Hong Kong’s Role in China’s Economic Rise After 1997

Introduction

The People’s Republic of China has marked an impressive economic development over the last few decades. This great advancement has helped to steer the country to the top in matters regarding the global economy. According to recent reports on global economy, China has overtaken other powerful Western and European countries to become the second largest economy in the world today, after the United States. China’s economic strength can be seen through its outstanding participation in international business transactions, where the country is ranked among the global giants. For instance, in terms of exports and imports, the People’s Republic of China is said to be the largest exporter and the second importer of products globally.

In fact, China has replaced the United States of America as the fastest-advancing major economy in the world. More importantly, the Chinese are the largest manufacturers of products in the world. All these features are symbolic of a booming political and economic power. The rapid development of China has occurred as a result of both internal and external factors. Among the various factors that have helped to shape the economic status of China is the continuous role of Hong Kong, which has been a major business hub in the region. This paper seeks to understand the contribution of Hong Kong in transforming the People’s Republic of China into a dynamic economy after 1997.

Brief Overview of Hong Kong and China

Even though Hong Kong is still within the Chinese territory, it is governed by a different political system. This, however, was as a result of the one country, two systems principle that was adopted by China in early 1980s with the aim of achieving a peaceful reunification with Hong Kong, Taiwan, and Macau. The main agenda of the policy was to ensure that the three regions that have been under the control of colonial powers are allowed to continue with their own affairs, even upon reunification with the People’s Republic of China¹. In this case, the three regions will have to exist under the capitalist system, while the mainland China and its entire population will continue to be under the socialist system. As a result of the one country, two systems principle, Hong Kong had no option, but to establish independent political, economic, financial, and legal systems. Being among the most prosperous regions in Great China, Hong Kong has progressively continued to play a significant role in the transformation of the entire Chinese territory.

Today, Hong Kong city continues to take a different way compared to Mainland China when it comes to political and economic matters. This, however, is because of the sovereignty segregation, which may have passed as a blessing for Hong Kong city². In this regard, it is quite understandable that the return of Hong Kong under the Chinese sovereignty has brought both opportunities and challenges to the city’s planning and management. In matters regarding the economy, Mainland China and Hong Kong city have progressively established smooth integrations with each other.

Hong Kong city still remains a world financial center, and for that reason, has continued to play a significant role in opening mainland China to the outside world. Ever since its return to Chinese Jurisdiction sixteen years ago, Hong Kong has endured a lot of challenges to become a successful business hub within the People’s Republic of China. Politically, these conflicts and constraints may appear to be tougher for Hong Kong, but generally, the big city has proved to the world that it is actually on the right track in political and economical affairs under the “one country, two systems” concept. In fact, the constant reforms that have been implemented inside Hong Kong over the years have been effective in promoting a better city.

The Chinese economy has indicated one of the highest growth rates in the present world, with a GDP growth rate of between 9% and 10% annually between 1997 and 2009. Ever since the year 2007, China has been the third-biggest economy in the world. However, come 2010, it overtook Japan to secure the second place after the U.S. There is no doubt that, the subsequent economic comeback after 1997–98 played a significant role in promoting the rapid growth and transformation of China’s economy³.

In fact, with the booming economy of Hong Kong integrating into that of mainland China, numerous low-end value-added companies and industries would shift from Hong Kong to the Mainland, particularly in the Pearl River Delta, owing to lower production costs. As the two economies came together for what seemed to be a reasonable cause, people in Hong Kong would not stop worrying about the future role of Special Administrative Regions within the People Republic of China, Asia, and even internationally. However, Hong Kong, which had in the recent past become a critical source of best practices in business and management, was fast to prove its great potential in economic affairs to the world.

