Many recognize Hong Kong as an international financial hub, business center, shopping paradise, and tourist destination but are still unclear about its true identity. 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. Hong Kong maintains its own passports, currency, police force, and legal and judicial system. However, the mainland Chinese government manages Hong Kong's military defense as well as its diplomacy with foreign countries. The mainland government has also been known to pull strings in local Hong Kong politics. 

British Colony

To understand the root of Hong Kong's separation from mainland China, one must go back to the Opium Wars between the 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. (See: What You Should Know About Hong Kong SAR)

Differences Between Hong Kong and China

Perhaps the most significant difference between mainland China and Hong Kong is that the mainland is communist 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.

Despite the separation in systems and right guaranteed by the Basic Law, the mainland Chinese government does assert itself in local Hong Kong politics. Mainland China's recent decisions on electoral reforms in Hong Kong set off the massive 2014 Hong Kong democracy protests. Protesters complained that only those candidates who aligned their interests with China would be allowed to run. (See: Hong Kong And China's Touchy Ties)

Hong Kong also has its own legal and judicial system broadly based on the British common law model. However, for land tenure and family matters, Hong Kong reverts to the Chinese customary law model. As part of its independent judicial system, Hong Kong has its own police force.

Hong Kong and mainland China use different currencies. Hong Kong continues to use the Hong Kong Dollar, which is managed under the Linked Exchange Rate System against the U.S. dollar. The mainland uses the Chinese yuan as legal tender. Merchants in Hong Kong do not freely accept the yuan. (See: Why China's Currency Tangos With The USD)

One China in 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 identify from mainland China. For example, Hong Kong has no independent representation in the United Nations, 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 (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. (See: Six Economic Reasons For Hong Kong Independence Protests)

Economic Unification?

Hong Kong and mainland China boost each other's economies, and the two have good economic relations. The Hong Kong economy is characterized by low tax rates, free trade, and less government interference. Mainland China is Hong Kong’s largest trading partner and source of Foreign Direct Investment (FDI). The economy of mainland China is more dependent on manufacturing. In recent years, the mainland Chinese services sector has started to pick up. However, the share of services in the gross domestic product (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 percent of China’s GDP while it is negligible in Hong Kong's. 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. According to HKTDC, “among all the overseas-funded projects approved in the Chinese Mainland, 44.3% were tied to Hong Kong interests (end 2013).” Hong Kong is also a preferred destination for listing mainland companies as the Chinese stock markets are more conservative. As of 2013, the Hong Kong stock exchange listed approximately 797 mainland Chinese companies. (See: China's GDP Examined: A Service-Sector Surge)

Bottom Line

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 which 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.

Want to learn how to invest?

Get a free 10 week email series that will teach you how to start investing.

Delivered twice a week, straight to your inbox.