“The Hong Kong Special Administrative Region is an inalienable part of the People's Republic of China.” ~ Article 1, Basic Law

Many people recognize Hong Kong – 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.

Colonial Days

To understand the root of Hong Kong's separation from the mainland, 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. (For more, 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.

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 right 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. (For more, see: "Six Economic Reasons for Hong Kong Independence Protests.")

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.

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 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.

The Economics: Separate yet Interwoven

The principal 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 does it 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. (For more, see "Why China's Currency Tangos With the USD.")

Economic Unification?

Even in times of twisted diplomatic relations, the economic ties have remained strong between mainland and its SAR.Hong Kong and mainland China boost each other's economies, and the two have good economic relations. Hong Kong, which is regarded as the world’s “freest economy,” can also be tagged as a “service economy”, as 92.7% of the gross domestic product (GDP) is constituted by this sector.

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 (7.2%) in the GDP has shrunk over the years, while agriculture doesn’t contribute to the GDP, as Hong Kong is not rich in natural resources and depends on imports for food and raw materials. The service export 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.

The economy of mainland China is more dependent on manufacturing, though in recent years, the service sector has started to pick up. (For more, see "China's GDP Examined: A Service-Sector Surge.") 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.

According to the Trade and Industry Department, HKSAR, mainland China is Hong Kong’s main destination for domestic exports (45.6%) as well as for re-exports (54.9%). It is also the biggest supplier of imports for Hong Kong (47.8%) and the main origin for re-exports (61.9%). According to the Ministry of Commerce, PRC, Hong Kong is mainland’s fourth largest trading partner and one of its major export markets. Mainland China is also Hong Kong’s largest trading partner and source of Foreign Direct Investment (FDI).

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, the Hong Kong trade development commission, “among all the overseas-funded projects approved in the Chinese Mainland, 44.3% were tied to Hong Kong interests.”

Stock Ties

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 conservative and restrictive. As of year-end 2017, the Hong Kong stock exchange listed 1,051 mainland Chinese companies, 50% of the total number on the exchange. In terms of market capitalization, these companies accounted for 56.9% of the stock market in Hong Kong.

In mid-November 2014, a program titled “Shanghai-Hong Kong Stock Connect” was launched, which establishes 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. With this plan, around 568 companies in mainland will be available via Hong Kong. Until now, there was no direct access for individual investors in Hong Kong (or overseas) to Chinese stocks.

These individual investors could participate indirectly via certain funds and investment products such as Renminbi Qualified Foreign Institutional Investor (RQFII) funds, Qualified Foreign Institutional Investor (QFII) funds, and RQFII A-share exchange-traded funds (ETFs). Thus, going forward, individual investors in Hong Kong and overseas will be able to trade Shanghai-listed A-shares of more than 500 companies in addition to these funds. In a similar way, individual investors in mainland will get direct access to stocks of companies in Hong Kong.

The Bottom Line

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. Hong Kongers who have lived under the British influence and ways for years 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 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.