Some of the common positive aspects associated with Hong Kong, and which have been influential in its success as a leading international center in the world include low taxation levels and free trade, high per capita incomes, high transportation and communication networks, economic competitiveness, the longest life expectancy levels in the world, and the ever promising status of the Hong Kong dollar, which is said to be among the most traded currencies across the world. All the above aspects have helped to ignite Hong Kong’s economic transformation, before and after the sovereign handover by the British government in 1997. These aspects have also played a key role in the economic rise of China since then. The economic ties between mainland China and Hong Kong have been in existence ever since 1970s. These links, however, were strengthened further after the return of Hong Kong to the Chinese sovereignty in 1997. There is no doubt that, Hong Kong has been the biggest driving force behind China’s rapid economic success recently. Following is an in-depth view of some of the major ways through which Hong Kong has contributed towards the rapid transformation of China’s economic status since 1997.

Direct Investment in China

One of the major engagements of Hong Kong within Chinese markets is through entrepreneurial links. Hong Kong is a city bulging with many business opportunities, considering its status as a thriving business center, not just in China, but also in the whole world. Hong Kong is one of the regions within China that had benefitted heavily from the wave of modernisation, which had swept the country back in 1979. This, however, was one of the key aspects that would initiate the process of economic transformation in the region, considering the availability of various aspects of success as highlighted earlier on that would help in necessitating diffusion of modernity and innovation in the entire region. The City of Hong Kong has been a major driver of numerous innovations in the modern world, especially in technology and management practices. These products and services have facilitated mutual business relationships between Hong Kong and China over the years, as Hong Kong entrepreneurs continue to seek new markets for their diverse processes and products in Mainland China.

In fact, Hong Kong investments in China have penetrated in both private and public sectors, thus providing the Mainland with crucial resources of development in almost all sectors of the economy⁴. In fact, in its unceasing engagement towards a successful China, Hong Kong has helped in facilitating the entry of Mainland China into the World Trade Organisation in the year 2001. In 2003, both Hong Kong and China modified their trading affairs by signing the Closer Economic Participation Arrangement policy, which came to serve as an integral avenue for further economic integration between the two regions. By the year 2006, Hong Kong businesspersons had dominated most parts of Mainland China, and had even started to get further into the region, as they continued to establish business interests in the regions of Zhejiang, Guangdong, Shanghai, and Jiangsu. Currently, Hong Kong enterprises have proved to be more successful within China markets, and in that way, have helped to raise China’s economic status over the years.

Hong Kong Industrial Manufacturers

Hong Kong’s successful trade story is directly linked to manufacturing. As it would be observed, most of the products from manufacturing industries within Hong Kong are now traded across the border to other regions of the world, including mainland China⁵. According to latest global business economic reports, Hong Kong’s growth in the manufacturing industry has mainly been as a result of external influences in the trade of services and products. In fact, the diverse Hong Kong region is arguably the world’s most efficient and promising light-manufacturing center. This, however, is likely to improve a lot in future if Hong Kong’s private and public sectors sustainably continue to enhance their supply-chain efficiency.

Over the last twenty years, industrial manufacturers from Hong Kong have continued to play a crucial role in the Mainland into a large production center for a broad range of products that can sustain the demands of the entire global market. China enterprises operating in foreign lands are said to be the most competitive in terms of consumer goods where Hong Kong city remains a big player, especially in its active role within the Mainland. China is among the largest exporters in the world today, selling up to hundreds of billion dollars annually, the bulk of which are consumer products. The manufacturing companies of Hong Kong specialise in a broad range of consumer goods, and some of their common products are games, garments, textiles, and accessories, most of which are assembled in Mainland China from where they are made available for international markets.

The sovereignty handover of Hong Kong in August 1997 would consolidate the transition, transfer of big, sophisticated and labor-intensive companies from the city of Hong Kong to China. The Chinese reunification with Hong Kong helped to reduce and eliminate numerous barriers for the economic integration between these two regions, especially following the agreement of Closer Economic Partnership Arrangement (CEPA) six years after the sovereignty hand over. As a result of these transformations, Hong Kong manufacturing mainly features on activities revolving around the re-export of products that are generated by Hong Kong firms in China. Hong Kong has fully exploited its production capabilities through the open gateway policy, and in that case, a market outlet has been provided for its manufacturers. With time, these policies have also come to generate business opportunities for vast service engagements, such as storage, telecommunications, freight transportation, banking, professional services in law, real estate development, accounting, and insurance, to name but a few.

