Hong Kong's Value and Future as a Business Hub

Japan External Trade Organization (JETRO)TAKASHIMA TomohiroDirector General, JETRO Hong Kong

26 April, 2021

Hong Kong’s Value and Future as a Business Hub

The information contained in this presentation is for general reference only. While every effort has been made to keep information current and accurate, JETRO is not liable for any, obligation and responsibility whatsoever for any loss, destruction or damage however arising from or in respect of any use or misuse of or reliance on the information.

Note: This presentation is translated from the original Japanese version for information purpose only: In case of any discrepancy, the Japanese version shall prevail.

2

69.3%57.3%

40.0%26.7%

22.7%

日本国内での報道が悲観的過ぎるから。過去のデモ・抗議活動に関連したイメージが残っているから。

米中対立の影響が見通せないから。新型コロナウイルスの影響が見通せないから。日本と香港の往来が制限されているから。

58.5%

19.5%

12.2%

拠点縮小の検討を指示されたり、促されたりしている。

新規のプロジェクトの見合わせや、見直しを指示されている。

拠点撤退の検討を指示されたり、促されたりしている。

27.9%

8.6%

28.8%

34.7%

本社は、香港の実情を正確に把握している。

本社は、香港の実情を楽観的に認識している。

本社は、香港の実情を悲観的に認識している。

どちらとも言えない。

The perception gap widens between HQs and their HK subsidiaries on HK business

■ 28.8% (64 companies) of respondents answered that the HQs in Japan assessed Hong Kong pessimistically due to ‘overly pessimisticcoverage of Hong Kong’ and ‘strong impressions of protests in Hong Kong in 2019’.

■ There are concerns for future as some HQs instruct or request their HK subsidiaries to downsize business operation in Hong Kong.

Source: Consulate-General of Japan in Hong Kong, JETRO Hong Kong, The Hong Kong Japanese CCI “The 7th survey of the business environment in Hong Kong”, 21 April 2021. Answered by 239 Co.s on 1-9 April 2021

（n=222）

Pessimistic factors （n＝75）【multiple answers】

Impact of pessimism （n＝41）【multiple answers】

HQ’s assessment of HKHQ in JPN has an accurate grasp of the actual situation in HKHQ in JPN is optimistic about HK's situation

HQ in JPN is pessimistic about HK's situation

None of the above

The coverage of HK in JPN is overly pessimistic Remaining strong impressions of protests in HK

Traffic between HK and JPN is restricted

Impact of US-China relations cannot be predicted

Impact of Covid-19 cannot be predicted

Instruction/Request from HQ to downsize base

Instruction from HQ to suspend/review new projects

Instruction/Request from HQ to exit Hong Kong

3

HKSAR Gov Budget Leaflet in Japanese Vaccine Booking Site launched in various languages

（Source) HKSARG Website

Copyright © 2021JETRO. All rights reserved. 4

１）Status of Economic Recovery in HK

２）Business Sentiment among Japanese Companies

３）Value and Future as a Business Hub

Presentation Contents

5

0

20

40

60

80

100

120

140

160

0

2000

4000

6000

8000

10000

12000

14000

20-Jan 20-Feb 20-Mar 20-Apr 20-May 20-Jun 20-Jul 20-Aug 20-Sep 20-Oct 20-Nov 20-Dec 20-Jan 20-Feb 20-Mar 20-Apr

Local / Imported ppl. per day

Total confirmed cases

confirmed Local Imported

1

The 1st

infection wave

The 2nd

infection wave

The 3rd

infection wave

The 4th

infection wave

Situation of COVID-19 Infection and HKSAR’s Response

(Status of Border Control as at 22 Apr)1. HK Residents・All entry from the Mainland, Macau and Taiwan undergo compulsory quarantine for 14 days, effective until 30 September（Regulation Cap.599C）・All entry from other places including Japan undergo compulsory quarantine for 21 days, effective until 30 September (Regulation Cap.599E)・Relocation with valid visa is accepted.2. Non-HK residents other than above are not allowed to enter HK indefinitely (Regulation Cap.599Ｅ)

■ The 4th wave of infection has finally subsided. Total confirmed cases:11,719, Hospitalized:149, Deaths: 209（as at 22 April 2021)■ Infection control measures without city-wide lockdown. Ban on business travelers from Japan to HK and HK to Mainland China

continues.

