Life in Hong Kong is rarely static: that is its blessing and also its curse.

In this rambunctious city of fast times and even faster money, things change with lightning speed and fortunes can be reversed – for good or bad – in what seems like mere moments. A speculator’s heaven (or hell, depending on one’s luck), Hong Kong remains a magnet for some of the world’s brightest and boldest businesspeople. More exciting than Singapore, more exotic than New York and more energetic than London, it is a city of dreams – but one beset in recent years by some nightmarish crashes and crises.


Hong Kong’s cosmopolitan, sophisticated residents are as well acquainted with busts as they are with booms. The SARS outbreak, coming as it did only a few years after the 1997 Asian financial crisis, hit hard. In a lot of ways, the city is still recovering from this violent one-two punch. But there is much to suggest that, nowadays, Hong Kong has got its bounce back.

John Rutherford, director general of Invest Hong Kong, and his deputy Mark Michelson – looking relaxed and confident in the investment promotion agency’s well-appointed offices in swanky Pacific Place – speak of the current upswing and dismiss doubts about Hong Kong’s continued relevance as a gateway to China and investment hub for Asia.

“Post 1997, Hong Kong is more relevant than it has ever been,” Mr Rutherford insists. “There is some talk that Hong Kong has had its day but that’s not the case. We’re seeing huge investments.”

Two-way gateway

Not only does Hong Kong still proclaim itself to be the official gateway into China, it is now also being positioned as a gateway out of China, as Chinese companies, urged on by the national government, expand internationally in greater numbers.

Invest Hong Kong could not ask for a better case study of this strategy than Shenzhen-based software company Kingdee. In 1998, Kingdee had a nice position as the number-one enterprise software company in China but it realised that, as competition encroached, if it wanted to maintain its pre-eminence it would have to mature into an international company. This was not to be done rashly – it took three years – but finally senior management went ahead with a meticulously planned internationalisation process. The starting point? Hong Kong.

Having listed on the Hong Kong stock exchange and revamped its processes to meet the higher customer service standards and tougher financial system regulations of Hong Kong, Kingdee is now ready to move out across Asia Pacific, and then the world. “Our competitors see that we are doing the right thing and following us,” says Toa Charm, general manager, Asia Pacific for Kingdee. They are following the company through Kong Kong.

B&Q Asia has used the same strategy, setting up its regional HQ in Hong Kong and expanding into China from there (see page 86).

New doors to China

As for traffic going in the other direction, there are inevitably those who question whether Hong Kong is needed as a jumping-off point into China anymore. Some companies are now inclined to jump straight in.

AMS Group, set up two years ago, advises foreign companies on outsourcing and product development in China. Most of AMS’s clients are pretty green, according to director Simon Masters. “It is usually their first venture into China,” he says.

He and his Dutch colleague Bart Bakkum, chatting in AMS’s small office in Guangzhou, are not convinced that it is necessary to go through Hong Kong. “Few companies looking to China would think of Hong Kong because of the labour costs. Tax is lower but it’s still a much more expensive place to be,” Mr Masters says, although he acknowledges that Chinese labour is not as cheap as it once was.

“I have heard of people doing high-tech work back in Hong Kong again, but people are still doing manufacturing here on the mainland.”

The work being done in Kong Kong, he says, is “very high level, very high-tech, but even that will lose its advantages because Shanghai and the coastal areas are catching up”.

Mr Bakkum says Hong Kong has its benefits and it makes sense for companies to capitalise on them when appropriate, but these days they are mainly administrative and tax related. “Before you talk about tax you need to make some money first,” he says. And it is pretty clear where he and Mr Masters think the money is to be made.

Stepping stone

Jeremy Sargent, a partner and resident representative at Stephenson Harwood & Lo’s Guangzhou office, is as good a judge as any of whether Hong Kong is still essential to foreign investment plans for China. As one of the few international law firms with an on-the-ground presence in southern China, Stephenson Harwood & Lo advises on most legal aspects involved in investing in China.

“In our experience, 90% of small and medium-sized enterprises going into China from the UK still use Hong Kong as a stepping stone,” he says.

Hong Kong officials have high hopes for the Closer Economic Partnership Agreement (CEPA) with mainland China, a trade and economic integration pact. While the jury is still out on CEPA, Mr Sargent reckons its long-term prospects are good. “No-one realistically expected it would bring instantaneous big results,” he says.

Mr Sargent has clients using CEPA for industries that are not already open to foreign investment, like distribution and trading, warehousing and retail. In one case, a client that was planning to shift its high-value-added manufacturing to China has now decided to keep it in Hong Kong, all because of CEPA. “This way, they can stay in Hong Kong where they already have good people,” he explains.

From a legal standpoint, there is much to be said for maintaining some kind of presence in Hong Kong. If an investor sets up a holding company whose sole purpose is to hold an investment intended for China, any changes that may occur to the structure of the business – even to that involving the Chinese investment – can be done through Hong Kong. Crucially, it means the company does not have to go through the Chinese government. In other words, Mr Sargent says: “It means you can remove yourself from the straitjacket of Chinese company law.”

No contest

And his verdict in the Hong Kong vs Shanghai debate? “Shanghai is more for domestic business,” he says decisively. “It won’t touch Hong Kong for a long time for international and regional business.”

Even so, some question whether the Hong Kong government is doing enough to encourage the kind of innovation within its business community that will ensure its competitiveness long into the future. Invest Hong Kong has responded to this with its Innovation and Technology Fund, which includes $300m in seed money intended for technology transfer centres. It is aimed at Hong Kong companies manufacturing in the Pearl River Delta (PRD). “We asked them what they needed in order to be competitive,” Mr Rutherford says. The idea is to allow companies to enjoy the benefits of a trio of complementary competences – research skills from around the world, product commercialisation in Hong Kong and low-cost production in China.

But what happens when complimentary competences turn into competitive ones? The day when Shanghai can match Hong Kong in management expertise, English proficiency and financial acumen is at least 10 years into the future – places like the PRD, no less than 20 – but in all likelihood it will happen. And then what?

It is a question Hong Kong officials are already pondering. In theory, the answer is simple: there is much talk of trying to stay ahead of the competition, of constantly moving up the value chain.

But what does this mean exactly? After all, Hong Kong cannot move that much further up the value chain; it is already comfortably situated along the top rungs with value-added industries and financial services.

Refocus and adapt

Frankie Sum, vice-president of sales for Asia Pacific North at EDS Electronic Data Systems in Hong Kong, suggests the solution lies in diversification and adaptation. “It’s not so much about moving up as refocusing,” he says.

One area Hong Kong is refocusing on – and rightly so, in Mr Sum’s opinion – is logistics, where the city’s sophisticated communications environment, convenient location and world-class airports and port make it very difficult to beat.

Yet in a get-rich-quick culture where speculative investment is practically a sport, worrying about the long term does not come naturally. “Hong Kong still has a lot of competitive advantages,” Mr Sum says. “But people need to be more forward-looking in their outlook rather than just looking back on the good old days.”

Given Hong Kong’s new buzz – or rather its returning buzz – some might argue that the good old days are happening right now.