Hong Kong expands as global hub

HONG KONG

A constantly expanding free-trade agreement between Hong Kong and mainland China has increased Hong Kong’s role as a major springboard for hundreds of American companies into the Chinese market. U.S. companies with regional headquarters in Hong Kong have increased by nearly 60 percent since 1996, reaching nearly 300 firms by June 2007. American companies that have established regional offices have increased from 226 in 1996 to 593 in mid-2007.

Nearly 400 other U.S. companies had opened local offices in Hong Kong by 2007. Altogether, the American presence in Hong Kong grew from 414 firms in 1996 to 1,285 in 2007.

“Hong Kong is … attractive because of its British legal system and a very strong rule of law,” said Marc Miles, a global economist who edited the 2004-06 editions of Heritage Foundation’s “Index of Economic Freedom,” which ranked Hong Kong the freest economy in the world. Hong Kong led Heritage’s 2008 rankings as well.

In 2003, six years after Hong Kong’s status changed from a dependent territory of the United Kingdom to a special administrative region of the People’s Republic of China, Hong Kong and China signed a free-trade agreement known as the Closer Economic Partnership Arrangement (CEPA).

CEPA, which is updated and expanded regularly, provides “greater access to China than what China agreed to in order to enter the World Trade Organization,” said Eddie Mak, the director-general of the Hong Kong Economic & Trade Office in Washington. Whereas the average tariff applied to goods entering China under WTO provisions is 9.8 percent, goods manufactured in Hong Kong enter the mainland duty-free.

CEPA provides a window of opportunity for Hong Kong-based businesses to gain greater access to the mainland market. This is especially true for Hong Kong businesses providing services, which today comprise more than 90 percent of Hong Kong’s gross domestic product.

For service providers, the preferential treatment includes relaxation of equity-share restrictions and reductions in entry thresholds, such as those that apply to sales volume and capital. CEPA also relaxes restrictions involving geographical location and business scope, said Arthur Char, the former assistant director-general of the Hong Kong Economic & Trade Office.

Notwithstanding the current downturn, Hong Kong’s long-term economic future remains bright.

“Hong Kong shows the benefits of being the freest economy on earth,” said Ian Vasquez of the Cato Institute, whose 2008 report, “Economic Freedom of the World,” ranked Hong Kong as the world’s freest economy for the 12th consecutive year. (The United States tied Australia for eighth place in 2008.) Hong Kong’s intensely capitalistic system has enabled it to “grow from a relatively poor territory to one of the most prosperous places on Earth,” Mr. Vasquez said.

The United States is one of the major sources of foreign investment in firms that benefit from CEPA, said Mr. Char. U.S. firms have provided more than $26 billion in inward direct investment in Hong Kong.

The United States is the largest foreign source of direct investment in the insurance market. For the financial-institutions sector (other than banks) and the wholesale, retail and import/export sectors, the U.S. presence ranks as the third-largest foreign investor. U.S. banks constitute the third-biggest foreign group by number.

To protect their intellectual property, companies can have design facilities in Hong Kong and manufacturing plants on the mainland. “The designs are protected by Hong Kong’s strict rule of law,” Mr. Miles said.

Hong Kong’s rule of law also has made it the arbitration center in that part of the world, Mr. Miles said.

“Accounting, insurance, banking and legal services are much easier to handle in Hong Kong than in China,” said John Tkacik, a senior fellow in Asian studies at the Heritage Foundation. If clients are foreign companies, auditing can be done remotely from Hong Kong without obtaining Chinese licenses and certificates.

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