Hong Kong vs. China: An Overview
"The Hong Kong Special Administrative Region is an inalienable part of the People's Republic of China." – Article 1, Basic Law
"The National People's Congress authorizes the Hong Kong Special Administrative Region to exercise a high degree of autonomy and enjoy executive, legislative and independent judicial power, including that of final adjudication, in accordance with the provisions of this Law." – Article 2, Basic Law
Most people know Hong Kong as an international financial hub, business center, shopping paradise, and tourist destination. However, the region's identity crisis and resistance to Beijing's interference are at the heart of the civil unrest in the former British colony. Pro-democracy activists in Hong Kong would like the region to remain different from other Chinese cities. So is Hong Kong a de facto country or is it truly a part of China? As with many things in Hong Kong, the answer is not clear cut.
The relationship between Hong Kong and China is far more complex than most people realize. It involves politics, economics, trade, laws, and, above all, the people. "Hongkongers," as they're known, who lived for years under the influence and ways of former ruler Great Britain are wary about China’s intentions and indignant about the mainland’s meddling in its political affairs.
Mainland China and Hong Kong complement each other economically. However, their political differences remain entrenched. The century-long separation between the People's Republic of China and Hong Kong created gaps that cannot be easily bridged even if the two are officially one country. Before Hong Kong and mainland China can truly unify, they must overcome significant differences.
- Hong Kong exists as a Special Administrative Region controlled by The People's Republic of China and enjoys its own limited autonomy as defined by the Basic Law.
- The principle of “one country, two systems” allows for the coexistence of socialism and capitalism under “one country,” which is mainland China.
- The Hong Kong economy is characterized by low tax rates, free trade, and less government interference.
- The mainland Chinese stock markets are more conservative and restrictive.
To understand the root of Hong Kong's separation from the mainland, one must go back to the Opium Wars between Great Britain and China (1839–1860). During these military and trade clashes, China was forced to cede Hong Kong Island and a part of Kowloon to Great Britain in perpetuity. In 1898, Britain negotiated a major land expansion of the Hong Kong colony and signed a 99-year lease with China. The lease ended in 1997, at which time Britain returned Hong Kong to China as a Special Administrative Region (SAR) called the Hong Kong Special Administrative Region of the People's Republic of China (HKSAR).
Under the doctrine of "one country, two systems," China allowed the former colony to continue to govern itself and maintain many independent systems for a period of 50 years. The Basic Law defines the limited autonomy of Hong Kong. Owing to its colonial history, English is one of Hong Kong's official languages.
Officially known as the People's Republic of China, this East Asian country is the world's most populous, with a population of more than 1.4 billion people. China is governed by the Communist Party of China, which has jurisdiction over 22 provinces, five autonomous regions, four direct-controlled municipalities, and the SARs of both Hong Kong and Macau.
China has the second-largest economy in the world, at $13.6 trillion, after the United States, at $20.4 trillion. China built its economy on heavy industry development, ramping up the country's industrial and service output over the years. Of late, consumer demand has driven growth. However, after a tougher 2018, in which the nation was embroiled in a trade war with the United States, the Chinese economy grew at its slowest pace in 28 years.
Chinese GDP in 2018 grew at a 6.6% pace. China is forecasting 2019 GDP growth of between 6% and 6.5%. Its economy grew 6.3% in the first half of 2019. Many economists have stated that they are wary of the accuracy of China's economic growth self-reporting over the years, however.
Differences in Government
Perhaps the most significant difference between mainland China and Hong Kong is that the mainland is communist and controlled by a single party while Hong Kong has a limited democracy. Both share the President of China as their chief of state. However, each has its own head of government: The premier is the head of mainland China, while the chief executive is the head of the Hong Kong Special Administrative Region.
The chief executive is accountable to the Central People's Government. The term of the chief executive is for five years, and any person can serve for a maximum of two consecutive terms.
Despite the separation in systems and rights guaranteed by the Basic Law, the mainland Chinese government does assert itself in local Hong Kong politics. In 2014, the region witnessed mass-scale protests and demonstrations against China’s proposed reforms for electing the Chief Executive. Protesters complained that only those candidates who aligned their interests with China would be allowed to run. The "Umbrella Protests," as they were known, failed to achieve any concessions from Beijing.
Hong Kong also has its own legal and judicial systems (including a proprietary police force), district organizations (with no political power), and public servants, broadly based on the British common law model. However, for land tenure and family matters, Hong Kong reverts to the Chinese customary law model.
In 2019, Hong Kongers protested against an extradition bill that would have allowed residents to be sent to China. It was eventually suspended and withdrawn by the chief executive. Critics feared the bill would undermine the region's judicial system. Amnesty International said the bill—if passed—would have extended the power of the mainland authorities to target critics, human rights defenders, journalists, NGO workers, and anyone else in Hong Kong.
Military and Diplomacy
Hong Kong defers to mainland China in two primary areas: military defense and international relations. Hong Kong may not maintain its own military; the mainland manages the military defense of Hong Kong.
In international diplomacy, Hong Kong has no separate identity from mainland China. For example, Hong Kong has no independent representation in the United Nations Security Council, the United Nations Conference on Trade and Development, the Group of 77 at the United Nations, or the Group of 22 (G22). However, Hong Kong may attend events of select international organizations like the Asian Development Bank, the International Monetary Fund, the World Health Organization, and the United Nations World Tourism Organization, though as an associate member and not a member state. It can also participate in trade-related events and agreements under the name "Hong Kong, China."
