The Economist explains
Why Hong Kong remains vital to China’s economy
Sep 30th 2014, 23:50 by S.R. | BEIJING
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AS PROTESTS grip Hong Kong and worries mount about how China might respond, one of the most unsettling questions for the city’s residents is whether its fate matters much to the rest of the country. Hong Kong has long served as the bridge between China and the world, conveying trade and investment flows both ways. That role has diminished in recent years as China has opened its borders and plugged itself directly into the global economy. Hong Kong's leaders warn that the current unrest will only result in Chinese businesses bypassing it even more. Judging by size, they have a point: Hong Kong is clearly less important than in the past. Its GDP has shrunk from 16% of China’s in 1997, the year it was returned to Chinese control, to 3% today. That has led many inside China and abroad to conclude that Hong Kong is fading towards economic irrelevance. Is it?

Not so fast. The focus on size alone is too simplistic. With China’s development over the past two decades, growth has spread around the country—no one city can dominate GDP when there are now nearly 200 cities with populations of more than 1m people and rapidly rising incomes. But in the financial sphere Hong Kong has remained indispensable to China. And in several dimensions its position has actually been consolidated, not eroded, in recent years. Hong Kong has proved to be more reliable than the mainland as a source of equity financing. Since 2012, Chinese companies have raised $43 billion in initial public offerings in the Hong Kong market, versus just $25 billion on mainland exchanges, according to Dealogic. More than anywhere else in the world, Hong Kong has also provided Chinese companies with access to global capital markets for bond and loan financing. What’s more, Hong Kong is the key hub for investment in and out of China. It accounted for two-thirds of foreign direct investment into China last year, up from 30% in 2005.

Although much of this money is simply passing through Hong Kong, foreign companies also use the city as their staging post for investing in China as it offers them something that no mainland city does: a stable investment environment, protected by fair, transparent courts that enforce long-established rule of law. And it is not just foreign companies and investors that turn to Hong Kong. Over the past five years, the Chinese government has made the city a testing ground for a range of financial reforms: the yuan’s path towards acceptance as a global currency began in Hong Kong in 2009 with an experiment in trade settlement; Hong Kong is also home to the biggest “dim sum” bond market—yuan-denominated debt that is issued overseas; and a soon-to-be-launched programme that will for the first time allow any foreign investor to buy China-listed shares will be conducted via the Hong Kong stock exchange. Hong Kong has been only too willing to host these experiments believing, rightly, that they are crucial to its survival as a thriving financial centre.

In short, China has benefited greatly from Hong Kong’s unique status. It is a city that is sealed off from the mainland but closely connected to it; a territory that is fully integrated into the global economy but ultimately controlled by the Communist Party in Beijing. Even with its unique status, however, there is no question where the balance of power lies in Hong Kong’s relationship with China: about half of Hong Kong’s exports end up in China; one-fifth of its bank assets are loans to Chinese customers; and tourism and retail spending, mostly from China, account for 10% of Hong Kong's GDP. In the opposite direction, the Chinese economy’s direct exposure to Hong Kong is vanishingly small. But it would be a grave mistake to conclude that Hong Kong therefore does not matter to China. If China were to do anything that jeopardised their special relationship, Hong Kong would suffer most; but China would also pay a heavy price.

Dig deeper:

The risk of Hong Kong's unrest spilling over into mainland China may continue to rise (September 2014)
Daily chart: China’s censorship of the Hong Kong protests on social media (September 2014)
Essay: China wants the respect it enjoyed in centuries past. But it does not know how to achieve it (August 2014)

Protests
Measuring people power

No exit
Days of student-led unrest in Hong Kong are a crisis for China’s Communist Party

HK backspace, backspace
Censors delete news of Hong Kong’s protests, but not quite fast enough

The Party v the people
The Communist Party faces its toughest challenge since Tiananmen. This time it must make wiser decisions

