Hong Kong’s role as ‘super-connector’ in global and regional supply chain

Hong Kong’s status as the preeminent supply chain ‘super-connector’ for Chinese Mainland enterprises to expand overseas and for global companies to access the market and regional supply chains has been reaffirmed by a major new US-Hong Kong research initiative published in December.

Commissioned by the Hong Kong Trade Development Council (HKTDC) and conducted by the Bay Area Council Economic Institute of the United States, the study analysed the ways in which the shift in US trade policy has triggered the accelerated reconfiguration of global supply chains.

Titled ‘Strategically Leveraging Supply Chains to Access the Asian Market’, the study noted that heightened geopolitical tensions, evolving trade policies, environmental pressures and technological advancements had served as a collective catalyst for a supply chain revolution that was impacting every aspect of the global economy.

In the wake of this mass recalibration, companies are having to reassess their operations and look to manage previously unencountered risks, ensuring that resilience is now prioritised alongside cost management and consistent competitiveness. This, it said, will inevitably impact the primacy of Asia’s role within this transformed landscape.

While subject to the same US reciprocal tariffs as the Chinese Mainland, Hong Kong as a stand-alone customs territory maintains a zero-tariff rate distinct from the Mainland and does not impose reciprocal tariffs on the import of US goods.

This and the exemption from tariffs for qualified goods exported from Hong Kong to the Chinese Mainland under the Closer Economic Partnership Arrangement (CEPA) has positioned Hong Kong as a key potential platform for US sales to the China market. In 2018, the CEPA was extended extension to include trade facilitation measures in the Guangdong-Hong Kong-Macao Greater Bay Area (GBA).

To qualify for the preferential treatment, goods exported to the Chinese Mainland require a Certificate of Hong Kong Origin–CEPA (CO–CEPA) issued by the Hong Kong SAR’s Trade and Industry Department or by one of several Government Approved Certification Organisations (GACOs) such as the Hong Kong General Chamber of Commerce.

International companies with a qualified Hong Kong presence are eligible to leverage CEPA’s benefits when accessing the Chinese Mainland market. This can be done by establishing a legal entity in Hong Kong or by partnering with or acquiring a qualified Hong Kong company.

The manufactured products produced in Hong Kong and sold in the Mainland market will not be subject to Mainland tariffs. Qualifying companies are required to meet Rules of Origin thresholds that may consider where production occurs, apply a change in tariff heading (CTH) approach, and consider local content in a value-added requirement.

For zero-tariff treatment in some product categories, a company’s products must undergo “substantial transformation” in Hong Kong, with a value-added of at least 30%. Companies can subcontract for processing outside Hong Kong and add final finishing to a product in Hong Kong before its export to the Mainland.

This would, for example, allow a US company to establish a base of operations in Hong Kong, develop production partnerships in the GBA, and export those products to the Chinese Mainland under favourable CEPA terms.

When structuring contracts or joint ventures with Chinese Mainland partners, including those in the GBA, the foreign company’s Hong Kong entity has the ability to select Hong Kong as the governing law and seat for arbitration, assuring access to the city’s common law framework and significantly mitigating risk with regard to trade, investment, intellectual property, and other commercial disputes.

Service providers can also access CEPA benefits. Currently, the Chinese Mainland has fully or partially opened up 95.6% of its service sectors to Hong Kong companies. Benefits include the allowance of wholly-owned operations, relaxed restrictions on equity shareholding, reduced registered capital requirements, and relaxed restrictions on geographic location and business scope.

The critical step is to incorporate a legal entity in Hong Kong. Under CEPA’s non-discrimination principle, a foreign-owned company registered in Hong Kong will be treated as a “local Hong Kong service provider” and eligible for CEPA benefits.

The entity could be a regional headquarters, a project-specific company, or a joint venture with a local partner. With the recent removal of a qualification requirement of three years of substantive operations in Hong Kong, newly established companies can access these benefits almost immediately.

Another evolution of the original CEPA provides (with some exceptions) national treatment for investors from Hong Kong in all non-service sectors including manufacturing and investment in assets. Investment protection measures apply to both the service and non-service sectors, including restrictions on the expropriation of assets, the transfer and return of investments, and the simplification of procedures relating to investment. The Trade & Industry Department provides Hong Kong Investor (HKI) certificates to qualifying Hong Kong entities.

The report cited the electric vehicle (EV) sector as one example where Hong Kong is already playing a pivotal role in the regional supply chain transformation process. As mainland-based automotive manufacturers, as well as their global counterparts, prioritise the expansion of EV and battery production in Southeast Asia, Hong Kong has served as a crucial investment and financial hub, acting as an effective conduit for significant capital to be channelled into countries such as Indonesia, Thailand and Malaysia.

More generally, recent investment data also clearly indicated that Chinese Mainland companies are increasingly utilising Hong Kong as the support platform for many of their regional projects. This outcome bolstered by Hong Kong’s wide-ranging financial and professional services sectors, as well as the city’s agility in adapting to technological transformation and the evolving regulatory landscape.

“The adoption of strategies such as reshoring, nearshoring and developing redundant supply routes by many global businesses is accelerating the regionalisation of supply chains,” said Sean Randolph, Senior Director of the Bay Area Council Economic Institute. “Companies are diversifying their manufacturing bases, while relocating certain activities from China to other countries in Southeast Asia, India and Mexico – adopting the so-called ‘China+1’ strategy in order to ensure resilience and reduce risk exposure.

“At the same time, despite the ongoing bilateral friction, it is notable that many US companies remain deeply engaged with China. This is largely on account of the country’s unique concentration of suppliers – especially in the case of regions such as the GBA – which cannot be easily replaced or replicated elsewhere.

“Indeed, a number of recent surveys and announcements – including major Chinese Mainland investment commitments by businesses of the stature of Nvidia and Apple – have clearly demonstrated that, for many US businesses, China remains a key locale, with their engagement at least partly due to the indispensability of the broader regional supply chains,” said Randolph.

This new HKTDC research highlights Hong Kong’s vital roles as both a ‘super-connector’ and a ‘super-value-adder’, while confirming the city’s status as the key enabler for any mainland enterprise looking to expand overseas, and simultaneously serving as a gateway for any global company looking to access the revitalised regional supply chains and the China market.

“As companies reshape supply chains and seek resilient gateways into the region, Hong Kong remains one of the most efficient and trusted locations to establish a presence,” said Alan Fong, Sovereign Managing Director – Asia. “Hong Kong is a key strategic hub where regional, Mainland and global businesses continue to build and expand their operations.”

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With Hong Kong’s strategic role strengthening, now is an ideal time for businesses and families to explore new opportunities in both the city and the wider Greater Bay Area. To learn how we can support your Hong Kong set-up or expansion, please contact us at below.