In the course of 1980s and early 1990s, the Hong Kong manufacturing sector would undergo the first phase of modernisation initiation, which featured the implementation of new economic reforms. These reforms would greatly aid in putting the Mainland on its current path in terms of economic and political matters. During this phase that had lasted for about thirteen years, China had started changing its economy into a world manufacturing base, from the agricultural economy it had been for many years. This transformation had set a new pace for Mainland China as it opened new avenues for Foreign Direct Investments into the region in spite of underdeveloped systems of transportation and telecommunications, among other crucial facilities.

Numerous infrastructure firms had already been established, setting the pace for grand investments in construction projects in the region. This, however, did not come easily, considering the fact that fragmented infrastructure in the Mainland would pose serious challenges to Hong Kong manufacturing investors who wanted to establish business operations in the region. The biggest problem was that, it was actually not possible for the investors to move their physical equipment and capital. In that case, Hong Kong firms had no option, but to erect their own operations bases within the region right from the scratch.

Presently, mainland China is bulging with many Hong Kong manufacturing companies and industries, and this is a clear evidence of how Hong Kong has contributed to the rapid transformation of Chinese economy over the years⁶. The dynamic contributions of Hong Kong firms within the Mainland have dramatically changed the landscape of China, making it presentable for any kind of investment plan. As it would be observed, one of the most outstanding strengths of Hong Kong entrepreneurs is their ability to adapt fast to global changes, particularly in matters regarding trade. In the course of the past one decade, Hong Kong’s business people have swiftly transformed the nature of their constant involvement in China’s manufacturing operations.

Changing Nature of Flows

It is apparent that a substantial number of flows that would be of great significance to Hong Kong and its population will in most cases be acquired from or taken to China. In other terms, many of the goods and products flowing through the city of Hong Kong are either coming from China or going to China. This, however, is a clear indication of the role that Hong Kong has continued to play in China’s development through important flows. Both Hong Kong and mainland China have benefited a lot from the flows. Hong Kong is part of a metropolitan region operating an increasingly global world, and in that case, it is associated with flows of all kind. Most of these flows revolve around people, goods, information, technology, ideas, services, knowledge, and capital.

Growth would come from seeking greater flow in every possible area, and Hong Kong has fully embraced this perception in its purposeful mission in China⁷.It will be important for any region that is business-oriented to make proper utilisation of producer-services flows. This, however, has been the case with Hong Kong, which has constantly applied this option to show just how services have been an important driver of their growth. Based on current observations, it is obviously clear that Hong Kong has excelled in such areas, in spite of the many challenges that have faced it in the past, especially in terms of property prices and weak private consumption⁸.

Services and manufacturing are said to be closely connected in the Hong Kong case, and for that reason, the two have to be understood better. It is better to understand the link between manufacturing and services well, since the two aspects are intimately linked up in the Hong Kong context. Hong Kong is likely to make good money whenever the Chinese markets in Mainland China experience strong growth in export. The main reason for this is that Hong Kong has been in the forefront in supplying the services that support China’s light industrial exports.

Offering Knowledge and Skills

Hong Kong research institutes, universities, and private firms have increasingly continued to help manufacturers within mainland China through interventions that include training personnel, providing product design and engineering services to upgrade their R&D, and introducing production technologies as well as processes. One good example here is the Hong Kong Productivity Council, whose role and activities in the Pearl River Delta and the surrounding regions cannot be overestimated. Ever since it was established in 1967, the council has constantly engaged in the promotion of productivity excellence among Hong Kong manufacturing companies within Mainland China.

