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Doing business in Hong Kong Your privileged connection to China

Doing business in Hong Kong Your privileged connection to China. Some basics on Hong Kong. Hong Kong is part of China since 1997 It’s status as a Special Administrative Region is laid down in the Basic Law under the principle “ 1 country 2 systems”. Hong Kong is

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Doing business in Hong Kong Your privileged connection to China

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  1. Doing business in Hong Kong Your privileged connection to China

  2. Some basics on Hong Kong Hong Kong is part of China since 1997 It’s status as a Special Administrative Region is laid down in the Basic Law under the principle “1 country 2 systems”

  3. Hong Kong is in the ranking of free economies (WSJ and Fraser Institute) 1st Hong Kong is lowest tax misery country in the world (Forbes tax misery index) 3rd Hong Kong is financial centre in the world (GFCI-9, March 2011) 3rd Why do business in Hong Kong ?Hong Kong as a safe haven for your China investment If you think “going into China” with your business, then also consider “going via Hong Kong” Hong Kong offers a few advantages that are not necessarily present in case of a direct entry into China • Free flow of capital • Fully convertible currency • No lending restrictions • Full range of financial services • State of the art business infrastructure • Companies can be set up in a few days • English as the general business language • Easy and low tax regime • Double Tax Agreements (since recently also with CZ) • Hong Kong as prime offshore Renminbi centre • China’s 12th 5Y Plan reconfirmed Hong Kong’s crucial role in the development of Mainland China • CEPA free trade agreement with Mainland China • Legal system under ‘rule of law’ with higher legal certainty Hong Kong is part of China “1 country, 2 systems” (Basic Law)

  4. Why do business in Hong Kong ?Hong Kong as a safe haven for your China investment Consequently it is common to see the following structure being implemented by European companies pursuing business opportunities in Mainland China European business HQ in Europe Trade 100% Hong Kong Holding Co in HK Opportunities in China Trade 100% Rep.Office / WFOE in PRC Suppliers and clients in PRC

  5. What do we offer you in Hong Kong ?KBC Hong Kong branch as an enabler for your business in Hong Kong • Getting started • Your company setup in Hong Kong • We maintain good relations with different company secretarial firms and consultants that can help you in setting up the right structure for your needs • • Your account opening at KBC Hong Kong • For your account opening in Hong Kong, we liaise with your company secretary in Hong Kong and with your relationship manager in CSOB • Physical presence in Hong Kong is not required to open accounts with KBC Hong Kong • Once your company is constituted with all necessary documents, we open accounts within 3 days • Limited but relevant service offer for your Hong Kong business • Cash management and payments • Working capital and investment loans • Trade Finance • Treasury • Corporate Finance advisory • NEW!: RMB services

  6. What do we offer you in Hong Kong ?NEW! : KBC offering RMB services If you were in Hong Kong recently, you cannot have missed the importance of Hong Kong as an offshore centre for the internationalisation of the Renminbi

  7. The internationalisation of the RMB - Why? Many good reasons for China to encourage the international use of RMB ... “The dollar trap” refers to the 1.8trn FX reserves in USD making China overly dependent on the American dollar, causing FX and liquidity risks. Encouraging the international use of the RMB should reduce the FX inflow “Sharing the RMB risk with the world” by progressively translating the Chinese claims on the outside world into RMB If China has the ambition to join the US and EU as a key player in the governance of the international monetary system, this is a crucial step Also, making Shanghai an international financial centre competing with Wall Street and The City by 2020 will be difficult without this evolution Empirical evidence shows the international rise of a currency goes in parallel with the economic power of a country (£, $, DEM, ...) It is an anomaly that the worlds largest exporter is not using its own currency to settle that trade. If the USD might be “punching above its weight” relative to the US economy, the opposite is true for the RMB Not “If?” but “When?” The internationalisation of the RMB will happen and is actually already long overdue End 2010, China’s total FX reserves mount to 2.6trn USD. Source: CIA Factbook. 6

  8. The internationalisation of the RMB - How? There’s a commonly accepted view on how currencies internationalise ... Potential roadmap The different stages are interdependent. E.g. accumulation of RMB outside the Mainland will support demand for RMB denominated investment products, while the availability of liquid RMB investment opportunities will encourage a wider adoption of RMB for trade 7 Source for 2020 volume estimates: Central Policy Unit Chatham House, London.

  9. The internationalisation of the RMB - How? ... but this case is nevertheless unprecedented in many ways This is also why China is using Hong Kong as a “testing ground”for the internationalisation of the RMB and as “a firewall” against undesired effects on the Mainland The terms “testing ground” and “firewall” were coined in relation to Hong Kong’s role at the publication of China’s 12th 5 Year Plan 8

  10. The internationalisation of the RMB - When? It is clearly happening, already today, in Hong Kong ... RMB deposits in HK (in bn) Gross issuance RMB bonds in HK (in bn) Global RMB trade settlement (in bn, HK part in %) 45 800 600 40 700 Of which 80% HK 500 35 600 30 400 500 25 400 300 20 Of which 73% HK 300 15 200 200 10 100 100 5 0 0 0 end 2011 2007 2008 2009 2010 1H 2011 2009 2010 1H 2011 end 2008 mid 2009 end 2009 mid 2010 end 2010 mid 2011 9 Picture taken at a tram stop in Hong Kong, showing a part of HSBC’s omnipresent RMB marketing campaign Source for chart data: HKMA