The Hong Kong Special Administrative Region may not maintain any separate diplomatic ties with foreign countries. The Office of the Commissioner of the Ministry of Foreign Affairs of the People's Republic of China in the Hong Kong Special Administrative Region conducts all foreign affairs. Foreign countries may have consulate offices in Hong Kong, but locate their main Chinese embassies on the mainland. The citizens of Hong Kong carry a different passport from the citizens of mainland China. Both must obtain permission before visiting the other region. Even foreign tourists who visit Hong Kong must obtain a separate visa before entering China.
Differences in Taxes and Money
The principle of "one country, two systems" allows for the coexistence of socialism and capitalism under "one country," which is mainland China. This principle has given Hong Kong the freedom to continue with its free-enterprise system, rather than merging into the communistic structure in China. Hong Kong has independent finances and the People's Republic of China (PRC) does not interfere in its tax laws or levy any taxes on Hong Kong.
The region has its own policies related to money, finance, trade, customs, and foreign exchange. Hong Kong and mainland China even use different currencies. Hong Kong continues to use the Hong Kong dollar, which is pegged under the Linked Exchange Rate System to the U.S. dollar. The mainland uses the Chinese yuan as legal tender. Merchants in Hong Kong do not freely accept the yuan.
Differences in Economics
Hong Kong has the freest and 35th largest economy in the world with a GDP of $362.9 billion in 2018. The economy of Hong Kong has witnessed a tremendous transition in the past decade as services took a lead in the region with manufacturing shifting base to the mainland. The contribution of manufacturing in the GDP has shrunk over the years (1.1%), while agriculture barely contributes to the GDP (0.1%), as Hong Kong is not rich in natural resources and depends on imports for food and raw materials. Construction contributes around 5%. The service sector includes services related to travel, trade, financial, and transportation. Overall, the Hong Kong economy is characterized by low tax rates, free trade, and less government interference.
Hong Kong, which is regarded as the world's "freest economy," can also be tagged as a "service economy," as over 90% of the gross domestic product (GDP) is constituted by this sector.
The economy of mainland China is more dependent on manufacturing, although, in recent years, the service sector has started to pick up. However, the share of services in the GDP is much less than that of developed countries like the United States and Japan and also less than that of developing countries like Brazil and India. Agriculture constitutes around 10% of China's GDP, while it is negligible in Hong Kong's.
Hong Kong's GDP per capita is vastly higher than that of China's, although the latter is rapidly climbing. China's GDP growth rate is over 6%, while Hong Kong's was 3% in 2017.
Differences in Stock Markets
The Hong Kong Stock Exchange has been the preferred destination choice for most Chinese companies looking to raise capital, as the mainland Chinese stock markets are more restrictive and have higher financial requirements. Hong Kong's stock market also attracts more overseas investors.
"Hong Kong has multiple advantages that are missing in China. First, a registration-based IPO system, which enables listing to be relatively faster and easier than in the mainland. Second, the absence of capital controls and greater international exposure, which allows Hong Kong to serve as an anchor point for global expansion. Third, a sound financial infrastructure, which mitigates operational costs. Fourth, an effective regulatory framework, which focuses on transparency and prudent minimum standards," wrote Tianlei Huang research analyst at the Peterson Institute for International Economics. "Neither Shanghai nor Shenzhen is likely to win this competition with Hong Kong, at least over the short term."
As of the end of 2018, the Hong Kong Stock Exchange listed 1,146 mainland Chinese companies, nearly 50% of the total number on the exchange. In terms of market capitalization, these companies accounted for almost 68% of the stock market in Hong Kong. Mainland companies have raised over $800 billion via stock offerings in Hong Kong since 1993.
In mid-Nov. 2014, a program titled "Shanghai-Hong Kong Stock Connect" was launched, which established a cross-border channel for access to stock markets and investment. This arrangement allows investors in these regions to trade specified companies listed on each other’s stock exchange through their local securities firm. There was no direct access for individual investors in Hong Kong (or overseas) to Chinese stocks before this. In Dec. 2016, the similar "Shenzhen-Hong Kong Stock Connect" was launched.
Even in times of twisted diplomatic relations, the economic ties have remained strong between the mainland and its SAR. Hong Kong and mainland China boost each other's economies, and the two have good economic relations with annual bilateral trade valued at over $500 billion.
Hong Kong in many respects is seen as a gateway to China for those who are interested in doing business on the mainland or accessing Chinese stocks or investments. As of Dec. 2018, 22 of the 152 licensed banks in Hong Kong were of Mainland interests.
Mainland China is Hong Kong's largest trading partner and its second-largest source of inward direct investment. The mainland's non-financial direct investment in Hong Kong was $70.05 billion in 2018, accounting for 58.1% of the total investment of $120.5 billion, according to the Ministry of Commerce of China. According to Hong Kong's Trade and Industry Department, mainland China is Hong Kong’s main destination for domestic exports (44.2%). It is also the biggest supplier of imports for Hong Kong (46.3%).
Hong Kong is a major supplier of entrepôt services to China. In 2018, the value of goods re-exported through Hong Kong from and to the Mainland was $467.6 billion and accounted for 89.1% of Hong Kong's total re-export trade value.
However, some argue Hong Kong's economic importance and relevance to China's growth story is rapidly falling.