（Source) Centre for Health Protection “Latest situation of cases of COVID-19” (Updated daily)

6

Economical Impact of the Spread of COVID-19 Infection2■ In October 2019, HKSAR Gov announced the region slid into recession. COVID-19 gave an additional blow to the situation.

■ Confined domestic demand had limited effect on economic recovery.

Retail Sales

Hang Seng Index / Market Capital

Trade

Economic Growth(Real GDP growth rate)

InboundTourists

28,543.52（2 Jan 2020） 27,231.13（31 Dec 2020）

Q3 of FY2020 was -3.0％, rebounded from Q1’s -9.1%. FY2020 recorded -6.1％. This year’s forecast is 3.5–5.5% growth (HKSARG).

Feb 2020 had its biggest drop of -44%, -4.3% in FY2020Feb 2021 increased by 30% first year-on-year growth in 25 months

2019 -14.2％（55.91mil / 43.78mil from the Mainland）2020 -93.6％（3.57mil / 2.71 mil from the Mainland）

Export：HK$3,988.7B HK$3,927.5B -1.6%Import：HK$4,415.4B HK$4,269.8B -3.3％

Real Estate Price

2019 vs 2020 Office Rent Index：-9.3％Retail Rent Index：-5.0％, Residential Property Price Index：-0.03％

Unemployment Rate Oct-Dec 2019 -3.3% Dec 2020-Feb 2021 -7.2%

2019 2020

HKD359.7B (end of Jan 2020） HKD475.2B（same as above）(Source) Census & Statistics Department of HKSARG, HKEX documents

7

Pandemic brought change in Consumption Structure3■ Food items (meat & fish, fruits & veg) and supermarket sector are going strong. Liquor sales was sluggish at specialty stores but

grew at supermarkets.

■ Apparel and footwear slumped due to pandemic, as did gems, watches & cosmetics due to decline of visitors from the Mainland.

Monthly Data in 2020 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2019 2020 19/20

Overall Retail 37,735 22,723 22,977 24,103 26,788 26,531 26,466 25,551 26,076 27,430 28,699 31,383 431,174 326,462 -24.3%〇 Food / Liquor Specialty Store (excl supermarket) 4,393 3,437 2,696 2,994 2,875 2,780 2,671 2,961 3,395 3,031 2,888 3,264 42,834 37,385 -12.7%

〇Supermarket 5,277 4,778 5,106 4,771 4,745 4,659 5,526 5,159 4,691 4,604 4,367 4,811 53,322 58,496 9.7%〇Department Store(excl supermarket section） 3,545 1,782 2,400 3,115 3,623 3,349 2,803 2,632 2,982 3,215 3,258 3,235 46,353 35,939 -22.5%

Meat & Fish 1,254 1,756 1,087 1,145 1,005 973 893 1,006 1,005 915 999 1,200 11,729 13,240 12.9%

Fruit & Vegetable 229 204 230 292 300 312 280 349 336 352 252 281 2,920 3,416 17.0%

Bread, Sweets 1,084 775 708 739 692 709 735 733 1,269 776 704 809 11,420 9,733 -14.8%

Liquors, Cigarette 558 148 82 80 93 97 69 80 94 86 113 145 5,177 1,644 -68.2%

Apparel 3,613 1,454 1,544 1,639 2,658 2,233 2,169 1,690 1,964 2,219 2,369 2,958 45,155 26,510 -41.3%

Footwear 930 246 255 304 452 459 304 340 411 426 417 494 8,353 5,038 -39.7%

Furniture 599 395 544 661 632 652 624 689 646 530 656 717 7,318 7,344 0.4%Consumer Durables

