Unleashing Qianhai’s Full Potentials

By China Business Knowledge @ CUHK

The Qianhai Shenzhen-Hong Kong Modern Service Industry Cooperation Zone has been developing very rapidly in recent months. What are the unique business opportunities there for Hong Kong and international companies? What are the advantages of getting one’s foot in at the early stage?

Qianhai is a hot potato right now. New companies and facilities are opening and new policies are drafted every few months. The queue of the companies applying to set up shop in the zone is so long that the Qianhai Authority office in Hong Kong has a huge backlog. There is a palpable sense of excitement in the air. Many businesses—whether they are large multinationals or small enterprises in Hong Kong—are eager to find out how they can benefit from the new policies tailor-made for the zone and the new potentials that the vast mainland consumer market is about to unleash.

To shed light on the scale of opportunities and the latest developments at the Qianhai Cooperation Zone, and to explore the future potentials it offers, a joint panel discussion was organized by China Business Knowledge @ CUHK and the American Chamber of Commerce in Hong Kong on April 30. Titled “How Can the Potentials of Qianhai Be Fully Unleashed?”, the event was a full-house affair, attracting more than 60 enthusiastic attendees. Two CUHK Business School professors and an official from the Qianhai Authority were invited as panelists.

When Qianhai became part of the “Twelfth Five-Year Plan” four years ago, it had two strategic goals: to develop the cooperation between Shenzhen and Hong Kong in all areas of modern services; and to be a testing ground for opening China’s financial system. Are things moving in the direction toward these goals?

The first panelist, Dr. Witman Hung, Principal Liaison Officer for Hong Kong of Shenzhen Qianhai Authority, kicked off the discussion by showing the latest developments at the zone since three months earlier. For example, the Qianhai Court has been established. An incubation center, E-Hub, measuring 200,000 square meters in usable area, has recently opened its doors to entrepreneurs, offering co-working space, incubation partners, exhibition halls and training facilities. Banks such as Citibank and the Bank of East Asia has set up branches there. Important Chinese e-commerce players such as TMall and JD Worldwide, have also set up their operations in the zone. In addition, a building with e-services counters putting all relevant government departments, such as immigration, tax and company registrar, under the same roof, is ready to serve all incoming companies.

So far, a total of 25,673 companies have registered their business in the zone, roughly 1,400-1,500 of which are Hong Kong-based companies. In terms of the industries represented, the majority, or 57 percent, consists of financial services companies; 14 percent are modern logistics companies; 12 percent are information services companies; and 17 percent are technology and other services.

The unique advantages that companies can enjoy at Qianhai, according to Dr. Hung, are tax incentives, capital support program, development opportunities, an incubator for entrepreneurs, as well as efficient and simple government services—which, as he pointed out, are not easy to find outside of the zone.

The tax incentives for registered companies in the zone take the form of a 15 percent corporate tax subject to certain requirements. While the finance industry does not enjoy any tax incentives, it has a lower entry barrier in conducting business there.

“There are a lot of things that are much easier to do in Qianhai than somewhere else in China, such as cross-border RMB loans, QFLP, QDLP, QDIE and more,” said Dr. Hung. He explained that the Qianhai Authority enjoys a “rolling policy innovation”: “Every couple of months, we actually go to the Central Government and ask for more. We have to write our own rules and submit for approval. One thing that we still have not achieved is for insurance companies that meet certain criteria to have a lower entry barrier. We are trying to push for that.”

Another incentive is capital support in the form of rental or building grants, which amount to a certain percentage of a company’s registered capital. The finance industry enjoys a higher percentage but companies are required to stay in Qianhai for at least seven years. Alternately, some companies would enjoy interest subsidy by the government after taking out a loan.

Besides these incentives, the main allures for Hong Kong businesses to set up shop in Qianhai are, according to Dr. Hung, the capacity for expansion (much more land space and easy access to a big pool of talents from the mainland); geographic proximity to Hong Kong; and policies that allow certain things to be done much more easily than anywhere else in mainland China.

Cross-border E-Commerce

The second panelist, Prof. Xufei Ma, Department of Management and Associate Director of the Center for Entrepreneurship (CfE), CUHK Business School, serves as the project director in charge of CfE’s collaboration with Qianhai’s E-Hub. In his presentation, Prof. Ma explained Qianhai’s strategic role in promoting cross-border e-commerce in China. Currently, there are six pilot cities in China designated under the national strategy to develop inward cross-border e-commerce, among which Qianhai is the newest kid on the block, joining the scheme as recently as July 2014.

According to Prof. Ma, cross-border e-commerce is a business model that allows end consumers in China to buy directly from overseas manufacturers through electronic platforms. It essentially transforms the B2B model to a B2C one, streamlining many of the regulatory procedures such as commodity inspections and quarantines. At the same time, the delivery of goods is speeded up. What attracts consumers most is that the transaction costs are significantly reduced, both in terms of the retail prices and levied taxes.

Why is cross-border e-commerce increasingly prevalent in mainland China, and why is Qianhai the ideal place to develop this business model? The prevalence is due to the significant price difference between certain products, such as foreign infant formulas, sold domestically and overseas. As the demand for a higher quality of life by mainland consumers increases, the demand for those products that are perceived to contribute to a higher quality of life also increases.

Prof. Ma showed that in 2013, online shopping for overseas goods via Alipay increased by 117 percent, compared with the 65-percent increase in domestic online shopping. The Top 5 product categories are: cosmetics and skin care; mom and baby; clothing; health care and electronics. Together, these constitute a huge market potential with strong growth.

