As part of the foreign exchange control policy, the amount of foreign debts borrowed by a wholly foreign-owned enterprise (“WFOE”) in Mainland China is limited by foreign debt quota (“the Quota”).

Traditional method of the Quota is the differences between the paid capital and registered capital (“Method 1”). Starting from the year 2017, the net asset method can also be selected (“Method 2”). The current multiplier is 2.[1]  

Usually, the amount of the Quota calculated by using Method 2 would be larger than the amount calculated by using Method 1. As such, a FIE may evaluate whether Method 2 can be used to increase the Quota.

Points to Note
Despite the relaxation, it is still more flexible for Chinese Enterprises to set up a Hong Kong company to borrow external loans in foreign currencies (e.g., the USD) as there are no foreign exchange controls in Hong Kong. Benefits of obtaining Hong Kong financing are as below:-

The borrowing rate in Hong Kong is generally lower than that in the PRC; and USD is still the currencies commonly received by the Chinese Manufacturers and exporters from its overseas customers. Borrowings in USD would reduce the foreign exchange rate risk of Chinese Enterprises.

Having said that, your Hong Kong company must establish business track records in order to borrow from Hong Kong banks. It is easy for exporters and manufacturers to set up business records in Hong Kong when their customers or suppliers are from overseas.

To conclude, besides tax saving purposes, financing costs are also another reason for setting up your business in Hong Kong. Whether to set up office or employ staff in Hong Kong or not is another story.