(household appliances etc.) 3,307 2,400 2,138 2,563 2,609 2,338 2,525 2,798 2,342 3,160 4,610 4,427 40,441 35,218 -12.9%

Jems, Watches, Luxury Gifts 4,932 1,549 1,648 1,360 2,009 2,510 2,518 2,473 2,736 2,864 2,774 3,093 66,196 30,467 -54.0%

Medicine, Cosmetics 3,724 1,776 1,531 1,588 1,543 1,553 1,691 1,618 1,467 1,572 1,641 1,810 43,005 21,512 -50.0%

(Source) Census & Statistics Dept. of HKSARG ’December 2020’ & ’December 2019’,”Report on Monthly Survey of Retail Sales”

（HK$ million）1st

wave2nd

Wave3rd

Wave4th

Wave

8

HK remains Japan’s Largest Export Market for Agricultural, Forestry and Fishery & Food products

■ Export in 2020 was up 1.2% from the previous year to JPY206.1B, which is ranked top for the 16th year straight. The composition of items have changed significantly, however.

■ It was a uphill battle for Japanese food in the COIVD-19 pandemic, but performed relatively “well”.

Change & Challenge of HK Market in the COVID-19 Pandemic

Pearl export plunged, ‘19 JPY28.5B → ’20 JPY4.6B Export of all dried seafood for Cantonese cuisine dropped.

Egg export doubled ‘19 JPY2.2B → ‘20 JPY4.5BVegetables, pork, sake and instant foods are also going strong.

‘Don Don Donki’ (1st store opened in July ‘19) → expanded to 7 stores‘ Sushiro ’ (1st store in Aug ‘19) → 7 storesDemand for ‘ Oisix ’, fresh vegetable home delivery surged.

Challenge is rent & logistics. → Rent continues to drop but logistic environment is deteriorating.

The number of Japanese restaurants (1,400) is the largest among the restaurants serving international cuisine. → Adopting takeout menu & customer cap.

(Source) Data is tentatively created based on MAFF publication & trade statistics.1. Classification of item is based on the statistics of actual exports of Japanese agricultural, forestry and fishery products and foods (by country/region).2. Alcohol beverage: Sake JPY6.18B, liqueur JPY2.04B, Whisky JPY670M, Beer JPY460M, Wine JPY110M, Shochu JPY90M etc.

Agricultural, forestry and fisheries products Export to HK in 2020（preliminary basis）

Rank Item JPY Change

1 Sea cucumber (dried) 15.5B -17.0%

2 Alcohol beverage 10.0B 59.5%

3 Cigarette 7.9B -19.3%

4 Scallop (dried) 5.8B -0.5%

5 Beef 5.4B 6.5%

6 Soft drinks 5.1B -8.6%

7 Sweets (excl rice snack） 5.0B -14.4%

8 Pearl (natural / cultured) 4.6B -83.7%

9 Egg / Egg yolk 4.5B 104.9%

10 Sauces and mixed seasonings 3.5B 26.7%

Total 206.1B

4

9

8.822.6

31.935.1

26.128.8

25.729.3

39.443.4

47.358.0

43.034.2

21.618.1

21.212.2

22.513.9

7.13.4

5.40.9

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

2020 Q1

2020 Q2

2020 Q3

2020 Q4

2021 Q1

2021 Q2

Improved Unchanged Deteriorated Seriously deteriorated

△ 12.2△ 19.4

△ 56.7

△ 25.5

3.2 13.6

△ 0.5

15.8

-80

-60

-40

-20

0

20

5

DI trend（Overall）（Point）

Performance Trend in Each Quarter

Business Sentiment among Japanese Companies■ It shows recovery trend after the low of Q1 2020. China business was a driving force from Q3 and domestic demand in HK

also picked up in Q4.■ Growth is expected to continue, but business sentiment is subject to the status of infection and quarantine measures with

entry restrictions.

