Mainland China-ASEAN Economic Ties: Positioning Hong Kong as a Service Hub

Hong Kong has long been a premier business and trading hub in Asia. The city is home to more than 9,000 foreign companies, many of which have placed their strategic functions, including sales, operations, research and development (R&D), distribution, regional headquarters and corporate treasury centres in the city. Located strategically between mainland China and the ASEAN countries, Hong Kong is well positioned to develop as a Central Business Platform amid growing mainland China-ASEAN economic ties. As one of the most service-oriented economies in the world, Hong Kong offers a full range of finance, legal and other professional services to support the growth of all cross-border businesses.

In a survey conducted by HKTDC Research¹, respondents evaluated Hong Kong’s performance in providing professional services for their mainland China-ASEAN businesses. Overall, respondents were found to be largely satisfied with the financial and legal services offering in Hong Kong, especially for the maturity and comprehensiveness of the market as well as the diversity of the services provided. However, respondents were slightly disappointed with the capability of the city in nurturing start-ups, mainly because of insufficient government support and incentives.

A Well-Recognised Finance Platform

Hong Kong is known as a leading financial centre around the world. Despite the challenging global economic situation, the city remains the world’s largest initial public offering centre and is ranked second in Asia in terms of private-equity capital under management as of end-2019. Focusing on the mainland China-ASEAN business, respondents were asked to rate Hong Kong’s performance as a finance platform on a scale of 1 to 5, with 1 being the least satisfied and 5 the most satisfied. While most would agree that operating in Hong Kong comes with high costs, respondents were found to be satisfied with the overall quality of financial services offered for their regional businesses, with an average score of 3.9 out of 5.

The maturity and comprehensiveness of the financial markets in Hong Kong were found by most respondents to be impressive, not only with its accessibility to the international financial markets (4.24), but also because the city offers a huge cluster of international financial institutions (4.21) and diverse financial products and services (4.12). A partner of a global consulting firm interviewed praised Hong Kong as the perfect place to raise funds given “its abundance of venture capital and private equity”.

The vigorous offshore renminbi (RMB) business in Hong Kong is clearly another unique edge, which makes the city stand out from other financial centres in the region. Clearance and settlement in RMB (3.9) have been efficient and reliable. The city is also filled with financing and investment opportunities in RMB, with a broad spectrum of financial products and banking services (3.77) available.

Plato Wai, General Manager of SHOPLINE, stated: “Hong Kong possesses good fundamentals such as a funding platform, talents and culture for nurturing e-commerce start-ups in the region.” As an attempt to venture outside Hong Kong, SHOPLINE has specifically leveraged the city as a funding platform to support its development in other Asian markets.

However, considering the increasing opportunities arising from the developments of national strategies including the Belt and Road Initiative (BRI) and the Guangdong-Hong Kong-Macao Greater Bay Area (GBA), as well as the intense competition from other financial centres in the region, respondents were well aware of the importance of Hong Kong’s financial market catching up with regional developments.

In the in-depth interviews, respondents suggested Hong Kong explore with mainland China and ASEAN authorities to try to open up more channels for cross-border fund flows. For example, mutual customer-base access between Hong Kong and mainland China would help financial-services providers in Hong Kong to further penetrate the Chinese market. As for the ASEAN market, Hong Kong could strengthen its connection with the local financial markets by being actively involved in the Regional Comprehensive Economic Partnership (RCEP) and other agreements with a focus on financing aspects.

Interviewees also looked for greater alignment and convergence around the regulations for the finance sector in the GBA and ASEAN. A seamless banking experience across the region would be particularly essential, according to respondents, including the ease of opening and operating bank accounts, as well as standard compliance requirements such as the cross-border know your client (KYC) procedures.

Finally, technology advancement is expected to disrupt the finance industry, interviewees noted. To enhance its strengths as a premier financial services provider, Hong Kong should optimise resources to boost the adoption of financial technology (FinTech) in the city. By fostering a complete FinTech ecosystem, from early-stage start-ups to international tech companies and the public sector, Hong Kong should prepare itself to capture not only the front-office functions that the city already specialised in, but also the manufacturing capabilities in developing prototypes.

Offering World-Class Legal Services

For companies operating across the border, legal issues could be particularly complicated, given the contrasting legal systems practised in different countries. Legal professionals in Hong Kong are not only familiar with the local legal system but are also knowledgeable of other common-law jurisdictions. With their rich experience in giving international legal advice, this has set Hong Kong up as a remedy to mainland Chinese enterprises’ unfamiliarity of legal systems, trade structures and commercial rules of foreign countries. Hong Kong legal practitioners are bilingual in Chinese and English, making the collaboration with mainland Chinese clients and legal practitioners more efficient in terms of time and cost.

On this front, Hong Kong is well positioned as the legal services platform for mainland China-ASEAN businesses, with an average score of 3.79 out of 5. Specifically, respondents were impressed by the deep pool of legal professionals and talents (4.02) available in Hong Kong. With more than half of the Global 100 law firms establishing their presence in the city, an Executive Director of a leading regional financial institution observed that, in his own experience: “There are lawyers from all over the world in Hong Kong, enabling the legal sector to provide well-rounded solutions to their clients.”

