HK bypassed by Japanese

MORE and more Japanese companies are bypassing Hong Kong to invest directly in China, spurred on by the rising yen and growing confidence in the mainland's economy.

High operating costs in Hong Kong had dampened interest in the territory, while Japanese companies had gathered enough experience over the past 10 years to feel comfortable about expanding operations, said Kyoko Nishikawa of Coopers & Lybrand.

Ms Nishikawa, who works in the accountancy firm's Japan division, said that even among its Japanese clients, who still invested in Hong Kong, up to 70 per cent saw China as their main market.

'The main reason for investing in China used to be manufacturing, but now they [the Japanese] are looking at the domestic market,' she said in Hong Kong yesterday.

Japan's direct investment in Hong Kong dropped slightly last year to US$1.13 billion from $1.23 billion in 1993. But the investment in Hong Kong as a percentage of Japan's total Asian investment fell more sharply from 18.6 per cent to 12 per cent, according to statistics from the Japanese consulate in Hong Kong.

Meanwhile, China accounted for 36 per cent, or US$2.56 billion, of Japan's Asian investment last year, up from 25 per cent in 1993 and 16.7 per cent in 1992.

Although Japanese firms are still concerned about transferring technology, the appreciation of the yen is forcing Japanese industries to move a larger portion of their manufacturing out of Japan.

Johnnie Cheng, a partner at Coopers & Lybrand, said: 'In a very short period, you will see the transfer of the shipbuilding and automobile industries overseas. The profits from these will be used to finance a third generation of industries in Japan, such as aerospace.' China's recent decision to reduce value-added tax (VAT) rebates on exports for foreign companies formed after 1993 and for all domestic enterprises may damage investors' confidence.

In a circular written by Premier Li Peng on May 25, China decreed that export refunds would be cut by three per cent starting on July 1.

'Clients are certainly confused and frustrated by these changes. Very often their marketing plan and their pricing policy are fixed before the beginning of the year. Their budget is based on the tax regulations,' said Marina Wong, a partner at Coopers & Lybrand.

She predicted more changes to the tax system over the next four to five years because China rushed to implement its new tax system at the start of last year without working out all the details.

Many services such as transportation are subject to a business tax in China instead of the VAT. A company cannot claim a input rebate against the VAT on its finished products.

Mrs Wong said the government may change that policy.

China's eventual admission to the World Trade Organisation would require China to cut many tariff rates.

Mrs Wong said this would induce China to review exemptions and customs duties.

The government would probably try to unify China's income tax regulations. Foreign-invested and domestic enterprises were subject to different rates now.