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The
‘Freest Place in the World’
How Hong
Kong Can Help You Unlock China’s Treasure Chest
By Jack
W. Flader, Jr., and Johnson Chien
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| 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. |
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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.
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| 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 |
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