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A Look Ahead at Operating in Hong Kong and China in Times of Uncertainty

Between the pandemic and Hong Kong’s new national security law, there is a lot of uncertainty for companies operating in Hong Kong and China. In this article, Benjamin Qiu explores how companies can best equip themselves for success in these markets. 

Benjamin focuses his practice on venture capital financings; fund management; corporate governance; and intellectual property portfolio building, licensing and protection. Representing emerging growth enterprises from a variety of technology sectors, he has significant experience working with electronics and software companies as well as internet startups.

What could be the possible impact of the Hong Kong national security law that was passed by China? 

In June 2020, China announced a new national security law regarding Hong Kong that went into effect on July 1. The new law created several broad categories of criminal liability and specified certain circumstances in which China can exercise jurisdiction over Hong Kong. 

The law could add uncertainty for global companies operating in the Hong Kong market, and they are still working on understanding the law and how it may impact their businesses. However, we do know two things on a basic level: First, certain conduct that was permissible in the past may not be permitted anymore. For example, certain content relating to politics or history might become problematic. Currently, locals can watch on various streaming services documentaries that are critical of governments, and business analysts can make and circulate statements critical of government policies or the governance of state-owned companies. However, such content or speech may now be in violation of the national security law. 

That creates a dilemma for content creators and distributors, as well as for investors: Whether to keep or remove certain content from their platforms could be interpreted as taking a political stance or, worse, be deemed a violation of the national security law. Some companies may decide to pull out of the Hong Kong market entirely rather than take these risks.

Second, certain laws that were not previously applicable in Hong Kong may be applicable or legislated in Hong Kong in the future. For example, China has enacted cybersecurity, privacy and data laws that historically have not been applicable in Hong Kong. However, with the passage of the national security law, even if these Chinese regulations do not extend to companies operating in Hong Kong, the latter may be under pressure to catch up on the legislation. This adds another layer of uncertainty.

Fundamental questions remain: What will enforcement of the law look like, and what will be the time frame for enforcement? We will have to wait and see how the law is enforced and what impact it will have on global companies operating in Hong Kong.

You represent companies in a variety of technology sectors. How are global technology companies adjusting to the changing Hong Kong market in light of the ongoing pandemic?

Overall, Hong Kong has dealt with the COVID-19 pandemic quite effectively, in part due to its experience with SARS in 2003, a similar coronavirus that caused the deaths of dozens of medical workers and citizens in Hong Kong. The Hong Kong offices of global technology companies adjusted quickly, beefing up their technology to offer remote access so their employees could work from home. 

We represent several well-funded technology startups that combine robotic and medical science to provide disinfection services in public spaces. It’s been interesting to see how companies are developing new technologies in response to the pandemic.

What are some common mistakes that technology companies make when stepping into the Hong Kong and Chinese markets, and how can they be avoided?

Over the years, U.S. technology companies have significantly improved in terms of their approach to entering the Hong Kong and Chinese markets. However, there are several common mistakes that companies continue to make. 

The first mistake is that companies fail to hire a good local team to assist with their product launch and operations. Or if they do hire a local team, they fail to give the local team enough freedom to run the company or develop and modify products based on the behaviors and interests of local consumers. Having a dedicated team on the ground that is knowledgeable about local trends and familiar with consumer habits is vital to the success of any company entering the Hong Kong and Chinese markets. 

We also see companies making several mistakes when it comes to protecting their intellectual property (IP). The first thing companies must do is register their rights, including their patents and trademarks, in China. Some companies assume that even if they registered their IP, they will lose in court if they try to enforce the patents or trademarks. But that thinking is outdated. If companies fail to register their IP, then it will be very difficult to make a case for infringement later on. On the other hand, if one has been careful with building the IP portfolio and, as in any jurisdiction, has a good case before an experienced judge—in China, this typically means being able to file suit in a major city—then the IP owner should feel confident about pursuing the infringer.

If technology companies do their homework, assemble a strong local team and give that local team autonomy to act, then Western companies can enter, compete and thrive in Hong Kong and China.

What developments or trends are you seeing with regard to cross-border work and U.S.-China investments? 

In 2020, China will probably be about the only major economy that sees growth. That, plus an already sizeable consumer market and the adoption of additional productivity technology, will continue to drive many investments. Hot investment sectors include electric automobiles, education software and medical science. On the legal side, notable developments include the implementation of the Chinese cybersecurity law, as well as several new cases relating to the enforcement of overseas arbitration decisions (including those issued in Hong Kong) by courts in China.

Meanwhile, due to the U.S.-China split, investment by China-based investors or companies in the U.S. has diminished. However, Chinese and U.S. companies alike are exploring alternatives to traditional models of investment and supply chain, such as taking advantage of major reforms and opening up in China’s financial services and securities market.

How is Loeb a leader in this space? What differentiates our practice from other firms?

Loeb remains a leader in U.S.-China corporate deals, relying on our deep connections and local knowledge in Mainland China, Hong Kong and the U.S., as well as our dependable and expanding team. For corporate transactions, clients expect value and responsiveness without losing sight of complexity and the potential involvement of a deep bench of experts. For many clients, the Loeb team excels at efficiently pooling resources to deal with a broad range of needs relating to each corporate transaction, such as IP, tax and disputes.