(Note) DI is Diffusion Index, calculated by taking the percent of “improved” and subtracting the percentage of “worsened” and “substantially worsened”.

(Source) “The 3rd to 7th survey of the business environment in Hong Kong”

10

6

244 232 226

421 431 427

728 750 745

0

100

200

300

400

500

600

700

800

2018 2019 2020RHQ Regional office Local Office

1,393 1,413 1,398 （# of Co.s）

86.2%

41.7%

58.9%

28.0%

2020 Q1 2020 Q2 2020 Q3 2020 Q4 2021 Q1

COVID-19

US-China conflict (trade etc.)

China's economic trend

Social unrest from demo & protest

Impact of Circumstantial Change on Business Activities

■ The number of Japanese companies was 1,398 in 2020, down by 15 (YoY), but the trend is unchanged.■ “Novel Coronavirus” affected almost all business activities throughout the year. The “China factor” was also continuously

claimed by about a half of the respondents to have impacted their business activities.

No of Japanese Companies by Corporate Functions

Impact of Circumstantial Change on Business Activities

(Source) Census & Statistics Dept. of HKSARG “Report on Annual Survey of Companies in Hong Kong with Parent Companies Located outside Hong Kong”, ”The 3rd to 7th survey of the business environment in Hong Kong”

11

32.7

15.3

9.4

5.5

48.7

51.5

45.0

45.3

12.7

19.0

33.1

40.7

1.0

3.1

4.0

2.5

4.9

11.1

8.5

6.0

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

2020 Q2

2020 Q3

2020 Q4

2021 Q1

Very concerned Concerned Not so concerned Not concerned Not sure

31.4

8.5

9.0

6.4

8.3

54.3

65.0

68.6

59.4

36.2

24.6

22.9

0.9

1.0

1.4

2.1

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

2020 Q2

2020 Q3

2020 Q4

2021 Q1

Nagative No impact Not sure Positive

7■ Concerns over the NSL has decreased gradually (July 81.4%→April 50.8 % ). In April, 68.6% answered “No impact”.■ 15 companies indicated indirect impacts (April). Very few responded to have been positively impacted.

How concerned about National Security Law

(Anticipated) Impact on the business by the National Security Law

Japanese Companies’ Concerns about the National Security Law and its Impact

(Source) ”The 4-7th survey of the business environment in Hong Kong“, The 4th survey was conducted before National Security Law was enforced.

12

Evaluation of Hong Kong's business environment unchanged8

■ The trend that rates Hong Kong business environment highly has not changed between July 2020 and January 2021, according to the survey results.

■ Japanese companies are interested in Hong Kong market’s domestic demand, its position as a gateway to Mainland China and S.E. Asia and its part in the GBA initiative. Hong Kong’s role as international financial and logistics center remains highly valued, while its tax system, from the business environment viewpoint, is also highly evaluated.

(Source) “The 3rd and the 6th survey of the business environment in Hong Kong”

Perceived advantages of Hong Kong office n=291 as of July 【multiple answers】

175101

6571

93179

0% 10% 20% 30% 40% 50% 60% 70%

Accessibility to Mainland China

Participation in GBA initiative

Accessibility to overseas market excluding the above two

Regional hub / Cash management hub

Free port

Simple and low tax system

Reasons to keep/expand Hong Kong office – answered in open-ended format n=115 as of Jan 【multiple answers】

4333

209

2719

149

44

Size of the market & its domestic demandGateway to Mainland China

Gateway to PRD/GBARegional hub of S.E.Asia

International financial centerInternational trading & logistics center

Simple and low tax systemMultilingual talent pool

Rule of lawOverall competitiveness of HK's business environment

13

Management Challenges in Asian Countries/Regions

Customs proceduresare cumbersome

Tax burden (corporate, transfer price tax etc.)

Fluctuation of local currency exchange rate

against US$

(Note) The chart shows countries & regions with 10 or more valid responses.

