Look at the fine print in any big foreign acquisitions of Chinese companies over the past two years and you will be struck by something odd: foreign companies including Yahoo! and eBay actually bought Hong Kong companies that held contracts with Mainland companies of the same names. Yahoo! Hong Kong bought 3721 Network Software Co. (Hong Kong), which in turn had contractual agreements with 3721 (Beijing). Britain’s legacy to Hong Kong, the “rule of law,” is lending new meaning to Hong Kong’s moniker: gateway to China.
For Australian companies considering a push into China, Hong Kong still makes sense as a launching point. The relative ease of company set up, low corporate taxes, and access to “China expertise,” make Hong Kong the next best thing to being there. Companies expanding into the region will probably find that their lawyers already have an office in Hong Kong (for Mallesons Stephen Jaques clients, the firm merged with Hong Kong’s Kwok & Yih back in July of 2004).
For companies looking to grow fast, Hong Kong is still home to one of the world’s most liquid stock markets and the base for many Mainland-focussed private equity and venture
capital firms. Approximately 70 companies listed on Hong Kong’s public markets in 2004. The little island’s markets gave the US a run for its money (242 companies had initial public offerings in the States last year). Many of the Chinese companies that would have opted for a Nasdaq or even New York Stock Exchange listing in the past, now see Hong Kong as an easier road to exit: lower compliance costs, time zone, and even cultural differences make up for the liquidity companies give up when they opt out of a US listing. On the private side, global giants including Carlyle, 3i, and JAFCO base their northeast Asia operations out of Hong Kong.
Comfort aside, many VCs and private equity firms prefer to base themselves in Hong Kong over Shanghai and Beijing because Hong Kong gives them easy access to the 80 million consumers in China’s richest province, Hong Kong’s neighbour, Guangdong.
At the Hong Kong Sevens in 2004 “Rule of Law,” was one of the slogans broadcast over a bemused audience. However, in building a regional niche, Hong Kong’s legal and regulatory systems are what sets it apart. “I see law and order,” says one of Hong Kong’s spokespeople in its Asia’s world city campaign – the campaign succeeding Hong Kong will take your breath away, which unfortunately coincided with the SARS breakout.
While doing business on the Mainland remains a confusing affair for most foreign investors, Hong Kong’s arbitration system in particular and legal environment as a whole, still make Hong Kong a logical place for multinationals and minnows alike to launch forays into the Mainland. Even as wholly owned foreign enterprises (WOFEs) become common in China’s major cities, many foreign companies would rather test the market before investing in a China operation. Hong Kong offers those companies a window (albeit one on extremely expensive real estate) to see if China really does offer opportunities and competitive advantages.
Aside from proximity to Mainland China, Hong Kong has the closer economic partnership agreement (CEPA), granting Hong Kong headquartered companies favoured status when conducting business on the Mainland. Professional services available in Hong Kong rival those in New York, London, and Tokyo – Shanghai, Beijing, and Shenzhen are only now finding their feet in the professional services arena, mostly thanks to big pushes from municipal governments and ‘big four’ accounting firms. Beijing’s 2008 Olympics and Shanghai’s 2010 World Expo will be catalysts that bring China’s biggest cities up to international best practice in all manner of metrics: services, capital markets, recreational activities. But for now Hong Kong has it and the Mainland does not.
Paul Waide is the founding editor of Pacific Epoch, a Chinese-based boutique research house providing ICT trade news and investment analysis. Pacific Epoch releases a monthly “Red Book”, which covers the deals, people and industry changes that impact investment decisions in the emerging Chinese market.
