Hong Kong vs. Mainland China: Understanding the Economic and Financial Differences

Hong Kong vs. Mainland China: An Overview

Many people know Hong Kong as an international financial hub, business center, shopping paradise, and tourist destination. However, it is also a Special Administrative Region (SAR) of the People's Republic of China (PRC). As such, Hong Kong is an inalienable part of China and, at times, has resisted Beijing's interference in its political life.

Pro-democracy activists in Hong Kong would like the region to remain distinct from other Chinese cities. That makes the relationship between Hong Kong and mainland China complex. However, mainland China and Hong Kong complement each other economically even if their political differences remain entrenched.

Hong Kong

In 1898, Britain negotiated a 99-year lease with China on its Hong Kong colony. That lease ended in 1997. At that time, Britain returned Hong Kong to China and Hong Kong became the Hong Kong Special Administrative Region of the People's Republic of China (HKSAR).

Under the doctrine of one country, two systems, China will allow the former colony to continue to govern itself and maintain many independent systems for a period of 50 years. Owing to its colonial history, English is one of Hong Kong's official languages.

Although diplomatically, Hong Kong has no separate identity from mainland China, it may attend as an associate member (not a member state) events of select international organizations such as the Asian Development Bank, the International Monetary Fund, the World Health Organization, and the United Nations World Tourism Organization. It can also participate in trade-related events and agreements under the name Hong Kong, China.

Mainland China

This East Asian country is the world's most populous, with more than 1.4 billion people. China is governed by the Chinese Communist Party, which has jurisdiction over 22 provinces, five autonomous regions, four direct-controlled municipalities, and the SARs of both Hong Kong and Macau.

Mainland China has the second-largest economy in the world at $17.73 trillion. It follows the United States, whose economy was valued at $23 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 tough 2018, in which the nation was embroiled in a trade war with the United States, the Chinese economy has grown at its slowest pace in 28 years.

Taxes and Money

Hong Kong is allowed to continue to use its free-enterprise system, rather than merge into the communistic structure of mainland China. Hong Kong has independent finances and China neither interferes in its tax laws nor levies 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 a linked exchange rate system to the U.S. dollar. Mainland China uses the Chinese yuan as legal tender. Merchants in Hong Kong do not freely accept the yuan.

Economies

Overall, the Hong Kong economy is characterized by low tax rates, free trade, and limited government interference. While mainland China, as mentioned above, had the second largest economy in the world at $17.33 trillion as of 2021, Hong Kong had the 39th largest, with a gross domestic product (GDP) of $368.13 billion.

Hong Kong's economy was rated the freest in the world from 1995 to 2019 by The Heritage Foundation's annual index of the world's freest economies. However, it was removed from that list in 2021 due to the belief that it may be more directly controlled by China.

The economy of Hong Kong has witnessed a tremendous transition over the past decade as services took a lead in the region. In fact, they made up 93.4% of GDP in 2020. The service sector includes services related to travel, trade, financial, and transportation.

As Hong Kong's manufacturing has shifted to the mainland, the manufacturing sector's contribution to Hong Kong's overall GDP has shrunk over the years to 1.0%. Agriculture contributes just 0.1% because Hong Kong is not rich in natural resources and depends on imports for food and raw materials. Construction contributes around 4.1%.

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. Furthermore, it's less than that of developing countries such as Brazil and India. Agriculture constitutes around 8% of China's GDP, while it is a negligible part of Hong Kong's.

Hong Kong's GDP per capita in current U.S. dollars is vastly higher than that of mainland China's—$49,660 vs. $12,556. However, as of 2021, China's GDP per capita growth rate was 8%, while Hong Kong's was 7.4%.

For 2021, Hong Kong's annual GDP growth was 6.4% while mainland China's was 8.1%.

Stock Markets

The Hong Kong Stock Exchange has been the preferred choice for most Chinese companies looking to raise capital. That's because mainland Chinese stock markets are more restrictive and have higher financial requirements. Hong Kong's stock market also attracts more overseas investors. As Tianlei Huang, research analyst at the Peterson Institute for International Economics, wrote:

"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"

Access to Capital and Investments

In mid-November 2014, a program titled "Shanghai-Hong Kong Stock Connect" was launched. It established a cross-border channel for access to stock markets and investment.

This arrangement allowed investors in these regions to trade specified companies listed on each other’s stock exchange through their local securities firms.

Prior to the program, individual investors in Hong Kong (or worldwide) had no direct access to Chinese stocks. In December 2016, a similar program titled "Shenzhen-Hong Kong Stock Connect" was launched, as well.

Market Capitalization

At the end of 2021, the Hong Kong Stock Exchange listed 1,368 mainland Chinese companies, slightly over 50% of the total number of listed companies on the exchange. By market capitalization, these companies accounted for almost 79% of the stock market in Hong Kong.

Also at that time, Hong Kong's stock market was the fourth largest in Asia and seventh largest in the world by market capitalization, at $5.4 trillion.

Economic Interdependence

Even though diplomatic relations can sometimes be strained, the economic ties between Hong Kong and mainland China remain strong. In fact, Hong Kong and China boost each other's economies. The two had annual bilateral trade valued at over $562.5 billion in 2021.

Hong Kong can be seen as a gateway to China for those who are interested in doing business on the mainland or in accessing Chinese stocks or investments. As of June 2021, 32 of the 160 licensed banks in Hong Kong were 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 $501.9 billion in 2020. That accounted for 27.1% of the total, according to Hong Kong's Trade and Industry Department.

Moreover, the Trade and Industry Department also noted that Hong Kong directs 39% of its domestic exports to mainland China. China is also the biggest supplier of imports to Hong Kong (45.8%).

Hong Kong is a major supplier of entrepôt services to China. In 2021, the value of goods re-exported through Hong Kong from and to the Mainland was $562.5 billion and accounted for 89.5% of Hong Kong's total re-export trade value.

However, some argue that Hong Kong's economic importance and relevance to China's growth story is rapidly fading.

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