Hong Kong remains of crucial importance to Mainland China

Despite Hong Kong’s traditional role as an ‘economic’ city in which politics plays only a minor role, anti-government protests have rocked Hong Kong over the summer. This has led to speculation in Hong Kong and around the world that the successful post-colonial formula of “one country, two systems” is under threat.

While it has certainly been an unsettling period for those of us living and working here, Hong Kong’s primary concern has always been to ensure that the wheels of commerce can continue to run smoothly. We firmly believe that normal business will resume because Hong Kong remains more important to Mainland China than its size and status might suggest.

According to The Economist, Hong Kong’s economy is disproportionately useful to China because it has a status within a body of international law and rules that gives it seamless access to Western markets.

“The status is multifaceted,” said the magazine. “It includes: a higher credit rating; lower risk-weights for bank and counterparty exposures; the ability to clear dollars easily; independent membership of the WTO; ‘equivalence’ status for its stock exchange with those in America, Europe and Japan; recognition as a ‘developed’ stock market by index firms and co-operation agreements with other securities regulators.”

Cross-border bank lending booked in Hong Kong has roughly doubled in the past decade and Hong Kong’s stock market is now the world’s fourth largest, with about 70% of the capital raised for Chinese firms. Most Chinese foreign direct investment flows through Hong Kong and the number of multinationals with their regional headquarters Hong Kong has increased by two-thirds since 1997, to around 1,500.

And a piece of good news which went largely unnoticed is that on 18 January 2019, Hong Kong and China signed the Arrangement on Reciprocal Recognition and Enforcement of Judgments in Civil and Commercial Matters between the Courts of the Mainland and of the Hong Kong SAR. In our view this means Hong Kong’s position as the gateway to China is enhanced and made even more important. Hong Kong’s usefulness in recent years has relied strongly on it being the service centre for the Far East and the place where foreign investors prefer to have their affairs settled. It offers the protection of numerous advantageous treaties which make it easier and more tax friendly as the gateway to China. Now commercial disputes in China can be litigated in Hong Kong as long as there is an Hong Kong connection. Setting up the holding company in Hong Kong would provide the necessary nexus. Judgements obtained in Hong Kong can be enforced without further court proceedings in China and vice versa. This is potentially massively advantageous. How much better to litigate in Hong Kong rather than China. Add this to the existence of the CEPA (Closer Economic Partnership Arrangement) and the tax treaty between China and Hong Kong and there are still compelling reasons to incorporate in Hong Kong to access China.

This all means that resolving the protests is important, not just for the citizens of Hong Kong, but for a huge number of other stakeholders. China also knows how much is at stake economically and how much its biggest firms depend on Hong Kong.

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