The economic future of Hong Kong

10 May

One country, two systems…

Since being handed back to the People’s Republic of China by the British in 1997, Hong Kong has existed as a Special Administrative Region (SAR) of China, exerting a particularly high degree of economic autonomy. Notwithstanding the mainland’s responsibilities of foreign policy and defence, Hong Kong will retain its political, economic and judicial integrity until at least 2047, 50 years after the retrocession. Despite this assurance, made under the 1984 Sino-British Joint Declaration, many believe that the current economic and trade dynamics will shift Hong Kong’s economic relationship with China from one of synergy to one of full integration, possibly undermining the region’s autonomy.

The tightening of the economic relationship between the mainland and Hong Kong since the handover took place in 1997 is enabled and coerced both formally and tacitly.

The Closer Economic Partnership Arrangement (CEPA) is an official agreement to facilitate and encourage trade between the two economies. It was originally signed in June 2003, with the official mandate to aid and strengthen trade and investment cooperation, and is continually amended and supplemented. Indeed, CEPA VIII was signed as recently as December 2011.

The rapid increase in economic activity between China and Hong Kong is perhaps best represented by the growth in bilateral trade and investment. Between 1997 and 2006, trade with China increased from 35% to 46% of Hong Kong’s total trade (Martin, 2007) and continues to rise – the level of Foreign Direct Investment from mainland China into Hong Kong reached HKD318.1bn (Hong Kong’s Census & Statistics Department, 2011). The trade has been beneficial to both economies, with Hong Kong business investing rabidly in mainland facilities and operations and the mainland traditionally taking advantage of Hong Kong’s highly developed services sector (Sung & Wong, 1998). The ten years after the handover saw an increase in China’s share of Hong Kong’s services exports from 19% to 26% (Martin, 2007).

Hong Kong’s economic relationship with China is more than one of just direct trading between the two economies. Hong Kong has long been regarded as one of the economic hubs of the world, with great financial freedom. For the 19th consecutive year, Hong Kong has remained as the world’s freest economy in the Heritage Foundation’s 2013 Index of Economic Freedom. “Its highly competitive regulatory regime and efficient and transparent framework sustains vibrant engagement in global trade and investment” (HF, 2013). Due to its financial freedom and special investment facilitations into China, foreign firms often use Hong Kong as a conduit or stepping-stone into the Mainland China marketplace. In addition to this, around 13% of China’s imports were handled via Hong Kong in 2011, as it is often preferable for imports to be taken into China using Hong Kong’s favourable alignment (Martin, 2007).

The entwining of the two economies is set to increase as Hong Kong is progressively used as a stepping-stone out of China. As mainland businesses begin to look outward, Hong Kong is seen as a place where they can learn of the global financial markets before directly investing and dealing with the financial capitals of the world, such as New York and London, as Schoen (2010) discusses, “If they go straight to New York or London, they’re in the middle of nowhere. They don’t know the people, the language, the customs or the regulations”. Certainly, it will be interesting to see how the role of Hong Kong develops in this regard, as it is chiefly dependent on the way in which mainland China is opened up to global financial markets. The continuing internationalization of the yuan suggests that China will further expose itself as an economy. In addition, Chinese and China related companies now account for over a third of the companies on the Hong Kong Stock Exchange, another symbol of the deepening economic relationship fuelled from the mainland.

The favourable trade and investment conditions afforded to Hong Kong have also led to the emergence of a strange financial phenomenon known as ‘round tripping’. It is the name given to the act of Mainland Chinese firms reinvesting into China via Hong Kong. It is this circular flow of investment that continues to tie a loop around Hong Kong, pulling it closer and closer to China, economically. While Hong Kong’s entrepreneurship, business methods, and managerial expertise have been introduced into China along with its expanding investments, at a more macro and systemic level institutional convergence will move Hong Kong closer to China rather than the other way around (Huang, 1997). 

