Hong Kong

2 Chapter Economic Environment

    • Economic Status Quo

       The Hong Kong economy slowed further in the first quarter of 2016, growing by 0.8% over a year earlier.   This compared to the 1.9% growth in the preceding quarter.  The external environment deteriorated during the quarter, characterised by subdued global growth and sharp gyrations in global financial and monetary conditions, leading to a deeper setback in both goods and services trade.  The domestic sector also lost some momentum, as the weak global outlook with rising downside risks hurt local economic sentiment.


      The labour market stayed largely stable in the first quarter, notwithstanding the slowdown in the overall economy, with the seasonally adjusted unemployment rate edging up to a still-low level of 3.4%.   Wages and earnings sustained moderate growth.   However, total employment grew only slowly and labour demand saw signs of further weakening, particularly in the trade- and tourism-related sectors. The local stock market underwent another correction at the start of the year, in tandem with many overseas stock markets, reflecting increased risk aversion upon the bleaker global outlook and  intensified divergence in 2 monetary policy stances among major central banks.  Stock prices nevertheless stabilized somewhat in March.  The residential property market remained quiet, with flat prices still on the decline alongside a visible slowdown in trading activities. Inflationary pressures remained contained in the first quarter, alongside the weakening of overall economic growth.  Looking ahead, the upside risks to inflation should be limited in the near term, given the soft import prices and diminished rental cost pressures. 

    • Challenges

       The recent slowdown in Hong Kong's economic growth was considered by HKU Alumni members, as reflected in the survey, to have arisen as a result of the following governance issues:

       • Swinging Government Policy

      • Lacking support on key policies

      • Inadequate policy making procedures

      • Inability to handle crises

      • Other factors include the unnecessary politicizing of public issues due to severe social discontent, and the declining quality of human resources


    • Doing Business in Hong Kong


      Hong Kong is a cosmopolitan city, well known for its business-friendly environment, rule of law, free trade and free flow of information, open and fair competition, well-established and comprehensive financial networks, superb transport and communications infrastructure, sophisticated support services, and a flexible labour market with a well-educated and highly motivated workforce. Hong Kong has a fully convertible and stable currency, and a simple, low-tax system.


      Hong Kong is the natural gateway for trade and investment in Mainland China. With its international outlook and its status as the region's premier business hub, Hong Kong serves as an ideal base for international businesses looking to tap the vast opportunities in China and other parts of Asia.


      Hong Kong signed a unique free trade agreement with Mainland China, the Closer Economic Partnership Arrangement (CEPA), in 2003. The agreement came into effect on January 1, 2004.


      It provides tariff-free access to Mainland China for goods made in Hong Kong and enhances access for Hong Kong service suppliers in 48 service sectors in the Mainland. Because CEPA rules are nationality-neutral, companies from around the world can enjoy the same benefits as local Hong Kong firms if they set up business in Hong Kong or partner with Hong Kong companies to fulfil the CEPA rules.

    • Financial Stock Market

       In the banking sector, at the end of April 2015, there were 157 licensed banks, 23 restricted licence banks and 21 deposit-taking companies in Hong Kong, together with 64 local representative offices of overseas banking institutions. These institutions come from 36 countries and include 71 out of the world’s largest 100 banks. Together they operated a comprehensive network of about 1 376 local branches, excluding their principal place of business in Hong Kong. Banks in Hong Kong engage in a wide range of retail and wholesale banking business. Hong Kong has been ranked first in terms of economic freedom for 21 years (1995–2015), according to the Heritage Foundation.   Hong Kong has a mature and active foreign exchange market, the development of which has been stimulated by the absence of exchange controls in Hong Kong and its favourable time zone location. Links with overseas centres enable foreign exchange dealing to continue 24 hours a day around the world. According to a triennial global survey conducted by the Bank for International Settlements in 2013, Hong Kong was the world’s fifth largest foreign exchange market in terms of turnover. The Hong Kong money market consists primarily of the interbank market. The money market is mostly utilised by institutions at the wholesale level. The Hong Kong Interbank Offer Rate (HIBOR) is determined by the supply of and demand for funds between market players, and therefore is one of the most important indicators of the price of short-term funds in Hong Kong. The daily turnover in the Hong Kong interbank market averaged HK$239 billion in February 2015. Hong Kong’s stock market was the fifth largest in the world and the third largest in Asia in terms of market capitalisation as at the end of April 2015*. Hong Kong was one of the most active markets for raising initial public offering (“IPO”) funds. In 2014, US$29.8 billion were raised. A wide variety of products are traded in the stock market, ranging from ordinary shares to options, warrants, Callable Bull Bear Contracts (CBBCs), Exchange Traded Funds (ETFs), Real Estate Investment Trusts (REITs), units trusts and debt securities. As at the end of April 2015, 1 780 companies were listed on the Stock Exchange of Hong Kong (SEHK), with a market capitalisation of HK$30,995.2 billion. Among them, 896 were Mainland enterprises which have together raised around HK$4,531.4 billion from 1993 to the end of April 2015.   

