China (respectively, the Peoples Republic of China), consists of 22 provinces, 5 autonomous regions, 4 direct-controlled municipalities and 2 Special Administrative Regions (SARs). A SAR is under the sovereignty of the PRC but has partial (and relatively far-reaching) independence; the most interesting status: “one country, two systems”. The SAR is seen as an independent territory and not considered to be a regular part of mainland China.
Note, SARs and special economic zones (SEZs), which are business development zones in the mainland, are very different concepts, and should not be confused.
There are two Special Administrative Regions within China, namely Hong Kong and Macao. Hong Kong is a much more significant region, as it is made up of 7 million people, whereas Macao’s population is only 600,000. These two territories were previously occupied and under the rule of other countries, with Hong Kong being under British rule and Macau being under Portuguese rule until the late 1990’s.
Due to this, the SARs had developed in a different manner than mainland China that granted them a perseverance of their special status also after being integrated in the PRC again. This guarantee allowed them to become special administrative regions within the country, which is leading to interesting phaenomena ever since.
What practically separates SARs from the PRC is that the legal & economic system, education and ideology are much closer matched to that of Western countries. The citizens who reside in these areas are also not governed under the Chinese regime–they have their own citizenship.
Hong Kong is the more famous and important SAR of China.
Re-Imports and Fake Trade
China as a country has a high re-import rate, residing at 8%. When compared with other Western countries like France, UK and so forth, these countries generally sit at 0.5-1.2% of total imports.
The reason for such a high re-import rate is quite complex, and underlying factor is the special relationship that China has with Hong Kong. Even though Hong Kong is technically under Chinese sovereignty, it is still classed as independent, meaning all goods that cross the border from Hong Kong to China twice are determined to be a re-import. The reasons are due to China using a general trade system. This means that China doing business in Hong Kong, the goods are classified as imports or exports with Hong Kong being treated as any other trading partner like the U.S. China also uses the rule of origin to define those trading partners, so if the goods originally come from China, it gets classified as a reimport even if the goods were shipped through Hong Kong
Doing business in Hong Kong provides inward processing for China, as well as being a distribution centre. This results in many goods being shipped to Hong Kong then back to China again for logistics reasons, counting as a re-import. Many private manufacturers in China only have a license to sell their products abroad, which makes it necessary for them to send their goods to Hong Kong and back if you want to go around this limitation. Another important aspect to explain the huge share of re-import is the difficulty for Chinese people to send money abroad. By sending not money but goods abroad respectively to Hong Kong, you can go around the strict capital controls by disguising the money as payments for imports and exports. If cleverly organized regarding the pricing of the goods, you can basically keep the difference in your foreign account. All this “fake trade” especially with Hong Kong is supposedly so big that even Chinese national trade statistics are biased. The issue of trafficking goods from the SARs to the mainland for tax reasons is another closely related border phenomenon.
Special Privileges and Advantages of Doing Business in Hong Kong
Due to Hong Kong being so close geographically to China, there are many advantages of doing business in Hong Kong.
Firstly, one of the strongest advantages of doing business in Hong Kong is the comprehensive legal system. This provides a fair and equitable system that is favourable to international companies, as under the PRC the courts can be heavily weighted in favour of Chinese firms. The quality of the – inherited British – legal system is also shown in the number of legal services, with many legal professionals working out of Hong Kong. These are not restricted to lawyers or solicitors, but also accountants and other professional services.
Furthermore, in doing business in Hong Kong, they provide a resolution service for business disputes, acting as an intermediator or arbitrator. More than 140 different jurisdictions uphold the arbitration rulings made in Hong Kong, providing security to businesses who trade in China. In addition to this, Hong Kong also benefits from lower tax rates for individuals and businesses. These are currently set at a maximum of 15% for income tax for individuals and 16.5% for corporations, whereas in mainland China the income tax can reach 45% and 25% respectively. This has allowed Hong Kong to be one of the most attractive places to conduct business and register companies.
Many people in Hong Kong are afraid that they could lose their privileges
when the direct influence of the communist party increases.
Another large advantage is the special relationship that Hong Kong and China have. This is seen under the Mainland-Hong Kong Closer Economic Partnership Arrangement (CEPA). A very similar agreement was also enacted with Macau. These arrangements focus on improving the relationship between the “two countries” in areas of finance, trade and investment facilitation, attempting to tie the two countries together for a greater purpose. Currently, if you produce a product in Hong Kong which confirms to CEPA origin rules, it can be imported into China without being subjected to any tariffs. Even foreign firms based in China can take advantage of CEPA, as long as it meets a few rules first.
While Hong Kong has been mentioned significantly in this article, Macau investment should not be overlooked, and also, the various benefits are similar to those in doing business in Hong Kong. Along with lower tax rates, the zone allows gambling, which is outlawed in mainland China and has allowed the state to generate significant revenues from the activity. Due to the size difference and better business infrastructure in Hong Kong, Macau’s role is usually limited to gambling. However, here it plays plays a leading role and is the by far largest gambling centre in the world since 2006.
Due to Hong Kong’s colonial history, English is a commonly spoken language in this area, which is ideal for international businesses doing business in Hong Kong in English. The nation is also perfectly located in the heart of Asia, making it an ideal central base not only to if you desire to break into the Chinese market, but also Asia as a whole.
While these two special administrative regions have come with many various advantages, there are signs of concern arising. Particularly for doing business in Hong Kong, which has built the territories foundation on being a business hub. This role they have created has become under threat recently, as mainland China continues to relax its own financial policies and making itself more attractive to foreign investment and other professional services. For example, previously Hong Kong exclusively offered many professional financial services which were not available in China; however, recently these are now available in Shanghai and Shenzhen. While Hong Kong should remain as a business hub, if China does continue to relax their policy, Hong Kong will feel knock-on effects.