  11. The resulting RMB realities you currently face Pick your field, according to your needs OFFSHORE ONSHORE CNH • Offshore participants only • Free circulation offshore • FX rate USD/CNH differs from USD/CNY • Currently CNH more expensive than CNY (strong demand faced with limited supply) • Spread will continue to exist as long as “flow back” and arbitrage opportunities are restricted CNT • Trade related CNY (max 3 months!) • FX rate linked to CNY (CNT-CNY fungible) • RMB agent bank needed (onshore correspondent bank or BOC in HK or MC) CNY • Onshore participants only • FX rate fixed by PBoC TRADE SETTLEMENT SCHEME FLOW BACK REGULATED Limited retail flows between HK and Mainland CNY Forward market CNY NDF • Offshore non deliverable forward market • Linked to CNY FX but settled cash in USD Some arbitrage 10

  12. Why would you use the RMB trade settlement scheme Access to a larger pool of trading partners at potentially better margins Trade settlement in RMB What is in it ? For your Chinese trade partner For you as a corporate Lower transaction costs No FX risk Increased competitive position … Larger pool of potential trading partners in RMB Partner might agree to sell lower / buy higher in RMB Will have to manage the FX risk Case by case assessment to see whether the advantages of trade settlement in RMB outweigh the costs 11

  13. What do we offer you to exploit the RMB opportunity? We cover most operational needs of a corporate in HK and SG We offer this in KBC Hong Kong KBC Singapore You want to • Open an RMB current account (for CNH and CNT) • Buy and sell RMB forwards for • Hedging purposes • Speculation • Settle trade transactions in RMB • In open account • Under LC • Discounting of RMB usance LC • In RMB • In FX • Invest in RMB • Deposits • Bonds and Equities • Borrow in RMB • Short Term Advance in RMB • Trade finance products • Bond and equity issuance                 12

  14. Opening a RMB account with KBC You see 1 RMB account, we manage 2 sub-accounts What you will see as a KBC Hong Kong corporate client Just another account with one balance in CNY (CNY is the only ISO code for RMB) Existing KBC Bank Hong Kong clients can open CNY accounts by sending us an instruction letter and after acceptance of the new account rules New KBC Bank Hong Kong clients can open CNY accounts based on the same documentation process as for any other currency. KBC Bank Hong Kong closely liaises with the European branches and with local secretarial firms in Hong Kong to ensure a fast process that puts as little documentation burden as possible on the client. Physical presence in HK is not required. 1000 HKD HKD account 1000 HKD 1000 EUR EUR account 1000 EUR 1000 CNY CNY account Two sub-accounts with each a balance and a potential use. CNH can be used freely outside China. CNT can be used for settling trade with China but CNT nature expires after 3 months What we will manage as your corporate bank 250 CNH 750 CNT 13

  15. I want to pay my Chinese supplier in RMBPossible with the CNT in your account with KBC Hong Kong • YOUR SUPPLIER • Needs to be an authorised Mainland Designated Enterprise allowed to settle exports in RMB • YOU • Provide us with • Payment instructions • Evidence of the trade related nature of the transaction TRADE TRANSACTION CNY CNY account € $ £ FX account € $ £ € $ £ FX account € $ £ CNY CNY account CNY • Either you have CNT available (max 3 months old) • Or you exchange FX into CNT • KBC Bank HK CNH RMB clearing bank Bank of China in Hong Kong • Bank will return the money if your supplier does not meet the conditions • Local bank CNT Similarly, KBC Bank HK can issue import RMB LC’s towards your Chinese supplier. The settlement of the LC will be done with your available CNT balance or after converting FX into CNT. 14

  16. I receive RMB from my Chinese buyerPossible to receive it as CNT on your account with KBC Hong Kong YOUR BUYER YOU Provide us upfront with evidence of the trade related nature, if not we must qualify incoming RMB as CNH TRADE TRANSACTION € $ £ FX account € $ £ CNY CNY account € $ £ FX account € $ £ CNY CNY account CNY • Either you keep CNT (max 3 months) • Or convert into FX • Or transfer outside (making it CNH) • KBC Bank HK CNH RMB clearing bank Bank of China in Hong Kong • Bank will return the money if your supplier does not meet the conditions • Local bank CNT Similarly, if you are the beneficiary of an RMB LC from your Chinese buyer, the settlement will be done on you CNY account with KBC HK and will be qualified as CNT. 15

  17. Questions and Answers If you would like more information on our service offer, please do not hesitate to contact us. Stefaan Stappers General Manager KBC Hong Kong branch +852 2879 3388 Stefaan.stappers@kbc.be Jo Vander Stuyft European Desk Corporate Banking +852 2879 3372 Jo.vanderstuyft@kbc.be Andre Liu European Desk Corporate Banking +852 2879 3412 Andre.liu@kbc.be

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