25.8

47.0

46.3

41.1

40.6

40.0

39.8

38.5

33.7

28.6

25.6

22.4

17.5

9.8

9.5

6.5

6.4

0 25 50 75 100

Total（1,408）

Bangladesh(31)

Pakistan(19)

Indonesia(252)

Myanmar(71)

Laos(14)

Vietnam(336)

India(121)

Cambodia(33)

Philippines(36)

China(209)

Thailand(138)

Malaysia(41)

Taiwan(25)

South Korea(11)

HK, Macao(22)

Singapore(35)

25.7

52.5

51.3

50.0

42.3

38.9

37.9

35.9

31.2

25.1

24.9

22.3

19.5

19.1

17.1

14.2

10.4

5.0

0 25 50 75 100

Total（1,426）

Cambodia(52)

Indonesia(325)

Pakistan(21)

India(135)

Philippines(49)

Sri Lanka(11)

Bangladesh(23)

Vietnam(263)

Myanmar(48)

Malaysia(60)

South Korea(27)

Thailand(120)

Australia(25)

China(142)

Taiwan(37)

Singapore(59)

HK, Macao(17)

24.2

78.6

50.7

50.3

48.3

39.4

32.1

30.2

28.8

27.3

23.7

21.1

19.9

16.2

16.1

10.7

8.2

0 25 50 75 100

Total（1,341）

Pakistan(33)

Indonesia(321)

Myanmar(96)

Sri Lanka(14)

Malaysia(95)

Australia(42)

Philippines(38)

India(92)

South Korea(33)

NewZealand(14)

Thailand(130)

China(165)

Taiwan(42)

Singapore(91)

Vietnam(90)

HK,Macao(28)

Quality of EmployeeNew customer acquisition is hindered

41.9

50.9

48.9

45.2

44.7

44.0

43.8

43.0

42.0

41.2

40.9

39.4

39.4

38.1

36.3

34.0

32.6

30.7

23.9

0 25 50 75 100

Total（2,275）

HK,Macao(175)

Singapore(274)

Thailand(285)

South Korea(55)

Sri Lanka(11)

Laos(14)

Myanmar(71)

China(350)

Malaysia(100)

Vietnam(330)

Indonesia(239)

Taiwan(100)

India(120)

Philippines(45)

Bangladesh(16)

Cambodia(31)

NewZealand(19)

Australia(31)

40.4

51.8

51.6

49.2

48.5

48.1

46.7

46.0

45.7

42.5

41.8

40.0

39.3

38.7

34.3

33.3

31.3

29.4

27.3

21.0

0 25 50 75 100

Total（2,309）

Malaysia(127)

Indonesia(331)

Myanmar(95)

Bangladesh(32)

Philippines(63)

Thailand(300)

Laos(17)

Cambodia(48)

Pakistan(17)

India(135)

Sri Lanka(12)

China(338)

Vietnam(337)

Taiwan(91)

South Koera(41)

Australia(42)

Singapore(172)

HK, Macao(98)

NewZealand(13)

Reference

Notable issues in HK among common challenges across the region(Responses given in each country/region are shown in %. Higher % indicates the challenge is bigger)

(Source）JETRO “FY2020 Survey on Business Conditions of Japanese-Affiliated Companies (Asia & Oceania)”Survey was conducted from 24 Aug 2020 to 25 Sep 2020 in 20 countries/regions. 359 companies in HK & Macao participated.

14

5.5%

59.7%7.1%

11.3%

13.9%

2.1%

0.4%

Business expansion of the Hong Kong office

Remain the same

Not sure at the moment

There is a possibility of review its role

Business reduction of the Hong Kong office

Review of Hong Kong office's role as RHQ

Withdrawal from Hong Kong

Future plan for the Hong Kong base of Japanese companies9

■ Comparing the surveys conducted in July 2020 and April 2021, “Not sure at this point” decreased by13.8 points while “Remain the same” increased by 24.6 points. Around 30 companies “downsized the business operation” and “reconsidered the role of its HK base.” after having a “review”. Only few choose “withdrawal from the local market”.

