The Legal Relationship Between China and Hong Kong and Why This Matters to You and Your Business

Our China lawyers are often asked to explain the relationship between Hong Kong and China.

When I would get asked this, I would usually start by telling American clients to think of Hong Kong’s relationship to China as being similar to New York’s relationship to China. For our European clients I would use London or Madrid or Frankfurt or some other European city as the example and for our Australian clients I would use Sydney. I would then say that for businesses, Hong Kong is essentially a foreign country when it comes to China.

I then might explain how a Hong Kong trademark is not a PRC trademark and if you think that having a Hong Kong trademark will protect you in the PRC, you are wrong. See China Legal. Not Hong Kong Legal. Not Taiwan Legal. Not Macau Legal and China And Hong Kong Trademarks. Think Puerto Rico. And then I would usually launch into how having a Hong Kong company does NOT permit you to do business in China and that it is dangerous to think otherwise.

If relevant to the discussion (and oftentimes it is) I would talk about how China has become incredibly adept at hunting down foreign companies doing business in China without a required Chinese entity and that it shows no more mercy to a Hong Kong guilty of this than to a New York or London or Sydney company that does this. I repeat: Having a Hong Kong company will no more help you get legal in China than setting up a new company in New York. When it comes to business law, you need to think of Hong Kong as a completely different country than the PRC. For more on the China-Hong Kong distinction when it comes to corporate entities, check out How to Form a China WFOE: What’s Hong Kong Got to Do with It?

One last area where we often have to deal with the differences between Hong Kong and China is with manufacturing contracts such as NNN Agreements and Product Development Agreements. Many Chinese manufacturing companies want their agreements with their foreign customers to be with the manufacturer’s Hong Kong entity, not with its China entity. This creates all sorts of complicated ownership and liability and jurisdictional and venue issues that must be resolved correctly to prevent a legally nonsensical or invalid agreement or equally bad, an agreement that makes perfect legal sense, but provides no protections to the foreign buyer. Again the key issue here is that Hong Kong and the PRC are legally separate when it comes to commercial transactions.

But I was asked this question today by someone and it made me realize that my answer started changing earlier this year. Now my response is a question along the lines of why do you want to know. I ask this because if you or your company have ever had a legal problem in China or if you or your company owes any money in China or if you or your company have been outspoken about how China oppresses anybody (especially on the Internet), you absolutely should think long and hard about whether it is safe for you to go to Hong Kong, because it may not be. See The Case of Hong Kong’s Missing Booksellers.

Will going to Hong Kong be as risky as going to the PRC? Absolutely not. But is it riskier than going to Singapore or to London? Absolutely yes. My advice is that if you or your company have any of the China “issues” I mention above, you should include Hong Kong in your risk assessments.

This is another reason to think long and hard about accepting Hong Kong as your venue for international arbitrations. Will you be able to go there in two to three years should you have a dispute? The odds are overwhelming that the answer to that will be yes, but again, why take even this small chance?

What are you seeing out there? Are you re-assessing your Hong Kong risks?

We will be discussing the practical aspects of Chinese law and how it impacts business there. We will be telling you what works and what does not and what you as a businessperson can do to use the law to your advantage. Our aim is to assist businesses already in China or planning to go into China, not to break new ground in legal theory or policy.