    • Investment Regulation

       The foreign business community plays an important role in the Hong Kong economy. Foreign companies bring in capital, new technologies and new business practices, and create employment opportunities. The Government believes in, and supports a free market economy and a liberal investment regime.


      According to the United Nations Conference on Trade and Development (UNCTAD), Hong Kong was the second largest destination for foreign direct investment in Asia in 2003. On a global scale, Hong Kong ranked 11th in foreign direct investment inflow in the same year. UNCTAD also pointed out that despite challenges brought by the Severe Acute Respiratory Syndrome and difficult economic conditions during the first half of 2003, foreign direct investment flow to Hong Kong in 2003 reached US$13.6 billion (HK$106.1 billion), up by 40% from an adjusted US$9.7 billion (HK$75.7 billion) in 2002. Further, for the 10th consecutive year, the Heritage Foundation has rated Hong Kong as the freest economy in the world.  


      In view of the general lack of restrictions on investment in Hong Kong, there are few additional or specific incentives to encourage investment; the low rate of taxation and generally favourable investment climate are felt to be sufficient to stimulate investor interest in Hong Kong[1]. However, from time to time the government does launch special schemes to encourage investment in certain areas.

    • Investment Incentives

       Hong Kong does not offer targeted incentive regimes to overseas investors or foreign-owned firms. However, its duty-free status, low tax rates, good infrastructure, freedom from government interference and substantial available capital make it attractive to potential investors, and thus competitive with other countries in the region. The simplicity of procedures for investing, expanding and establishing a local company is a major attraction for foreign investment in Hong Kong. Nevertheless, the government does make certain tax facilities available. While capital expenditure generally is not deductible for Hong Kong tax purposes, to promote and direct capital expenditure toward specific areas, the government grants accelerated depreciation allowances on plant and machinery, as well as special deductions for the following: expenditure on R&D (subject to specific deduction criteria); payments for technical education; purchases of patent rights, rights to know-how, copyrights, registered designs or registered trademarks; expenditure for building refurbishment; capital expenditure on the provision of prescribed fixed assets, including manufacturing machinery and computer hardware and software; and capital expenditure on environmentally friendly vehicles. These special deductions are not available to assets purchased under hire-purchase arrangements or assets leased to other persons. Additionally, preferential profits tax treatment may be available, including a levy of only 50% of the profits tax rate or an exemption for certain qualifying debt instruments, qualifying reinsurance business, captive insurance business and profits of offshore funds derived from specified transactions carried out by a nonresident. In addition, there are proposals to provide certain tax incentives for qualifying corporate treasury centers and open-ended funds. The trading of exchange-traded funds is exempt from stamp duty.  

    • Reasons to Invest in Hong Kong

       1. Government support for companies


      There are various programmes designed to help overseas and local SMEs set up in Hong Kong. These include:

      -Government support for companies

      -Incubator programmes

      -Loan guarantees

      -Funds for marketing



      a.     The Hong Kong Science & Technology Parks incubator scheme provides subsidised office space, consultancy services, investment matching and a small financial aid package to support R&D.


      b.    The Design Incubation Programme (DIP) provides office space for design tenants and other professional support.


      c.    The incubation programmes run by Hong Kong’s Cyberport help creative digital media SMEs and start-ups realise their ideas and build their business.




      a.     The SME Loan Guarantee Scheme (SGS) secures loans of up to HK$6 million for companies that need working equipment or business capital.


      b.     The SME Export Marketing Fund (EMF) helps companies participate in overseas exhibitions and business missions and to place B2B advertising. It can fund up to 50 percent of approved expenditure, up to HK$50,000 per application.


      c.     The SME Financing Guarantee Scheme can provide guarantee coverage of 50–80 percent on loans up to HK$12 million.


      d.     The CreateSmart Initiative provides financial support to SMEs in the creative industries, funding them to build their brand through participation in overseas exhibitions and competitions.




