HK retains competitive edge despite pandemic

Global companies, investors give city's business environment vote of confidence

Hong Kong, which is recovering from a fifth wave of COVID-19, remains a magnet for international enterprises and investors, who have voiced confidence in the city's business environment and new opportunities in the Guangdong-Hong Kong-Macao Greater Bay Area.

The latest wave of infections, which has resulted in more than 1 million cases, is finally easing in the city. The Hong Kong Special Administrative Region government has decided to gradually relax COVID-19 rules over the next three months, while continuing to safeguard the health of citizens.

Experts believe that companies and individuals who have left Hong Kong temporarily will eventually return as the outbreak subsides, due to the ease of doing business in the city.

Although a few businesses have left Hong Kong, the number of companies arriving continues to grow.

According to a Hong Kong Census and Statistics Department survey, the number of businesses in the city with parent companies located outside it rose from 8,225 in 2017 to 9,049 last year. Even with the exclusion of companies from the Chinese mainland, the number is still considerably higher than that in 2017.

A survey by InvestHK, the Hong Kong government's direct investment promotion agency, found that companies arriving from 90 locations worldwide have set up in Hong Kong, showing a high level of confidence in the city's institutional strengths.

United States companies, in particular, boast the largest number of regional headquarters in Hong Kong, although those from the mainland are quickly catching up.

In a report released last month, the International Monetary Fund also reaffirmed Hong Kong's position as a major global financial center and emphasized that the city's financial sector has continued to expand robustly, even during the pandemic.

John Siu, managing director of the Hong Kong office for global real estate services company Cushman & Wakefield, believes that the city's fundamentals as an international financial hub－its free flow of capital, well-established legal system, low tax rates and favorable business environment－remain unchanged despite the recent surge in COVID-19 cases.

He said the stringent measures implemented to contain the virus will not jeopardize the city's attraction to international businesses in the long run.

"In fact, we have consistently seen expansions or new setups in the banking and finance sectors, such as asset management companies, financial technology service providers, crypto traders and hedge funds, in Hong Kong in recent years," he added.

According to DBS Bank, which is based in Singapore, Hong Kong's financial competitiveness will remain strong in the long term thanks to its offshore renminbi business.

Samuel Tse Ka-hei, economist of Group Research at DBS Bank (Hong Kong), said: "It is easier for companies to arrange their capital to flow in and out from the mainland through Hong Kong, compared with other economies. Renminbi deposits remain ample and rose by 28 percent year-on-year by the end of 2021."

According to the Society for Worldwide Interbank Financial Telecommunication, or SWIFT, about 76 percent of global renminbi payments were settled through Hong Kong last year.

The city faces a brain drain due to pandemic prevention measures, but Tse believes this is a short-term factor.

Noy Elram, managing director of Sarine APAC at Sarine Technology, a diamond technology company based in Israel, experienced difficulty in recruiting staff members when the company expanded its regional headquarters in Hong Kong last year.

"We interviewed around 50 candidates over a period of six months for one position, and we couldn't travel out of Hong Kong because of the COVID-19 restrictions," he said. Elram added that the company turned to digital solutions to interact with its teams and customers in various locations.

Such problems failed to halt the company expanding the Hong Kong headquarters as its base in the Asia Pacific region.

"Hong Kong is a global commercial hub, business-friendly, cosmopolitan, and has excellent infrastructure, financial and professional services. It is also close to our Asia-Pacific teams' major target markets," Elram added.

"The group is expanding its Hong Kong team to leverage the city's advantageous position within the Guangdong-Hong Kong-Macao Greater Bay Area.

"This area has already become one of the world's biggest jewelry production bases, and trade collection and distribution centers. We see great potential in the industry and hope to partner with more diamond jewelry retailers in the Greater Bay Area via the Hong Kong office."

The company has established links in the area with jewelry brand Chow Tai Fook, key gem laboratories such as the Shenzhen Laboratory of National Gemstone Testing Centre, and several diamond manufacturers.

Maggie Hu, an assistant professor of real estate and finance at the Chinese University of Hong Kong, said, "Hong Kong can further improve its competitiveness by strategically forming an alliance and liaising with partners in the Greater Bay Area to attract more international businesses and to incubate startups with great prospects."

Hu said the Greater Bay Area also provides the capital market and a large pool of talent for Hong Kong to develop the technology sector－a main driving force for economic growth.

She added that the innovative nature of startups and the originality of their technologies can potentially attract international praise and recognition－helping promote the international business environment in Hong Kong.

Hu said an international hub typically has a strategic geographic location, stable legal system, favorable business environment, and a large pool of local and international talent.

Despite the challenges posed by the pandemic and the business slump it has brought, Hong Kong has maintained its competitiveness on all fronts, she added.

According to InvestHK, the city is home to more than 3,700 startups by the end of last year, and the founders of about 30 percent of them are from outside Hong Kong.

Venture capital investment in the city surged from $1.24 billion in 2014 to about $41.7 billion last year. Moreover, for biotechnology, the city is Asia's largest and the world's second-largest fundraising hub.

Machiuanna Chu, corporate commercial partner at Deacons, a law firm headquartered in Hong Kong, said some businesses and expatriates have decided to leave for destinations less-affected by the pandemic. However, she believes a short-term impact on the city's economy resulting from social restrictions appears to be inevitable in order to contain infections.

"We believe a majority of these foreign companies take a long-term, strategic view when assessing their options for an Asian headquarters, and will decide to stay put," she said. "As the history of the HKSAR repeatedly shows, those who decide to leave eventually return when the challenges are over."

Chu feels that the overall legal environment in Hong Kong remains highly conducive for established and new businesses.

She cited favorable factors for companies setting up their Asian headquarters in the city. These include its proximity to the vast mainland market and its businesspeople, a common law system that is understood and trusted by the international business community, and a business-friendly tax regime.

The city also boasts a sophisticated and reliable regulatory environment, highly skilled professionals, high-standard international schools for expatriates' children, and a world-class financial infrastructure that allows the free flow of capital.

Stefano Mariani, Deacons' corporate commercial partner, said the city's tax system, in particular, is well-adapted to a modern economy oriented toward financial services.

Business profits sourced from outside are generally not taxable in Hong Kong, he said.

"This may render it convenient for multinational enterprises to establish regional headquarters locally with a view to mitigating the tax leakage that may otherwise arise in jurisdictions that tax residents on their worldwide income," he said.

The 16.5 percent corporate tax rate in Hong Kong is also competitive for companies operating in the region, with a concessionary rate of 8.25 percent available for the first HK$2 million ($255,590) of assessable profits, Mariani added.

In comparison, the corporate tax rate is 17 percent in Singapore, 19 percent in the United Kingdom, 21 percent in the US, and 25 percent on the mainland.

The InvestHK survey also found that a "simple tax system and low tax rate" was the most favorable factor for 63 percent of overseas and mainland companies choosing Hong Kong to set up their businesses.

According to the city's 2022-23 budget released last month, Hong Kong will invest more in the technology sector through various related funds to "enrich the information technology ecosystem" and seize opportunities in the Greater Bay Area.

Evan Auyang, group president of Animoca Brands, a multinational blockchain technology and investment company based in the city, said, "We are committed to Hong Kong."

He added that the city's competitiveness in the capital market can facilitate China's "going abroad" strategy.

Hong Kong is the only place in the country where the currency is convertible and international capital can be raised under a Western-based legal system, Auyang said, adding that the city is the ideal location for the development of blockchain technology.