What China wants
As China becomes the world’s largest economy, it wants the respect it enjoyed in centuries past. But it does not know how to achieve it
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guest-ssewjjwOct 2nd, 08:21
On September 22, chairman of the PRC Jinping Xi meets with the Hong Kong industry and business delegation in Beijing. Xi clearly comments to the HongKong election in 2017 as "unswervingly implement the "one country, two systems "policy and the basic law, firmly support the Hong Kong to promote the development of democracy, firmly safeguard the long-term prosperity and stability of Hong Kong." By understanding the comments, you can understand the sincerity and determination of China. -- Xinhuanet
http://news.xinhuanet.com/2014-10/02/c_1112701925.htm

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guest-ilnwjmsOct 2nd, 08:02
This article is smart enough to identify HK's advantage as being "fully integrated into the global economy but ultimately controlled by the Communist Party in Beijing" while now HKers want to challenge the second part themselves. One thing for sure is that once China ultimately lift its control on foreign exchange as planned, it is simply not necessary to support such an arrogant off-shore RMB centre which pays NO TAX to the central government.
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hamsoupOct 2nd, 04:40
When it comes to the harmony of 1.6 billion people and the survival of CCP, no one city is irreplaceable. History has shown Beijing doesn't react well to threats.
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ewakornOct 2nd, 00:39
Hong Kong is replaceable. But it is not going to be replaced by Shanghai, Shenzhen or even Singapore. Its role can only be replaced by US and UK.
For example, when Alibaba could not IPO in Hong Kong, it did not switch to IPO in Shanghai, Shenzhen or Singapore. It opted for NYSE.
Now London handled more dim dum bond transactions than Hong Kong does.
Only NYC and London have the market breadth for those big deals.
But will Beijing prefer that China's economy tied on the neck with the rope held by HK, UK or US?
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VLHCin reply to ewakornOct 2nd, 01:01
HK's advantage, the reason for its success is not that it has a stock market, but because its the gateway to the mainland market, with proximity to the mainland and most importantly has policy support that gave it exclusive status.
NYC or London will do a lot of RMB trade in the future, but they will never replace HK, because the policies that make it possible would never exist.
Only Shanghai can, because only Shanghai will be allowed to. If NYSE or London could, they would have already.
Alibaba did not choose NYSE over HK because it couldn't IPO in HK, they choose not to, because they want to expand into the US and the instability they see in HK
And they did not do so in Shanghai because its not possible, Shanghai is not fully open to foreign investors. Not yet.
HK-SH exchange next month is the first step toward changing that.
This gets back to the point, HK's status is artificial, and it replacement is chosen, not born.
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ewakornin reply to VLHCOct 2nd, 01:48
Jack Ma tried one year in vain to try to convince Hong Kong to let it IPO under its special management formula.
Though HKSE Chairman Mr. Li (another so called "New Hong Konger" who immigrated from Mainland) nodded, the Security Watch Dog said NO. Finally after many beggings, Ma gave up and switched to NYSE.
Probably Ma preferred HKSE over NYSE because he is afraid of class action lawsuit in U.S. since there are so many knockoff stuffs in Taobao.
HK-SH exchange benefits Shanghai more than Hong Kong.
Can Shanghai replace Hong Kong as financial center? Wait until Shanghai courts' judges are not sat by retired PLA veterans but by professional law school deans. And wait until Shanghai does not regularly block sensitive internet websites.
But when will these happen in Shanghai? Maybe 2114.
If Shanghai cannot open, then most likely China still has to rely on HK or NYC or London for the next century.
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rep3Oct 2nd, 00:33
But I think the core problem with HK is it has gotten complacent as the Gateway Into China. For most of the last 60 years, China was closed to the outside world. HK has a massive port so it because a nexus of trade from Common Wealth network into China. HK's status as an Asian financial center ultimately rests upon this.
After 92 this relationship begins to change. Now, China has comparable ports from Dangdong to Fanggang. HK's roll as China's access to foreign financial markets is similarly being displaced by Shanghai. And HK can't directly compete with Shanghai without becoming into Shanghai. This is the problem that erks HKers. Must of HK's work force has gotten used office work therefore resent much of the talent being imported from the mainland.
What HK should be doing is pivot itself as a Gateway Out of China. Due to archaic capital controls, Shanghai could not compete with HK as a financial center for international investment. Even for the ill gotten gains seeking a safe haven, HK could be funneling that money into London and charge a nice premium. Alternatively, HK could build ultra luxury apartments in New Territories and sell time shares to the mainland. But instead they had these money buying into the existing property market, as if the price wasn't high enough.