The increasing economic activity between Hong Kong and China can be put into a global perspective by comparing the growth in trade between the two economies with the growth in trade between Hong Kong and the US over the same time period. Between 1997 and 2006, Hong Kong’s trade with China more than doubled, from $141bn to $301.5bn, whilst only increasing by 6.5% or $3.8bn with the US (Martin, 2007). Importantly, a rising share of business transactions are now denominated in Renminbi rather than Hong Kong Dollars or US Dollars, such is the growing Chinese influence in region. As more and more trade and financial flows in Hong Kong are conducted in Renminbi rather than Hong Kong dollars, it will become increasingly difficult to support the current linked exchange rate with the U.S. dollar — or possibly maintain a separate Hong Kong currency.

Many worry that Hong Kong is developing reliance upon the Mainland, such is the growth in activity since 1997. It is estimated that before 2016, half of Hong Kong’s economy will be supported by its links to Mainland China. By 2020, as much as 70% will be attributable to the mainland (Kwok, 2013).

Traditionally, it has been mechanisms such as different currencies, separate customs and immigration departments and distinct laws and regulations that have created and maintained Hong Kong’s high degree of economic separation and autonomy.  As discussed by Huang (1997), “the level and nature of business activity between Hong Kong and the Chinese mainland may eventually supersede the ability of the structural institutions to maintain a viable degree of separation.”

With the growing rise in Renminbi denominations, the continued development of CEPA and most importantly, the increasing immersion of Chinese firms in the region, one has to wonder whether Hong Kong’s economic borders will effectively dissolve long before the Sino-British Joint Declaration ceases to endure.

…One country, one system?



HF. (2013). 2013 Index of Economic Freedom. Available: Last accessed 13th May 2013.

Hong Kong’s Census & Statistics Department,. (2011). Statistics 2011. Available: Last accessed 13th May 2013.

Huang, Y.. (1997). The Economic Integration of Hong Kong and Mainland China. The National Bureau of Asian Research. 8 (3), p15-25.

Kwok, D.. (2013). Hong Kong can benefit from changing mainland economy. Available: Last accessed 10th May 2013.

Martin, M. F.. (2007). Hong Kong: Ten Years After the Handover. CRS Report for Congress. 1 (1), p1.

Schoen, J. W.. (2010). Hong Kong thrives as gateway to China trade. Available: Last accessed 13th May 2013.

Sung, Y. & Wong, K.. (1998). Growth of Hong Kong Before and After Its Reversion to China: The China Factor. American Economics Association. 2 (1), p25-75. 


2 Responses to “The economic future of Hong Kong”

  1. pw9g10 May 10, 2013 at 8:57 am #

    It appears that the increasing economic links between China and Hong Kong have yielded vast mutual benefits and it is difficult to determine whether this increasing reliance and falling independence will truly cost Hong Kong. Considering the prosperity that it has enjoyed due to Chinese involvement it cannot simply be viewed as leading to future negatives. Undoubtedly Hong Kong is seen as one of the world’s major economic hubs but this role is enhanced due to the significant involvement of China. Therefore future involvement with China, as it continues its path to economic superiority, may bring further benefits to the region.

    One area for concern for Hong Kong is the economic rise of Guangdong province. Initially the increased trade with China and this province in particular will have been beneficial. However, there is the potential to skip Hong Kong as a stepping stone as China becomes more accustomed to international trade and potentially introduces favourable trading conditions to some of its other major trading partners. This is increasingly likely considering that three of the original special economic zones were set up in Guangdong and over time it is possible for those attempting to export to China to become more direct reducing the role of Hong Kong as a way into China.

    • timhaythorne May 10, 2013 at 10:37 am #

      I think that this forecast is indeed of growing importance for Hong Kong. As you can see below, the Hong Kong service sector which the Mainland relied upon since 1980 now has a new competitor emerged form the Mainland itself. This means, in other words, that China now has the foundation and stability to export it’s own goods without need Hong Kong at all.

      Previously, Hong Kong had a great advantage over China in the form of a superior stock of human capital. This left them as ideal trade partners, where China was able to use it’s vast labour force to produce cheaply manufactured goods, and Hong Kong could market and finance the trade internationally.

      However, as China now has developed a broad spectrum of skill-levels, the costs of exporting through Hong Kong can be eliminated entirely. If this were indeed to happen, the relationship between the two would hang precariously, and it is with great curiosity in which we can ask will this simply absorb Hong Kong in to the Mainland or will this trigger the breakaway?

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