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The ‘Freest Place in the World’ - How Hong Kong Can Help You Unlock China’s Treasure Chest
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.
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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
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