within China, one will find many doors and boxes guarding different fortunes
for manufacturers seeking low cost production, traders sourcing inexpensive
products, companies with unique products they want to sell to the 100+
million consumers with relatively high disposable income, and pure investors
who want to play the real property market or invest in non-performing loans
or China “B” shares. Finding the correct keys to access China’s treasures
is no easy task. The good news is that Hong Kong is not only the gateway
to China, it holds the golden key to China’s many treasure chests.
Key #1—Language and Culture:
There is a Chinese phrase that describes Hong Kong well—Zhong Si He Bing—literally
meaning “combination of east and west.” Since 1841, when Hong Kong was
given to the British during the Qing Dynasty, Hong Kong has been the gateway
to China. Hong Kong’s unique geographic location allowed for the mixing
of different cultures and languages. One could call it the ultimate “cultural
fusion.” Hong Kong people learned the languages and cultures of not only
China, but those of the foreigners who visited her shores.
Key
#2—People: There is a joke to describe Hong Kong people that goes “In
most parts of the world, people greet each other by saying how are you?
In Hong Kong, people greet each other by saying ‘How is your business?
I have this wonderful business idea,’ while they are shaking hands and
subsequently exchange business cards.” This joke gives a general idea how
Hong Kong people operate in daily life. Seven million people, who, over
the centuries and decades, moved to Hong Kong to start a new life or to
seek business opportunities, resulted in a hard working, business-minded,
determined and creative population.
Key #3—Small Government and
Favorable Tax Regime: The Hong Kong government seeks to play a cost-effective
(translation: limited) role in the everyday business of Hong Kong with
a chief executive, two tier legislative regime and efficient civil service
that employs less than 5% of the entire working population.
Hong Kong offers a favorable and
fairly simple tax regime with low salary taxes (standard rate of 16%) and
corporate profits taxes (17.5%), property tax (primary revenue for government),
and estate duty (which is likely to be abolished in 2005). Hong Kong does
not tax dividends, capital gains or offshore income or profits and has
tax exemption for interest income from authorized financial institutions.
Key
#4—Location, Location, Location: Hong Kong is at the doorstep of China
and by air is within five hours of most destinations in Asia and fifteen
hours to the rest of the world. All day flights, virtually non-stop rail
services and, arguably, the most active port in the world, make Hong Kong
a leading international logistics hub for the movement of people and products.
Key #5—International Standards
in Legal, Accounting, Financial, Banking and Services Industries: Over
the years, Hong Kong has attracted many international law, accounting,
company secretarial, and financial services firms that have laid the foundation
for what is recognized as one of the leading international professional
services industry. With more than 100 foreign banks, nearly as many foreign
insurers, and stock market capitalization of approximately US$800 billion,
Hong Kong leads Asia as THE hub for professional services.
Key #6—Freedom in Everything:
Hong Kong has been recognized as the world’s freest economy by the Heritage
Foundation/Wall Street Journal (last 11 years), Cato and Frasier Institutes
(2004), and Milken Institute (last 3 years). Under the still developing
model of “one country, two systems,” Hong Kong enjoys a convertible currency,
negotiates and signs economic/trade agreements in its own name, maintains
an independent judiciary, police force and immigration/customs department,
and an active and free-wheeling media (ranked the highest in Asia for press
freedom by Reporters without Borders) with more than 50 daily newspapers
and 800 periodicals. Hong Kong also hosts some of the most active trade
shows in the world, where buyers and sellers are free to conduct business
in a dynamic environment dedicated to success.
Now that you know the keys that Hong
Kong offers, let’s look at the treasures that can be unlocked in China.
Unlock Five Treasures of China
Treasure
One—Cost-effective manufacturing. For 20 years, China was the cheapest
producer of products to satisfy the unquenchable demands of the Western
world. Now, China is no longer the cheapest, but is instead the most cost-effective
manufacturer. That’s an important difference that isn’t lost on Western
companies that are moving production to China.
Hong Kong people have been successful
investors in mainland China and their professionals have assisted in structuring
the best way to access this treasure by seeking alternatives to purchasing
used facilities and machinery in favor of “buying production.” The art
of “buying production” involves conducting due diligence on a group of
similarly situated manufacturers, choosing a few based on their production
capacity as well as quality, management, etc., and negotiating with the
one from which you could take an overwhelming amount of its production
capacity. If you are able to take an overwhelming amount of the manufacturers’
production, you effectively become an owner who can determine not only
quality and delivery schedules, but even price. Foreigners who have used
this strategy have even been able to price products at cost plus an agreed
upon markup, which is very helpful in meeting price points for sale to
their buyers.
Treasure Two—Transhipment
Hub. Hundreds of thousands of traders visit Hong Kong each year to attend
dozens of trade shows featuring products from China. Many of those products
come from Guangdong province, which is only two hours away by train and
produces approximately 70% of China’s manufacturing output. A trading company
set up in Hong Kong can outsource banking and administration to a company
secretarial firm while moving 40-foot containers directly from China to
the West—without any tax liability accruing to the Hong Kong trading company.
Treasure
Three—100-million Strong Middle Class. People hoping to make their
fortune always believed they could sell one bar of soap to 1.5 billion
people in China for US$1 a piece. For a long time, the problem was that
Chinese people did not use Western soap and they did not have US$1 to spare.
However, China is now a market with 100 million plus consumers hungry for
any and all the unique Western products they can obtain. Hong Kong is the
testing grounds for such products and, upon those products proving themselves,
the distribution channel for delivering those goods to the Chinese consumers.
Treasure Four—Incredible Investment
Opportunities. China offers many opportunities for the passive investor,
but language, law and currency restrictions pose hurdles. Hong Kong offers
opportunities to get around those hurdles, including:
• Hong Kong’s stock exchange has
listed the shares of some of the best Chinese companies and investors can
buy/sell shares with the Hong Kong dollar, a convertible currency. Of equal
importance, these companies must adhere to the stringent rules of the Hong
Kong Stock Exchange. Finally, the international standards of law and investment
research available in Hong Kong assist the investor to make an informed
decision.
• Hong Kong’s brokerage firms also
assist investors seeking to buy/sell China B shares, which are shares of
mainland companies listed on the Shenzhen and Shanghai stock exchanges
and available ONLY to foreigners. The lack of liquidity and difficulty
to obtain information are important reasons why the foreign investor should
seek Hong Kong’s keys before going forward.
• China’s big four banks have for
many years built a non-performing loan (“NPL”) book of massive amounts.
The Chinese government, working with Hong Kong and international firms,
has packaged these NPLs for foreigners to acquire at significant discounts.
These NPLs offer great opportunity as well as risk. All are best accessed
via the professionals of Hong Kong.
Treasure
Five—China’s real estate market. Particularly on the coastline and
in major cities, real estate is booming. Residential, commercial and industrial
real estate is available in excellent locations and on good terms if you
know where to look. Hong Kong’s favorite investment is real estate.
The treasures abound. The keys are
in Hong Kong. If you are seeking an opportunity, you must do the research.
Start in Hong Kong, learn about what China has to offer, then make an informed
decision with help from professionals who know the language and culture
and know how to benefit from a business friendly government.
Jack W. Flader, Jr., is Managing
Director and General Counsel of the Zetland Financial Group Limited, Hong
Kong, and Johnson Chien is the Zetland Financial Group’s General Manager.
Contact: Jack Flader, 13/F, Silver
Fortune Plaza, 1 Wellington Street, Central, Hong Kong; Phone: +(852) 9104-1286.
E-mail: jflader@zetland.biz
