Hong Kong vs. Mainland China

Hong Kong is a region governed by the People's Republic of China with some autonomy. China operates on the principle of "one country, two systems," which permits both socialism and capitalism to coexist within the country. The Hong Kong economy is known for its low tax rates, free trade, and minimal government intervention. Compared to Hong Kong, mainland China's stock markets are more cautious and limiting. Hong Kong's stock market was ranked the fourth largest in Asia and the sixth largest globally by the middle of 2023.

Basics

Hong Kong, renowned globally as an international financial powerhouse, a thriving business mecca, a shopping haven, and an alluring tourist hotspot, conceals beneath its vibrant facade the distinction of being a Special Administrative Region (SAR) under the governance of the People's Republic of China (PRC). This status embeds Hong Kong as an inseparable component of China, albeit punctuated by periods of resistance against Beijing's involvement in its political sphere.

The intricate rapport binding pro-democracy advocates in Hong Kong with their genuine desire for regional distinctiveness underscores the multifaceted dynamics between Hong Kong and mainland China. While entrenched political disparities persist, the economic synergy forged between mainland China and Hong Kong remains a compelling reality.

Hong Kong: A Unique Administrative Transition

In 1898, Britain and China negotiated a 99-year lease granting Britain control over Hong Kong. This prolonged agreement concluded in 1997 when Britain handed the reins of Hong Kong back to China. Hong Kong subsequently assumed its new identity as the Hong Kong Special Administrative Region (HKSAR) under the People's Republic of China.

Guided by the principle of "one country, two systems," China granted the former colony a 50-year period to retain its self-governance and maintain numerous independent systems. Due to its colonial legacy, Hong Kong proudly embraces English as one of its official languages.

While diplomatically, Hong Kong doesn't possess a distinct international identity from mainland China, it enjoys the status of an associate member (not a member state) within select international organizations. These include prestigious entities such as the Asian Development Bank, the International Monetary Fund, the World Health Organization, and the United Nations World Tourism Organization. Moreover, Hong Kong actively participates in trade-related events and agreements, operating under the name Hong Kong, China.

Mainland China: A Dynamic Economic Powerhouse

Mainland China, situated in East Asia, is the world's most densely populated nation, boasting a staggering population surpassing 1.4 billion individuals. Under the governance of the Chinese Communist Party, this vast territory encompasses 22 provinces, five autonomous regions, four direct-controlled municipalities, and the Special Administrative Regions (SARs) of both Hong Kong and Macau.

What further elevates Mainland China's global stature is its impressive economic prowess, positioning it as the world's second-largest economy, commanding a staggering $17.73 trillion. This formidable economic ascent has been a result of a strategic focus on the development of heavy industries, steadily augmenting both industrial and service outputs over time.

While recent times have witnessed a notable shift, with consumer demand emerging as a primary driver of growth, it's essential to acknowledge the trials faced by the nation in 2018. During this period, Mainland China was embroiled in a challenging trade dispute with the United States, ultimately contributing to its slowest economic growth in 28 years.

Fiscal Autonomy in Hong Kong

Hong Kong's distinctive financial landscape remains unaltered, retaining its free-enterprise system despite its integration with mainland China's communist structure. Hong Kong exercises independent control over its finances, fortified by China's non-interference in its tax legislation and a complete absence of taxes imposed by China.

The region boasts self-governed policies pertaining to money, finance, trade, customs, and foreign exchange, setting it apart from mainland China. Notably, Hong Kong and mainland China operate with distinct currencies. Hong Kong continues to rely on the Hong Kong dollar, firmly anchored to the U.S. dollar through a linked exchange rate system. In contrast, mainland China exclusively employs the Chinese yuan as its legal currency. Consequently, merchants in Hong Kong do not readily accept transactions in yuan.

Contrasting Economic Landscapes: Hong Kong and Mainland China

In terms of economic structures, Hong Kong and mainland China diverge significantly. Hong Kong's financial framework is distinguished by its low tax rates, emphasis on free trade, and minimal government interference. On the other hand, as noted earlier, mainland China boasts the world's second-largest economy at $17.9 trillion in 2022, while Hong Kong ranks 42nd with a GDP of $360 billion.

For over two decades, Hong Kong held the coveted title of the world's freest economy, as per The Heritage Foundation's annual index. However, its omission from the 2021 list stemmed from concerns regarding increased control by China.

Over the past decade, Hong Kong's economic landscape has undergone a remarkable transformation, with services emerging as the primary driver, constituting a substantial 93.4% of the GDP in 2022. This encompasses various service sectors, including travel, trade, finance, and transportation. In contrast, the manufacturing sector's contribution dwindled to a mere 1.0%, as manufacturing activities shifted to the mainland. Agriculture plays a minor role, contributing only 0.1% due to Hong Kong's reliance on imports for food and raw materials, while construction contributes around 4.1%.

Mainland China, in contrast, leans heavily on manufacturing, although the service sector has recently gained traction. Nevertheless, the service sector's proportion in the GDP remains lower than that of developed countries like the United States and Japan and even lags behind developing nations like Brazil and India. Agriculture accounts for about 8% of China's GDP, a notable difference from Hong Kong's negligible contribution.

Per capita GDP underscores the economic disparities, with Hong Kong boasting a significantly higher figure of $49,660 in current U.S. dollars compared to mainland China's $12,556. However, as of 2022, China's GDP per capita growth rate stood at 8%, slightly increasing Hong Kong's 7.4%. For the same year, Hong Kong recorded an annual GDP growth rate of 6.4%, while mainland China outpaced it with an 8.1% growth rate.

