Hong Kong as regional HQ: time to move?

For those who care to look, the Hong Kong protests are exposing flaws in many assumptions about Hong Kong’s competitiveness. This is not only a short-term concern, either. As revenues come under pressure, partly due to the protests, partly due to a slowing Chinese economy, operating costs are inevitably being looked at more carefully by companies based in “Asia’s World City”. It would be surprising if only a few were considering moving or scaling back their operations here.

The question is: Can other cities in the Greater Bay Area offer compelling alternatives?

The short answer would be: Yes. But do some homework first.

Starting with the big picture, which has been brought into clearer focus by the protests, there is a compelling case for Guangzhou, Shenzhen, and even Zhuhai as relocation options – perhaps just for a part of a business currently based in Hong Kong.

Indeed, stepping back for a moment, it could be argued that Hong Kong’s attractiveness as a base for international companies rests on three pillars, each of which has been steadily eroded since 1997, by both internal and external environmental changes. The protests have simply shone a harsher light on these flaws.

The first of these pillars is Hong Kong’s role as an offshore trading center with a fully convertible currency. As long as China is not ready to open its capital account fully to global investment flows, this one seems to be pretty rock-solid. But is it?

Not from the viewpoint of Shenzhen’s Qianhai and Guangzhou’s Nansha, special zones with ambitious agendas to test the bounds of financial innovation on the mainland. It is only a matter of time before each could be ring-fenced from the rest of the mainland’s banking system and effectively placed outside the Great Firewall. Ping An Group alone could manage vastly increased cross-border trading, if necessary, at the flick of a PBOC switch. The digital Renminbi, which is being tested in Shenzhen, could also be a game-changer. Do multinational financial-service companies based in Hong Kong want to wait until office rents across the border have caught up to Hong Kong’s before considering whether to have a presence there?

This is a longer-term concern, admittedly. But how many corporate leaders in Hong Kong are aware of what is going on across the border in these special zones?

The second core pillar of Hong Kong’s competitiveness is that it is a place where contracts can be written up with parties engaged in China-related businesses, in the belief that the courts here are as impartial as those in their home markets. This pillar is much weaker, as it conveniently ignores the challenge of enforcement when the underlying business is being done across the border. Moreover, the protests are putting previously unassailable assumptions Hong Kong’s rule-of-law to the test, as the city’s courts become overwhelmed by protest-related cases and political “guidance” appears to become more overt.

For now, the pillar is holding. But in the meantime, it is worth looking at Qianhai’s legal reforms, where special courts are being set up to handle international arbitration cases. Guangzhou’s Internet Court, meanwhile, is setting new standards for handling data-dependent disputes. And in five years’ time, the basic structure of the South Station Area in Panyu will have been built out, with a special zone set aside for Hong Kong-Guangdong joint-venture law firms (we have a feature coming on this).

The third pillar, as an offshore hub for accessing business-critical information, thanks to free-speech protections provided under the Basic Law, is built on sand. Fake news is fast becoming as difficult to cope with in Hong Kong as it is on the mainland, and established news media shape their coverage to suit business priorities with increasing regularity. Hong Kong is still a better place to read a Bloomberg business terminal. But for how much longer will this gap with Shenzhen and Guangzhou – at least in their special zones – be maintained? The Red Pulse data/analysis service provides an inkling of how it is being steadily closed by smart people with AI-supported technology.

Beneath all three of these assumptions, moreover, lies an inconvenient truth. Many international companies put up with offensive office rents, less-productive local workforces, and generally higher costs of living in Hong Kong compared to Shenzhen and Guangzhou because their decision-makers are social animals who like living in a more Westernized city. As the protests drag on, this truth will become harder to hide as the real excuse for not doing harder work on a Plan B.

And by the way, both Guangzhou and Shenzhen have some wonderful F&B options – they just need to be searched out.

This is not a call to abandon ship. Hong Kong remains a great city, despite – and, in some ways, because of – the protests. It is a call to do better research about alternative options. Any company that doesn’t have someone looking at what’s on offer in the Greater Bay Area needs to assign one, pronto.

There are a lot of details to be considered. Top of the list is that Qianhai, Nansha and Hengqin are offering large incentives to move. Cheap office rents, tax equalization, and financial incentives are making relocation a no-brainer for any company with a large back-office operation still in Hong Kong. For client-facing staff, too, the high-speed railways and the HZMB make all three convenient for day trips. Foreigners, too: visas are easy to get these days, and those with PR in Hong Kong can now get a special GBA travel permit.

Also worth consideration are cleaner working environments. Anyone who scoffs at this hasn’t been to see Guangzhou or Shenzhen for some time. Neither city has public transport systems run by people who refuse to spend the necessary money on electrification. The skies and streets of these megalopolises are a lot cleaner than Hong Kong’s.

Again, no one needs to take a full day to check this out for themselves. The High-Speed Railway takes 17 minutes to arrive in Shenzhen’s Futian business district, while a 45-minute bus/taxi can be taken from Central across the Shenzhen Bay bridge to Qianhai. Getting to Guangzhou’s Nansha takes 45 minutes by HSR; getting to the city’s Tianhe business district takes 90 minutes, including a taxi ride from Guangzhou South, and this will be cut to 60 minutes early next year when a new Intercity Railway connection opens. Zhuhai’s Hengqin is further away without an HSR option, and involves more hassle crossing the HZMB, but this will change soon.

Granted, although they are catching up fast, none of these places has the same Western-oriented creature comforts that Hong Kong does. But their cost of doing business is a fraction of Hong Kong’s. As the protests continue to fill viewing screens the world over, for how much longer can this differential be justified?

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