Perfectly positioned?

In 1997 the UK handed over control of Hong Kong to The People's Republic of China, and Hong Kong became a Special Administrative Region of China.
This established the position of 'one country, two systems' by allowing Hong Kong to retain a significant degree of autonomy for a period of at least fifty years. The basis of law and doing business has remained unchanged from British rule with the exception of matters relating to security.

With this background, Hong Kong has continued to be a primary location for large corporate headquarters from all over the globe looking to expand in the region. In 2014, GDP grew by 2.3 per cent to US$287.9 billion. The forecast growth for 2015 is within a range of 1 per cent to 3 per cent, which shows the level of uncertainty within the forecasting, and is very dependent on the wider global economy.

Hong Kong has shown continued growth over the past few years, which has benefited the professional services sector. Growth in professional services in 2012 was 5.7 per cent, in 2013 4.6 per cent and in 2014 2.1 per cent. As this demonstrates, the professional services sector continues to grow in a difficult global economic market.

As a market, Hong Kong attracted Foreign Direct Investment (FDI) of US$77 billion in 2013 which put it in fourth position in the global rankings after the US, China, and Russia. Given the relative size of Hong Kong, this is an extraordinary statistic which demonstrates its importance to the global economy.

Hong Kong is listed first in the 2015 Index of Economic Freedom, building on its reputation of fiscal freedom and regulatory efficiency. Interestingly, the index measuring the freedom from corruption fell, which was seen as a result of increased influence of Beijing on the democratic process in Hong Kong, which resulted in protests in 2014.

Relationship with China

Without a doubt Hong Kong is perfectly positioned to leverage the unique relationship it has with China. In 2003, China and Hong Kong entered into the Closer Economic Partnership Arrangement, which has since been further enhanced by Supplements, and has expanded the liberalisation of the market and assisted with the development of economic cooperation between the two jurisdictions. This agreement has also helped with the supply of legal services into the mainland from Hong Kong.

In December 2014, a new agreement was entered into, the Agreement of Achieving Basic Liberalization of Trade in Services in Guangdong, which came into effect in March 2015. This is a further demonstration of an opening of the Chinese market to Hong Kong.

China's government has become much more internationally focused, realising the importance of the global economy on its own domestic economy. The measures it is taking to open China up will only increase the importance of Hong Kong as a stepping stone into China.

Recent changes have also permitted Hong Kong-qualified lawyers to practise in China following an easing of restrictions.

With China forecasting growth in the region of 7 per cent, and as the quality of this underlying growth improves, being a close friend will be a great base for Hong Kong's own economy.

The opportunities

For international legal firms looking to establish a presence in Hong Kong there are a number of areas of opportunity.

The IPO market allows legal firms with strong corporate practices to build a presence for the future with the investment cost being balanced with this strong pipeline of Chinese opportunities. The Ministry of Finance in China has been preparing a number of local banks and asset management businesses for IPO allowing firms to focus their efforts and marketing on specialist sectors.

Arbitration is another area into which Hong Kong has been expanding. The Hong Kong Arbitration Ordinance is internationally recognised and is an advanced process for arbitration. The decisions in Hong Kong are enforceable widely in the world, as it is part of the New York Convention. Hong Kong arbitration decisions are enforceable in China, and the location and links between Hong Kong and China will no doubt make Hong Kong well situated to develop the arbitration and dispute market place. Arbitration and mediation have been increasing as they are seen as a less costly way of resolving a dispute.

The level of FDI into Hong Kong is an indication of the level of deal activity, which also drives the need for legal advice and services. As noted above, FDI for Hong Kong was the fourth largest globally.

A place to live

Hong Kong has a dense population - an incredible 6,300 people per square kilometre! For some, this can feel a little too intense. Hong Kong does, however, have a significant proportion of its territory set aside as parks and recreational areas, giving some respite from the populous city centres.

Unemployment is very low in Hong Kong. This leads to a increasingly tight labour market, which in turn results in higher pressure on making wages competitive.

Wage costs in the professional services sector are also among the highest in Hong Kong, which needs to be considered when looking to relocate staff and also the cost burden when establishing a presence.

The personal tax regime is favourable in Hong Kong. The personal tax rates range between 15 per cent and 17 per cent, with either a progressive rate being charged or a standard rate - with the lower amount payable.

From an entity perspective, the tax regime is also relatively simple with a flat rate of 16.5 per cent. There are also 29 Double Tax Agreements in place, which allow for a more favourable tax treatment on an international basis.

Legal presence

There are already a number of established legal firms in Hong Kong. Data from the Hong Kong Bar Association shows that there are 75 foreign law firms in Hong Kong, with more than half of the top 100 global firms being represented. The sheer number of firms does mean the market can be considered a crowded market.

Firms need to give careful thought to their niche focus prior to expanding into Hong Kong which may be driven by specific sector expertise, dispute or corporate focus.

What will the future bring?

As highlighted earlier, the influence of China will continue to have a huge impact on Hong Kong. This can be seen as both a positive and a potential negative. The current strong links will without doubt provide a pipeline of corporate activity for Hong Kong.

The impact of the globalisation of the Chinese renminbi (the official currency of China) and the ability of Hong Kong to act as a cross border settlement jurisdiction will also increase trade flows through Hong Kong and help reinforce its position as a major financial centre.

However, with the current progressive government in China, which has a real international focus, and the continuing liberalisation of Chinese markets, this could mean that the long term future of Hong Kong as a launch pad for China is negated over time.

The level of autonomy within the region has also been called into question with the recent protests for democracy. Commentators are worried that the Chinese government may look to impose its will on Hong Kong before the 50 year agreement expires.

What is clear is that in the short to medium term, Hong Kong is a vibrant and exciting place to do business, with the current advantage of having a unique relationship with China - and this cannot
be ignored.

Matthew White is international practice leader for professional services at BDO (www.bdo.co.uk)

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