■ The biggest operational concern for the Japanese companies is “Border restrictions between Hong Kong and Mainland China”(79.7% , 188 companies, April) which may lead to call the existing role of Hong Kong office into question.

1.3%35.1%

20.9%6.0%

22.2%9.6%

3.6%1.3%

0% 10% 20% 30% 40% 50%

Business expansion of the Hong Kong officeRemain the same

Not sure at the momentSetting BCP, concerning every possibility

There is a possibility of review its roleBusiness reduction of the Hong Kong office

Review of Hong Kong office's role as RHQWithdrawal from Hong Kong

Survey: April 2021（n=238）

Survey: July 2020（n=302）

(Source) “The 4th and the 7th survey of the business environment in Hong Kong”

15

International Financial Market that connects China with the World and continues to evolve10

■ New listings market in HK were buoyed and is showing signs of capital inflow due to the relaxation of listing requirements and an increasing number of Mainland companies who “returned” to HKEX on the back of US-China conflict.. Mainland companies accounted for 80% of HKEX's market capitalization.

■ Neither foreign exchange reserves nor deposits suggest capital outflow from HK.

（Source）Hong Kong Exchanges and Clearing Limited (HKEX), Hong Kong Monetary Authority(HKMA)

Social unrest in HK COVID19

Social unrest in HK COVID19

(100mil HKD)

(Million HKD) (Million HKD)

3,100,000

3,200,000

3,300,000

3,400,000

3,500,000

3,600,000

3,700,000

3,800,000

3,900,000

12,000,00012,500,00013,000,00013,500,00014,000,00014,500,00015,000,00015,500,00016,000,00016,500,000

Changes in Foreign Exchange Reserves & DepositsDeposits(left axis)Foreign exchange reserves（right axis）

0

10,000

20,000

30,000

40,000

50,000

60,000

Changes in HKEX Market CapitalizationTotal Mainland Company Non-Mainland Company

6,000

5,000

4,000

3,000

2,000

1,000

16

New Opportunities in the Greater Bay Area（GBA)11■ HK’s promising areas are offshore banking, aviation and innovation.■ Japanese startup to launch its R&D base in Hong Kong, with a view to expand into the GBA.

1. Facilitate HK companies to tap into the Mainland market under the “One Country, Two Systems” and GBA.2. Enhance HK’s status as an international financial centre (Stock Connect for biotechnology companies listed in HK and stocks listed on the Mainland Sci-Tech Innovation Board）3. Enhance HK’s status as an international aviation hub (Construction of the 3rd runway, investment in the Zhuhai Airport development)

4. Development of an international science technology centre（Hong Kong-Shenzhen Innovation and Technology Park）5. Modernization of the land boundary control points and cross-border logistics between HK and Shenzhen（Implementation of “co-location arrangements”）6. Job placement support for young HK residents to work in the GBA (Greater Bay Area Youth Employment Scheme）7. Measures to combat COVID-19 pandemic (Supply vaccine made in the Mainland, implementation of “Health Code” once the border reopens.)

“Seven support measures for HK” in relation to GBA by the Central Government（25 November 2020, Policy Address by Chief Executive Mrs. Carrie Lam）

Tohoku University Startup “CogSmart” – Business expansion to Hong KongEstablished in Sendai City (current HQ is in Tokyo) in October 2019, with the aim to commercialize “dementia prevention using brain MRI” research by Professor Yasuyuki TAKI, Institute of Development, Ageing and Cancer, Tohoku University.The company expects to be the first Japanese startup to be approved for HK Science Park’s large-scale financial aid program “Incu-Bio” with a plan to set up R&D base in HK.The company also aims to expand into GBA through research work in HK, in collaboration with Japan side and through the development of innovative equipment for dementia prevention.

（Source）Reference provided by CogSmart Asia Limited, HK subsidiary of CogSmart.