Successfully investing in Hong Kong (S.A.R.)

last updated on 7 June 2024 | reading time approx. 6 minutes

How do you assess the current economic situation in Hong Kong? »
How would you describe the investment climate in Hong Kong? Which sectors offer the largest potential? »
What challenges does a German entrepreneur face when engaging in Hong Kong? »
What is the concrete impact of Peking's influence on Hong Kong? »
Are Beijing's increased influence and new regulations in Hong Kong affecting economic activity? »

How do you assess the current economic situation in Hong Kong?

After the drastic impact of the pandemic, Hong Kong's economy recovered in 2023 following the lifting of containment measures and the recovery of tourism. GDP grew by 3.2 percent in 2023. However, a challenging external environment due to rising geopolitical tensions and tighter financial conditions slow the growth.

Given the slowing factors mentioned above, only moderate growth is also expected for goods exports. Although goods exports have increased slightly, there is an imbalance: Exports to mainland China in particular increased, while exports to the US and the EU declined and exports to other Asian markets developed unevenly. Improvements in this area are expected to come mainly from the resolution of acute political conflicts and economic stimulus measures, in particular interest rate cuts, in the leading economies.

The retail sector continues to recover from the effects of the pandemic and reported higher sales last year. The consumer climate is expected to continue to recover, driven by an increase in the number of large-scale events, government measures to stimulate consumption and rising tourist numbers. However, changing the consumer behaviour of both the population and tourists remains a challenge.

However, the economic situation is fundamentally sound. Inflation is very low, although geopolitical tensions are causing uncertainty. The unemployment rate was just 3.0 percent in March 2024, with a total of 3.8 million people of working age.

Despite the challenging external environment, economic growth of 2.5 percent to 3.5 percent is forecast for 2024. Inflation is expected to remain low at 1.7 percent. The growth estimates are mainly based on rising exports of services, easing financial conditions in the major economies, rising household incomes and increasing tourist arrivals, including through the promotion of mega-events.

How would you describe the investment climate in Hong Kong? Which sectors offer the largest potential?

Hong Kong remains one of the freest and most competitive economies in the world. Hong Kong is ranked in the top three in a number of international rankings, such as the freest place to do business, recipient of foreign direct investment and ease of doing business. Hong Kong also ranks in the top 10 of the world's largest importers and exporters.

The city offers an excellent infrastructure, with an international airport and a free port, as well as an abundance of office space, technical infrastructure, free flow of information and, last but not least, a high quality of life. With English as the official language, communication with the authorities is also easy. Hong Kong is strategically located at the gateway to China and the Greater Bay Area in Guangdong, another economic heavyweight. All major Asian markets are within a 4-hour flight from Hong Kong.

Hong Kong offers excellent investment opportunities. Setting up a company is straightforward and can be done in a matter of days. The tax system is simple, corporation tax is low, many types of tax such as VAT or withholding tax on interest or dividends are non-existent, and offshore profits are tax-free. There is an independent judiciary and judgments from Hong Kong courts and arbitration institutions are recognised and enforced in most countries around the world, just as German judgments can be recognised and enforced in Hong Kong. Hong Kong has a well-educated workforce thanks to its strong education system. The labour laws are very employer-friendly. As an international financial centre, Hong Kong has an excellent banking system.

Mainland China is, of course, of paramount importance to Hong Kong. Hong Kong is the leading location for offshore RMB transactions and currently handles more than 70 percent of China's global RMB trade. There is a free trade agreement between Hong Kong and China (Mainland and Hong Kong Closer Economic Partnership Arrangement – CEPA), which opens up huge markets for Hong Kong goods and services. CEPA is nationality neutral and provides an effective platform for Hong Kong-based companies, whether local or foreign-owned, to tap into the huge market potential in China. Hong Kong's integration into the Greater Bay Area, a specially promoted economic region at the mouth of the Pearl River in southern Guangdong, further facilitates business activities in the region. In addition, Hong Kong is also a member of the ASEAN Free Trade Agreement, allowing Hong Kong to take advantage of improved market access and trade relations with the ten member countries of ASEAN.

Hong Kong offers a wide range of opportunities for German companies. In particular as a logistics centre and as a location for sourcing and purchasing companies. In terms of supply chain diversification, existing or new subsidiaries in Hong Kong can act as parent companies for new locations in South East Asia, such as Vietnam. In addition, many companies use their Hong Kong offices as regional headquarters to effectively implement compliance requirements such as the Supply Chain Due Diligence Law.

The ageing population requires investment in healthcare, creating opportunities for the pharmaceutical and medical technology sectors in particular. Although tourist arrivals have yet to fully recover, the city remains an attractive shopping destination, especially for mainland Chinese tourists, especially in the luxury segment. The dynamic fintech sector and Hong Kong's role as a logistics and trade hub make it an ideal e-commerce location, closely linked to China's huge consumer market. In addition, challenging infrastructure projects, such as fresh water supply and waste disposal, offer German companies good opportunities to participate in tenders.

What challenges does a German entrepreneur face when engaging in Hong Kong?

Hong Kong is one of the world's most expensive cities. This is particularly evident in the general cost of living, especially rents. This has an impact on the wage levels of foreign employees, with companies facing significantly higher wage costs. In addition, the labour market for skilled workers is currently tight. As with any overseas assignment, there are differences in mentality and cultural contrasts in Hong Kong. Expatriate professionals and managers should be sensitive to this and have the appropriate intercultural skills.

In addition, opening a bank account can be time-consuming and bureaucratic for new businesses. Almost all banks have tightened their procedures in this area, not least because of stricter anti-money laundering regulations.

What is the concrete impact of Peking's influence on Hong Kong?

After the handover, Hong Kong retained its own legal system as a special administrative region with a free market economy, its own currency, its own legal system, its own laws, a political system with democratic elements and guaranteed civil liberties such as freedom of expression, freedom of the press and freedom of assembly, in accordance with the "one country, two systems" formula. This formula is increasingly under threat from Beijing. In particular, the security law that has been passed significantly restricts civil liberties. The political system has also taken a significant step backwards with the marginalization of democratic parties.

The security law in particular is causing considerable unease. Foreign organizations and institutions are not allowed to engage in political activities. Mainland China has already enacted a large number of laws and regulations on security, counter-espionage and similar sensitive areas in recent years. These are now being extended to Hong Kong. Overall, Beijing can be expected to continue to exert a strong influence on Hong Kong's domestic policy, particularly with regard to the political activities of its citizens, but also with regard to the restriction of press freedom and the tighter regulation of the education system.

On the other hand, Beijing seems to be largely staying out of other areas. This applies to the economy, the currency, the legal system, membership of international organizations, the free flow of business information, the free movement of goods and capital and other areas. Hong Kong is also not subject to any directives from Beijing on tax and customs matters. Hong Kong still occupies a special position in relation to mainland China, and the differences are still exceptional. Citizens and businesses in Hong Kong continue to enjoy far greater freedoms than those in mainland China.

Are Beijing's increased influence and new regulations in Hong Kong affecting economic activity?

Given Hong Kong's economic and especially financial importance, it is likely that its special status as a Special Administrative Region will continue in the future. For example, the framework plan for the development of the Greater Bay Area indicates that Hong Kong has an important role to play, which requires the continuation of its special status. These include Hong Kong's continued development as an international financial, shipping and trading centre, an international aviation hub, a global offshore RMB trading centre, an international asset and risk management centre, an international dispute resolution centre and an intellectual property trading centre.

Hong Kong will continue to be an open bridgehead to mainland China and an excellent place to manage operations in East and Southeast Asia, welcoming investment and offering investors excellent conditions and business opportunities.