On June 11th, 2019, The ASEAN-Hong Kong Free Trade Agreement took effect, bringing Vietnam, Laos, Thailand and Myanmar and Singapore into Hong Kong’s new international free trade deal, with Malaysia, Brunei, Cambodia, Indonesia and the Philippines set to follow afterwards. The AHKFTA was originally signed in 2017, and this year should see the agreement benefit Hong Kong businesses as the region pivots towards new markets and trade platforms. ASEAN is a much-needed alternative to the USA and European Union for Hong Kong companies due to the pressures of the trade war, which have become increasingly severe and unpredictable. Hong Kong’s exports fell 2.5% in the first four months of 2019, largely due to the drop in re-exports of Mainland China origin goods to the USA.
These new trade links, which open 10 new markets for exports, investments, services, technology co-operation and legal arbitration, come at a much-needed time, as the world economy goes through a significant transition that hits close to home for Hong Kong. In 2018, ASEAN was Hong Kong’s largest trading partner overall, second only to Mainland China. Hong Kong is now even better positioned to continue serving in its signature capacity as a re-export window between China and the rest of the world, in this case the rapidly growing Southeast Asian economies.
So far, 85% of duties in Brunei, Thailand, Malaysia and the Philippines will be removed over the next 10 years, while Cambodia and Laos will remove 65% of their customs duties in the next 15 years. Vietnam and Indonesia will no longer charge duties on 75% of imports in the next ten years, with more reductions to follow. Hong Kong companies will also be allowed to take 50% or 100% ownership of enterprises in the Philippines, Thailand and Vietnam.
Beyond the benefits of reduced ASEAN tariffs and duties in China-ASEAN trade, the AHKFTA also opens new possibilities for Hong Kong businesses seeking to provide goods and services in emerging consumer markets like Vietnam.
Vietnam in particular presents opportunities for Hong Kong enterprises seeking to launch retail packaged products and e-commerce services, with the latter having grown by over 25% in 2017. Market research suggests that Vietnamese consumers respond well to a variety of products from Hong Kong, noting a preference for overseas branding that Hong Kong enterprises can cater to at a competitive price point.
While Hong Kong investment in Vietnam is increasingly common, other ASEAN countries are likely to follow in its footsteps in the next decade as youthful populations develop purchasing power and manufacturing infrastructure helps develop skilled labor and drives real estate values. In light of the growing market potential, as well as the thriving China-ASEAN re-export industry, the Hong Kong government has launched its Branding, Upgrading and Domestic Sales Enterprise support program for Small and Medium Enterprises seeking to enter ASEAN and mainland China markets.
The Dedicated Fund on Branding, Upgrading and Domestic Sales – Enterprise Support Programme, also known as BUD Fund, provides successful applicants with up to HK$1 million in funding for ASEAN and mainland China projects. The program will help expand the Hong Kong economy over the next decade by supporting Hong Kong companies as they pursue new business opportunities in the ASEAN region. The application deadline is on September 30th, 2019, and the program is open to any private company registered in Hong Kong. Before applying, Hong Kong companies should evaluate the conditions on the ground in the individual country and city where they plan to set up, including infrastructure and labor costs, and local considerations such as language, culture, tax regime and the extent to which legal and commercial institutions are developed. Every country and city is unique in its benefits and challenges, incentives and risks. The Hong Kong government also plans to increase funding to HK$3 million per enterprise in the future, with HK $1 million to the Mainland program and $2 million to the ASEAN program. Depending on the scope of the enterprise and timing of the application, these programs could potentially help leverage the development of the Greater Bay Area and ASEAN at the same time, creating the most fertile ground for growth in decades.
So far there have been 177 applications to the ASEAN program, which have comprised 24% of all applications to date. The HK S.A.R government’s 2019-2020 budget allocated HK$1 billion to the fund for Hong Kong investments in addition to last year’s HK$1.5 billion.
As countries all over the world face an uncertain new beginning, Hong Kong investment opportunities still abound. Setting up a company in Hong Kong still positions you to ride the waves of China’s international trade, with the growing Southeast Asian re-export industry set to continue routing through Hong Kong thanks to the AHKFTA granting ASEAN countries duty free access to the mainland China market, with various reciprocal benefits for Hong Kong exports. The government’s extensive investment in Hong Kong Small and Medium Enterprises meanwhile creates some of the most intriguing possibilities ever seen for Hong Kong company setups.
When embarking on new business journey, it is always prudent to take a holistic approach to business plans. Our business advisory services have helped create international success stories in Hong Kong and China over the past 50 years by providing world class services with personalized attention to detail for every client’s circumstances. Whether you want to set up in Hong Kong or explore new possibilities for expansion, our team of experts in tax, corporate structuring, business advisory and commercial law can help you find the most exciting new opportunities this year. Don’t hesitate to contact us with any enquiries you may have regarding business setup, tax preparation and company registration in Hong Kong, China and beyond. At Fung, Yu & Co., we are proud to be your window to a brighter future.
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