Dynamics of Capital Raising and Investment in Stock Markets

When it comes to raising capital, Chinese companies have overwhelmingly favored the Hong Kong Stock Exchange. The mainland Chinese stock markets impose more stringent financial requirements and restrictions, making Hong Kong a more attractive option. Moreover, Hong Kong's stock market lures a greater number of international investors, as highlighted by Tianlei Huang, a research analyst at the Peterson Institute for International Economics, who pointed out:

"Hong Kong possesses several key advantages that distinguish it from mainland China. Firstly, it operates a registration-based IPO system, streamlining and expediting the listing process compared to the mainland. Secondly, the absence of capital controls and its heightened international exposure position Hong Kong as a pivotal hub for global expansion. Thirdly, it boasts a robust financial infrastructure, which effectively curtails operational costs. Lastly, its regulatory framework is designed around transparency and prudent minimum standards."

Access to capital and investment received a substantial boost with the inception of the "Shanghai-Hong Kong Stock Connect" program in mid-November 2014. This innovative initiative established a cross-border conduit for accessing stock markets and facilitating investment. Investors in these regions were empowered to trade specified companies listed on each other's stock exchanges through their local securities firms. Prior to this program, individual investors in Hong Kong, and even globally, lacked direct access to Chinese stocks. A parallel program titled "Shenzhen-Hong Kong Stock Connect" was introduced in December 2016, further enhancing access to investment opportunities.

By the close of 2021, the Hong Kong Stock Exchange had listed 1,368 mainland Chinese companies, constituting just over 50% of the total listed companies on the exchange. Remarkably, in terms of market capitalization, these companies collectively accounted for nearly 79% of Hong Kong's stock market. During the same period, Hong Kong's stock market stood as the fourth largest in Asia and the sixth largest globally by market capitalization, amassing a substantial $5.4 trillion.

Economic Synergy Between Hong Kong and Mainland China

Despite occasional diplomatic tensions, the financial bonds between Hong Kong and mainland China remain robust and mutually beneficial. In fact, their economic interdependence is vividly illustrated by their annual bilateral trade, which soared to a remarkable $305 billion in 2022.

Hong Kong is a pivotal gateway to China for businesses seeking to engage with the mainland or explore Chinese stocks and investments. As of June 2021, 32 out of the 160 licensed banks in Hong Kong represented mainland interests.

Mainland China stands as Hong Kong's foremost trading partner and ranks as the second-largest source of inward direct investment. In 2020, mainland China's non-financial direct investment in Hong Kong reached an impressive $501.9 billion, constituting 27.1% of the total, as reported by Hong Kong's Trade and Industry Department.

Additionally, the Trade and Industry Department disclosed that a substantial 39% of Hong Kong's domestic exports are directed toward mainland China. At the same time, China stands as the primary source of imports, contributing 45.8% to Hong Kong's imports.

Hong Kong also plays a pivotal role in providing entrepot services to China. In 2021, the value of goods re-exported through Hong Kong to and from the mainland amounted to $562.5 billion, encompassing a substantial 89.5% of Hong Kong's total re-export trade value. Nonetheless, some voices are expressing concerns about Hong Kong's diminishing economic significance and evolving role within China's growth narrative.

Hong Kong vs. China: Economic and Financial Differences

In comparing Hong Kong to mainland China, striking disparities emerge in their economic and financial systems.

• Economic Systems: Hong Kong operates under a free-enterprise capitalist system, while mainland China follows a socialistic economic model.
• Financial Autonomy: Hong Kong exercises control over its taxation and finances, whereas mainland China refrains from interfering in Hong Kong's finances and imposes no taxes upon it.
• Currency: Hong Kong manages its own trade and foreign exchange, employing the Hong Kong dollar, whereas mainland China employs the yuan currency.
• Economic Rankings: Hong Kong possesses the 39th largest economy globally, in contrast to mainland China, which boasts the world's second-largest economy.
• Economic Composition: Hong Kong's GDP predominantly relies on the service sector, contributing a staggering 93%, while mainland China's GDP leans significantly on the manufacturing sector, with a burgeoning services sector.
• Trade Relations: Hong Kong directs 39% of its direct exports to China, while China serves as the origin of over 45% of Hong Kong's imports.
• GDP Per Capita Growth: Hong Kong records a GDP per capita growth rate of 7.4%, whereas mainland China registers a slightly higher rate at 8%.
• GDP Annual Growth: Hong Kong sustains an annual GDP growth rate of 6.4%, trailing behind mainland China, which maintains a robust 8.1% growth rate.

Factors Driving Hong Kong's Distinct Economic Role

Hong Kong, designated as a Special Administrative Region of China, has a unique status granting it significant economic and financial autonomy. In addition to this autonomy, Hong Kong also wields substantial executive, legislative, and independent judicial powers. This distinctive status empowers Hong Kong to chart its own course in directing trade and commerce according to its preferences.

Conclusion

Hong Kong and mainland China display economic disparities within their "one country, two systems" framework. Hong Kong's autonomy, distinct finance, low taxes, and global financial hub status contrast mainland China's manufacturing focus. Hong Kong's role as a gateway for international investors is evident, yet questions arise about its evolving role in China's growth story.