He gave a few examples to show how such businesses work in the zone. One of them is BDF Mall, a startup business founded by graduates of the CUHK Business School. It provides a one-stop e-commerce solution for overseas brands aiming to enter China. This electronic platform provides an online shop while using the Qianhai Bay Bonded Port Area to store the goods imported from overseas, manage the inventory, process customs clearance and fulfill customer orders. Another example is Tempus Exhibition Shop, co-founded by EMBA students of CUHK Business School. This exhibition shop makes use of the bonded area to provide the physical space for consumers to see, touch and experience the physical goods; and if the consumers like the goods, they can make their online purchases immediately using their mobile phones and will receive the goods roughly one week later (online-to-offline model).

“The limit for each purchase is RMB500. With this kind of policy, consumers in the mainland don’t need to go to Hong Kong to buy their daily goods,” said Prof. Ma. “This is the result, not the purpose.”

The third example is a business set up by CUHK EMBA students in Qianhai. It has a strategic partnership with Tong Ren Tang, the No. 1 brand in Chinese medicine. Only recently registered, this company aims to be the world’s No.1 cross-border e-commerce platform in health products and services.

Why is Qianhai such an attractive gateway for Hong Kong companies eyeing to enter the China market? Prof. Ma boils down the four reasons.

First, when counted as one location, Shenzhen and Hong Kong’s combined capacity in cargo, passengers and port throughout is No. 1 in the whole of China.

Second, each of the two cities provides great advantages for doing business: Shenzhen is China’s Silicon Valley and innovation center, with the most favorable policies and complete industrial chain for startups, while the international departments of Internet giants (Alibaba, Baidu and Tencent) will all be located there. Hong Kong is the world’s financial center, ranks No. 1 in economic freedom in the world and has many multinational Asian headquarters established.

Third, the most favorable trade policies in China can be found in Qianhai, which houses the following three “zones”—Qianhai Shekou Free Trade Area, Qianhai Shenzhen-Hong Kong Modern Services Cooperation Zone and Qianhai Bay Bonded Port Area.

Fourth, Qianhai aims to be the best in four modern services in China—financial services, information services, logistics services and professional services.

So why should businesses in Hong Kong pay attention to cross-border e-commerce in Qianhai?

“This can be the most cost-saving way to reach China’s consumers, especially if you are a small and medium-sized enterprise,” said Prof. Ma. “If you want to penetrate deeper into the huge China market, this might be the right time, the right place and the right business model. Most importantly, you’ll become the early bird when free trade between China and the United States becomes a reality.”

Financial Shopping Paradise

Besides those consumer goods mentioned above, Chinese consumers are also keen on buying insurance and other financial services in Hong Kong. In light of this trend, Prof. Zhou Yinggang, School of Hotel and Tourism Management and Director of the Center for Hospitality and Real Estate Research at CUHK Business School presented his idea of upgrading Hong Kong to be a financial shopping paradise and leveraging Qianhai’s unique positioning as a “shop front” for selling Hong Kong’s financial products. The great wave of China’s capital outflow in the next few decades could propel Hong Kong into a new role as the gateway for Chinese overseas investment, in contrast to its roles as the gateway to attract foreign capital into China since 1978. This will also provide Hong Kong with a new model for tourism while allowing the city’s financial industry to take advantage of the tremendous demand for quality financial products from mainland consumers.

Prof. Zhou explained that as tensions over “parallel trading” in Hong Kong continue, traditional businesses in the city’s tourism industry are losing out. On the other hand, mainland tourists are increasingly interested in purchasing insurance products in Hong Kong because of the larger number of choices and higher quality of the insurance products not available at home. “Financial products and services can be a unique competitive niche to upgrade Hong Kong’s tourism industry,” suggested Prof. Zhou.

In fact, new insurance policies sold to mainland tourists have seen a significant increase over the past few years, growing by 63.7 percent from 2013 to 2014. Premiums sold to mainland tourists made up more than one-fifth all insurance premiums sold during the same period.

Prof. Zhou’s proposal is to leverage Qianhai — being a pilot zone for China’s financial reform, to give it the role of a “shop front” for selling to mainland residents insurance and other financial services available in Hong Kong, while the latter is the “back office” providing the research and design of financial products.

According to the Ministry of Commerce in China, as much as 57 percent of China’s outward direct investment was directed to or channeled through Hong Kong by the end of 2013. Prof. Zhou estimated that outward investment by individual investors in mainland China would rise to US$5 trillion by 2020. If half of that would go to Hong Kong, then the total investment by mainland individual investors in Hong Kong would amount to US$2.5 trillion—a substantial sum. Thus the potential for Hong Kong to benefit from Qianhai as a front desk facing domestic investors is huge.

While it is currently illegal for mainland customers to buy Hong Kong insurance products and sign contracts in the mainland, Prof. Zhou proposed setting up O2O platforms for customers and financial services companies to find matches online through social media channels and using big data. Once they find a match, they can then sign contracts offline, for example, in an office in Qianhai. O2O can go the other way too. They can find matches offline and manage their business and relationships on the platform.

With the Shanghai-Hong Kong Connect in operation and the Shenzhen-Hong Kong Connect slated to be rolled out later this year, Prof. Zhou regards these as a part of the Hong Kong financial shopping paradise. He foresees an even greater cross-border demand for other financial products and services, such as private banking and wealth management services, tax and legal advisory services, due diligence, risk assessment and valuation services. Qianhai, with its strategic positions as a modern service industry cooperation zone and a pilot zone for financial reform and opening in China, would be a perfect place for expanding the financial shopping field.