      The Innovation and Technology Fund (ITF) supports companies to upgrade their technology and inject innovative ideas into their business.


      2. Strategically located for business in Asia


      Hong Kong is strategically located at the heart of Asia, alongside many of the region’s most exciting business markets.



      -Beijing, Shanghai, Singapore, Taipei, Manila, Kuala Lumpur and Perth are in the same time zone as Hong Kong

      -Bangkok, Jakarta, Seoul and Tokyo are within one hour’s difference


      Easy and efficient regional travel is key to Hong Kong’s success as a regional centre.


      -Over 100 airlines offer flights to about 190 locations

      -All Asia’s key markets are less than four hours’ flight away

      -Half the world’s population is within five hours’ flight time

      -About 1,100 daily flights between Hong Kong and the rest of the world


      3. Low and simple tax regime

      According to the 2016 Paying Taxes* study of 189 economies, Hong Kong has one of the most tax-friendly economies in the world. Why? The city only imposes three direct taxes and has generous allowances and deductions which reduce your taxable amount.


      -Profits tax is capped at 16.5 percent

      -Salaries tax is a maximum of 15 percent

      -Property tax is 15 percent


      More important are the taxes that Hong Kong does not impose:


      -No sales tax or VAT

      -No withholding tax

      -No capital gains tax

      -No tax on dividends

      -No estate tax


      4. International, transparent and efficient

      -Hong Kong, Asia’s most popular city for international business, is a city that works. Its enduring appeal is built on political stability, the rule of law, free market principles, free flow of information, and English as the language of business.


      All businesses in Hong Kong benefit from:


      -One of the world’s most open, and corruption-free economies

      -Independent judiciary and the rule of law

      -Free flow of information


      5. World-class business infrastructure


      High quality infrastructure is essential to the efficient operations of any business. Hong Kong offers one of the most advanced business infrastructures in the world, including:


      -Efficient and convenient local and regional transport

      -World-class telecommunications and connectivity

      -World-leading sea and air cargo system



      6. Easy recruitment of skilled staff


      Hong Kong thrives on strong work ethics, efficiency and a can-do attitude. Its people offer a winning combination of international savvy and knowledge of Western/Chinese business culture. Almost all business professionals speak excellent English, the usual language of business. Many people also speak Cantonese (Hong Kong’s most widely spoken language) and Mandarin (also known as Putonghua, the language of Mainland China). Recruiting local staff is straightforward and Hong Kong’s strong work ethic makes industrial action an extremely rare occurrence.


      Hong Kong’s immigration policies are designed to attract overseas professionals, talent and investors. Policies are family friendly and expatriate employees can normally bring their spouse and dependent children. Visa types and details can be found here and InvestHK’s staff are on hand to advise on applying for work visas.


      7. Living in Hong Kong


      It’s easy to find a home in Hong Kong. Hong Kong offers a wide range of homes and locations, from apartments in high-rise developments in the city to traditional houses in the country areas. Expatriates can choose a location that suits their lifestyle, from the buzz of Hong Kong Island, to beachfront apartments, family-friendly new town developments and the slower-paced villages of the New Territories and Outlying Islands.


      Hong Kong has an abundance of quality rented accommodation and there are many real estate agents who specialise in meeting the needs of expatriates. Serviced apartments are also widely available for shorter stays.

    • Japanese investors in Hong Kong

       Japan is one of Hong Kong’s most important trading partners. Total two-way trade was US$49.4 billion in 2015.Japanese foreign direct investment in Hong Kong was US$29.1 billion at the end of 2014. There were 25,000 Japanese passport holders in Hong Kong.


      As at June 2015, there were 238 headquarters, 447 regional offices and 673 local offices. Japanese companies in Hong Kong span various industries, including transportation, financial services, electronics, and technology. Some major Japanese companies include: ANA, Bank of Tokyo-Mitsubishi UFJ, Canon, Casio, Epson, Japan Airlines, Minolta, Mitsubishi and Sony.