Hong Kong poised to be China's strategic and regional hub

Hong Kong

TO GAUGE China's influence on Hong Kong's economy, one need only look up at the city's famous nightscape: Electronic billboards, one after another, beam atop skyscrapers and office towers, touting in huge characters the names of big Chinese firms.

This nightly topography displays the mainland's trading interests in neon clarity. Measured in numbers, mainland investors have, to be precise, steeply upped their market share in commercial real estate and government land from 9 per cent in 2013 to 25 per cent in 2017, data from real estate consultancy CBRE show. Last year capped an especially frenetic binge: mainland developers won 70 per cent of residential sites sold by public tender; including commercial sites, the total ratio was 41 per cent (seven of 17 sites tendered).

Their long march into Hong Kong's real estate market since 2013 has seen mainland investors shell out close to HK$200 billion (S$33.3 billion) for purchases of existing commercial real estate assets and government sites, of which HK$48 billion was spent in 2017, according to CBRE.

For those who wonder whether China's ever-tightening capital controls would reverse this trend, CBRE's executive chairman for Asia Pacific Rob Blain said, "We're now at the stage that Chinese enterprises are fairly entrenched in the Hong Kong commercial property space, to the extent that activity has moved beyond the trend phase. Our view is that demand from Chinese capital for Hong Kong commercial real estate and development land is expected to remain strong."

Mr Blain added: "Clearly, we have seen Chinese investment in Hong Kong evolve from a buying spree to a bona fide trend in recent years."

In office space, Chinese demand favours the premium location, the central financial district, where rents are expected to rise by up to 5 per cent this year after a 5.2 per cent rise in 2017. According to consultant Jeremy Sheldon, managing director of JLL's market and integrated portfolio services, office rentals in central Hong Kong, already the world's most pricey for the second consecutive year, are 60 per cent more expensive than the next major global market in London. Advertising on the canvas of Hong Kong's starry night scene can be seen as strategic posturing by mainland firms. Antonio Wu of Colliers International said: "Mainland financial institutions continue to be on the lookout for office buildings with naming and signage rights to raise their international profile by having an office building in Hong Kong. In fact, office buildings in Hong Kong are seldom for sale so in itself this is a very good long-term investment."

What's more, many Chinese companies long active in Hong Kong - such as insurers China Life and Taiping Life - are able to raise financing without sourcing capital from home, Mr Wu said, adding: "I personally see the trend will continue in most of 2018 unless the interest rate rises rapidly in the second half."

All this adds up to Hong Kong's resurgence as a regional hub, with a Chinese characteristic: The number of companies with regional or local operations has increased by 24 per cent since 2008 to 8,225, the largest contingent being from the mainland, at 1,264, up from 722. Mainland newcomers make up one-third of the total increase over this period.

Vincent Tang, associate director of InvestHK, the investment promotion arm of the Hong Kong government, noted that 70 per cent of these companies remain small, with fewer than 20 people. But 14 of them have a workforce of more than 500; eight of these have more than 1,000 employees. Most are in finance and banking, followed by import-export traders, wholesalers and retailers, and then transportation, storage and couriers.

And more could be in the offing. "It's an increasing trend. I think there will be more in the future. There are more and more mainland companies coming to HK," said InvestHK's Mr Tang. "2018 will be a big year."

A raft of government incentives is on the table to lure small and medium firms to the city, especially from the technology sector. A planned cut in the corporate profit tax rate by half, to 8.25 per cent for the first HK$2 million in profit, could take effect as early as this summer. A long bridge linking Zhuhai in Guangdong province with Macau and Hong Kong over the waters of the Pearl River Delta is scheduled for completion in the first half of the year. Another trophy infrastructure project - a high-speed rail that will link Guangzhou, via Shenzhen, to Hong Kong in a 45-minute ride - is due to open in the second half.

The ultimate motivation for getting a foothold in the world's priciest market is Hong Kong's simple, low tax regime, but also its free flow of information, according to a Hong Kong government survey. Other considerations cited include a corruption-free government, the rule of law, an independent judiciary and productive staff, in that order.

The consultancy CBRE estimates that Chinese companies will eventually lease as much as six million square feet of premium office space in the next few years, more than eight times the 727,700 square feet of total gross office space taken up by mainland Chinese enterprises last year. Chinese companies now own 11 Grade A office buildings in the city, mostly under single ownership, out of a total of 241 Grade A office towers.

A battalion of mainland property developers listed in Hong Kong, 103 of them, could also drive future demand. Henry Mok, regional director of capital markets at JLL, said : "We hold the view that the presence of PRC developers in the city will continue to grow, as they have more recently turned increasingly active in seeking investment opportunities in the private market. Strong sales results in the primary market recently also gave them the confidence to expand in Hong Kong."

A closer look also reveals a quiet cross-border migration not captured in the official data. Jacinto Tong, a newspaper columnist and CEO of Hong Kong-based Gale Well Group, said he had heard from a credible source, whose identity he declined to disclose, that more than 1,000 major companies have decamped across the border, by stealth or other means, from Shenzhen in the last five years. Sometimes, Shenzhen also serves as a springboard for mainland firms from other parts of China to go abroad, with their first stop often in Hong Kong, he said.

"They shut down their offices in Shenzhen and moved to Hong Kong. All companies in Shenzhen are waiting for a chance to move to Hong Kong," he said. "I believe the situation will continue."