We have some instances of external links (i.e. pointing to another domain) in site menus.

Although there are legitimate reasons (e.g. linking to a news archive kept on a separate domain) I understand this can be considered bad from a usability perspective.

This begs the question - is this bad for SEO? With the recent panda changes we've seen certain issues which were previously "only" about usability attract SEO penalties, but I can't find any references to this example.

Anyone have thoughts / experience?

Thanks William - just to clarify, the rationale I don't have is why moz.com mentions that the "notable exception to preferring subfolders is language specific sites".

My inclination is to go with subfolders (as we would if we were e.g. launching a blog), but since the standard advice has a caveat for language specific sites, I'd like to understand why this is so before making a decision.

We're launching an .org.hk site with English and Traditional Chinese variants. As the local population speaks both languages we would prefer not to have separate domains and are deciding between subdomains and subfolders. We're aware of the reasons behind generally preferring folders, but many people, including moz.com, suggest preferring subfolders to subdomains with the notable exception of language-specific sites.

Does this mean subdomains should be preferred for language specific sites, or just that they are okay? I can't find any rationale to this other than administrative simplification (e.g. easier to set up different analytics / hosting), which in our case is not an issue.

Can anyone point me in the right direction?

Thanks William - just to clarify, the rationale I don't have is why moz.com mentions that the "notable exception to preferring subfolders is language specific sites".

My inclination is to go with subfolders (as we would if we were e.g. launching a blog), but since the standard advice has a caveat for language specific sites, I'd like to understand why this is so before making a decision.