Being in possession of vast experience in matters of trade, Hong Kong businesspersons have continued to serve as transformers of Mainland China in almost every sector of the economy. More importantly, the operators of Hong Kong firms have had a perfect understanding of the manner in which business was conducted in china, and in that case, have been offering excellent services to people in the region. Some of the key areas in which the Hong Kong firms have had a positive impact include, but are not limited to, remote management, financial areas, and professional services through things such as insurance, transport, and banking among others.

Export and Re-Export Industry

Hong Kong city has a limited land area and minimal access to natural resources, considering its location in China’s South Coast. However, these geographic features have over the years continued to play a significant role in predetermining the future economic status of Hong Kong city. While the city’s Gross Domestic Product is observed to have grown over 180 times in the course of 1961 and 1997, the economic status in the region has experienced a number of major changes. As a matter of fact, the success of Hong Kong’s economy largely depends on external demand of products and services. The worldwide reputation of Hong Kong revolves around its achievements as a giant shipping, manufacturing, and commercial center in the world⁹.

The period between 1960 and 1980 would see Hong Kong undergo rapid industrialisation. This, however, was achieved through the manufacture and selling of labor-intensive products such as electronics, toys, and textiles, among other goods. Apart from the exports in products, Hong Kong has also benefited greatly from exports of services to foreign destinations. The contribution of services to the region’s GDP had skyrocketed to 85.6 percent in 2000 from 74.5 percent in the year 1990. In the same year, the value of Hong Kong’s exports in terms of services alone was HK$323 billion, while that of goods exports was valued at HK$153 billion. Exports and re-exports of labor-intensive products and services by Hong Kong firms have continued to play a significant role in the economic rise of Mainland China over the years.

Hong Kong’s Offshore Trade

It should be understood that, Hong Kong’s Small and Medium-Sized businesses control the production capacities in light industries within the PRD. The SMBs lack competition when it comes to provision of service exports. This is because the largest portions of it are delivered to affiliates and subsidiaries across the border, by the parent companies that are based in Hong Kong¹⁰. In this regard, production-related services will tend to go up, whenever Chinese exports perform well in the market. Most of the different products that would be taken through Hong Kong as re-exports are now carried back to offshore transaction without having to pass through the city again.

This will cover services of both merchanting and merchandising for business transactions that are conducted in the offshore. Merchanting, in this case, will refer to services connected with the marketing of goods or commodities that are acquired from a party who is outside the Hinterland, and then traded to another party who is also outside without the products having to get into the city. There is also inclusion of transactions of commodities or products attained by sub-contracting, which are marketed to parties who are outside Hong Kong without having to go via the city.

Hong Kong as International Financial Center for China

There is no doubt that, foreign financial firms would tend to shift their activities to Mainland China from Hong Kong once the Mainland China opens up its financial sector. Nevertheless, Hong Kong enjoys numerous competitive advantages in its name, and these can be very useful in helping to preserve the big city’s role as a center for Chinese international capital boosting for the predictable future¹¹. One of the advantages is that, Hong Kong has a sound legal framework, and independent and efficient judiciary, while the legal system of the Mainland appears to be in urgent need of development. There is also the advantage of free flow of capital and information in Hong Kong, unlike in the Mainland, where capital controls for the predictable future are fully maintained. Hong Kong also enjoys a mature financial market and sound banking systems. Actually, all these factors make it hard for any other city in Mainland to compete with Hong Kong as a significant financial center in the world. As a result of this, Hong Kong is still a key player in the development of China’s economy.

Foreign direct Investments to China will likely increase with WTO-related liberalisation of services sectors and the elimination of textile export quotas in 2005. Even though there would be challenges of entrance barriers and possible competitiveness owing to availability of other international firms, Hong Kong manufacturing and selling firms can benefit greatly from the opening up of Mainland’s financial sector¹². Considering its status as a regional commercial and financial center, Hong Kong should try to retain a constant flow in all directions of commercial activity with its trading partners, particularly the Mainland.