According to the survey respondents, the legal system in Hong Kong is also mature enough to handle their cross-border legal issues, including its robust track record of integrity (3.97), strong governance of legal practitioners’ professionalism (3.96) and access to a great variety of legal services (3.93). A Director of a leading financial institution interviewed commented: “Hong Kong is a top choice for resolving commercial disputes preferred by Chinese and ASEAN parties, on the strength of a trusted legal system, cost effectiveness, efficiency and reliability of mediation, arbitration and adjudication services.”

Eddy Wong, General Manager of Essendant, reaffirmed the city’s success as a Central Business Platform, given its transparent legal and tax structure, saying: “Compared with many other cities in the region, Hong Kong fully understands the importance of the procedural compliance and demonstrates a meticulous commercial process without overlooking the quality of output and products and services.”

Nonetheless, many respondents were disappointed with the level of government support and incentives (3.47) and the pace of the legal reforms (3.46) in the rapidly changing business environment. One interviewee said: “Some laws in Hong Kong are not tailored to the latest developments in business sectors, especially when new technology is involved.”

Expecting a growing demand for dispute-resolution services arising from the BRI developments, respondents hoped the government could encourage and attract Chinese as well as overseas enterprises to leverage Hong Kong as the dispute-resolution centre. In particular, setting up a co-operation mechanism with the relevant national authorities and organisations would help to promote legal and dispute-resolution services in Hong Kong.

To further enhance its competitiveness as a leading legal platform in Asia, respondents wished the city could encourage the use of artificial intelligence (AI) and other emerging technologies in the legal sector. The CEO of an InsurTech start-up interviewed stressed: “Legal services in Hong Kong need to adapt to evolving new economy models, including innovative pricing options for start-ups, as well as creativity to apply ‘legaltech’ and pushing legal boundaries to serve different businesses in an era of industry convergence.”

More Efforts Needed in Nurturing Start-ups

Overall, the survey shows respondents were, in general, satisfied with the offering of the professional services in Hong Kong for their mainland China-ASEAN businesses. However, when evaluating different growth potential of an economy, a well-established ecosystem in place for nurturing start-ups is indispensable. Unfortunately, the performance of Hong Kong as a start-up incubation platform in the region is relatively less impressive, with a rating at 3.19 out of 5.

The overall market environment for start-ups is optimistic, according to respondents. This includes the ease of doing business (3.62) and accessibility to private-sector funding (3.29). The Chairman of one leading start-up association interviewed said: “Hong Kong has the richest funding source from both public and private sectors in the region.” The city also has access to densely located world-class education institutions for research and development (3.26), “supplying good quality talents and research facilities”.

Jason Tu, the CEO of MioTech, added: “Hong Kong has a unique role in Asia because it has a richness of data in the region and access to technology from mainland China.” The city is also a haven for regional expansion, with its accessibility to an abundance of funding sources, including government schemes, accelerators and incubators, crowdfunding, venture capitalists and angel investors from all over the globe.

Despite the strengths, respondents have perceived a lack of commercialisation opportunities on the market (3.1). Government support and incentives (2.92) have lagged some way behind market expectations. As one Executive Manager of a leading financial institution interviewed said: “In order to create a sustainable environment for start-ups, a fundamental change should be driven by the government, then allow the market to adapt and operate.” Respondents believe a combination of a top-down and bottom-up approach is critical to the sustainability of a strong start-up ecosystem in Hong Kong.

For the top-down, interviewees suggested effective regulations and government promotions could contribute to the city’s high standings. The government should charter a policy direction and create a safe environment for start-ups to pilot-test as well as operate. Specifically, the government should review laws and regulations from time to time to ensure their applicability to new business models, product development and processes. The CEO of a leading resource and energy firm remarked: “Outdated laws imply increasing uncertainty to the technology sector.” With sunset clauses in place, the city could avoid holding back highly innovative enterprises.

The bottom-up solution, on the other hand, relies on support from every stakeholder in Hong Kong. Industry associations could collectively express the needs of their members and suggest ways to work along the policy direction. Corporates, universities, investors and start-up communities could collaborate with each other to provide a full range of support from mentoring, networking and fundraising for start-ups and entrepreneurs. For start-ups themselves, they can contribute to the ecosystem by creating success stories and branding themselves to inspire young entrepreneurs to challenge the status quo.

One Executive Manager of a leading automobile company interviewed noted: “Hong Kong has the potential to be the international innovation hub and the innovation gateway to the world.” Indeed, with world-class professional services offerings in the city, Hong Kong has sound fundamentals for the growth of start-ups. While the performance of Hong Kong as a start-up incubation platform in the region may fall short of the respondents’ expectations at this stage, many companies are looking forward to a greater collaboration between the government and industry professionals. With increasing support to all stages of companies, hopefully Hong Kong could develop as a more comprehensive business platform for mainland China-ASEAN businesses in the years to come.

¹ HKTDC Research commissioned Deloitte Advisory (HK) Ltd. to conduct a study on Hong Kong’s competitiveness as a Central Business Platform for trade and business between mainland China and ASEAN through a combination of in-depth company interviews and online surveys in late 2018 to early 2019.

A total of 304 senior executives in private and public sectors were interviewed for their experiences in leveraging Hong Kong. In addition, 115 survey responses were collected on the strengths and weaknesses of Hong Kong as a mainland China-ASEAN Central Business Platform in six key areas: (i) trade; (ii) supply chain and logistics; (iii) international finance; (iv) tourism and MICE; (v) start-up and incubation; and (vi) legal services.