There was a time in the recent past when the rapid growth of Shenzhen and Shanghai’s stock markets had misled people in doubting the status of Hong Kong as a financial center. Such perceptions, however, have gradually subsided as serious problems or challenges in the Chinese stock markets. In fact, it has become increasingly certain that Shenzhen and Shanghai stock markets have not reached a level where they can be termed as efficient capital markets. Meanwhile, in spite of talks on banking reforms for the last twenty years, China’s banking facilities still have not adopted the required standards. It is obvious that there are too much savings in the People’s Republic of China that needs to be utilised in a meaningful way. In this regard, Hong Kong’s financial markets possess a lot of potential that would be enough to help China handle its financial risks and resources. In order for this to be achieved successfully, the flow of funds between the two regions has to be managed properly and liberalised in a gradual manner. However, at the same time, there is a likelihood that Hong Kong may have to do something in terms of managing the high volatility that has been spilled from Mainland China.

As it is shown in this paper, the role of Hong Kong City in China’s development both economically and politically can never be overestimated. In fact, there is no way we can talk about China’s Economic rise over the years without talking of Hong Kong city. The latter has continued to play a massive role in mainland’s economic development, especially after 1997, when it was returned to Chinese sovereignty by the British. As it is shown in this paper, mutual integrations between Mainland China and Hong Kong since 1997 have helped to transform the two regions into giant economies in the modern world.

Bibliography

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Footnotes

1. N. Sharif and M. Tseng, ‘The Role of Hong Kong in Mainland China’s Modernisation in Manufacturing’, Asian Survey, vol. 51, no. 4, 2011, pp. 633-658.
2. A. Smart and J. Smart, ‘Time-space punctuation: Hong Kong’s border regime and limits on mobility’, Pacific Affairs, vol. 81, no. 2, 2008, pp. 175–193.
3. B. Ramon and S. Zhao, ‘Hong Kong transformation into a Service Hub’, Asian Survey, vol. 51, no. 4, 2011, pp. 584-609.
4. H. Cheng and J. Glascock, ‘Dynamic linkages between the Greater China economic area stock markets—Mainland China, Hong Kong, and Taiwan’, Review of Quantitative Finance and Accounting, vol. 24, no. 4, 2005, pp. 343-357.
5. K.Zhang, ‘Human capital, country size, and North–South manufacturing multinational enterprises’, International Economics, vol. 53, no. 2, 2000, pp. 237– 260.
6. K. Zhang and J. Markusen, ‘Vertical multinationals and host-country characteristics’, Journal of Development Economics, vol. 59, no. 12, 1999, pp. 233–252.
7. B. Naughton, The China circle: Economics and electronics in the PRC, Taiwan, and Hong Kong, Washington, DC, Brookings Institution Press, 1997.
8. N. Pun and K. Lee, ‘Locating Globalization: The Changing Role of the City-state in Post-handover Hong Kong’, The China Review, vol. 2, no. 1, 2002, pp. 1-28.
9. T. Chan and X Simon, ‘Advanced producer services industries in Hong Kong and Shenzhen: Struggles towards integration’, Asia Pacific Viewpoint, vol. 53, no. 1, 2012, pp. 70-85.
10. K. Tsai, ‘Off balance: The unintended consequence of fiscal federalism in China’, Journal of Chinese Political Science, vol. 9, no. 2, 2004, pp. 1–26.
11. H. Kevin, ‘Why does so much FDI from Hong Kong and Taiwan go to Mainland China?’, China Economic Review, vol. 16, no. 15, 2005, pp. 293-307.
12. S. Tsang, ‘The Hong Kong economy under asymmetric integration: Structural transformation or dissolution?’, The China Review, vol. 7, no. 42, 2007, pp. 35–63.