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roc999Oct 2nd, 00:01
Hong Kong is overrated. Its function can be replaced by Shanghai immediately.
Fully support Beijing's stratigical handling of the demonstration. Letting the protesters shut down Hong Kong for 2 months and destroy the livelihood of average Hong Kong people.
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guest-slewlwain reply to roc9992 hours 47 mins ago
Shang Hai would not and could not replace Hong Kong immediately because of the policies of CCP that act as restrictions. Hong Kong too is important for fair trades if you know what I mean.
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VLHCOct 1st, 22:55
The content of the article is correct, but the conclusion is wrong. HK's value to the mainland is providing an gateway, but it is the mainland that businesses and investors are after, not HK, this is very important.
HK's success is based on the fact that it's the only gateway, but this is not by nature but by design. If HK goes under, businesses will still need to do business and investors still need to invest, so long as this is true, there will always be a gateway, and its only a matter of policy to create a replacement.
By the looks of it, the replacement is already setup and preparing for the transfer.
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HaavBlineOct 1st, 22:46
While the author is correct that HK provide a lot of unique services which China find beneficial, sadly this situation are not likely to continue much longer.
A lot of these special services were arranged by China to help keep HK prosperous and, in the mind of Chinese leaders, serve as a better example for Taiwan to see the 'benefits' of one-country-two-system. It also lessened pressure for China to pursue more radical administrative reforms because a trusted HK can provide the needed services. However all this is only possible when China believe HKers always puts economy as top priority.
A HK that is confused about its priorities or even puts politics before economics is a city that can not be depended by China to provide those important financial services the author mentioned, at least not exclusively. This means whatever the short-term compromise of the current crisis will be, Chinese leaders already have an urgent action item in their hands, which is to accelerate reforms in special zones to establish competing alternative to HK as providers of all of the crucial services currently designated as HK's specialty. Sure there will be varying degrees of success by China to find alternative providers of those services, but HK will soon be squeezed by eager competition in those areas. China simply can no longer afford to allow HK any critical special economic role.
Sadly, the long-term damage by this Occupy movement to HK's future viability is probably already done.
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New Freetraderin reply to HaavBlineOct 1st, 23:27
Huh? It is China that needs HK, not the other way around. There are no 'other providers of these services' since it is HK's openness and rule of law - two things sadly lacking in the PRC - which makes it attractive to investors.
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YoungWeberOct 1st, 19:28
I am perplexed as to the grievances of the Hong Kong democracy movement; I understand they want universal suffrage and direct election of the legislature and Chief executive, but to what end? What freedoms do the people of Hong Kong lack today that they enjoyed under the British? I sense the work of outside agitators and gullible students who do not see the consequence of their actions; as is so often the case.
In the unlikely case that these people should succeed in forcing universal suffrage in Hong Kong they will only be slitting their own wrist; as soon as they begin tacking on the fees and taxes to support expanded welfare programs, as the masses are likely to do, the wealthy will flee and the re-export trade, of which Hong Kong is highly dependent, will dry up.
No good will possibly come from placing the executive and legislative power at the caprice of an ignorant multitude. If Hong Kong must have direct participation in government, then there should be asset and income qualification to hold office, the votes should be weighed in accordance with the percentage of taxes paid by the voter.
During Tiananmen Square, Deng was noted to have said;" If I have to shoot 200,000 students to save China from another 100 years of chaos, so be it", I hope Xi remembers that advice.
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Lubumbashiin reply to YoungWeberOct 1st, 19:53
If you think shooting 200,000 students is actually a good way to maintain stability, then I guess you have learned nothing from Chinese history. That "solution" has been used over and over in China over the last 200 years and what has been the result?
Let's compare Hong Kong with China over the same period:
Hong Kong, in its 150 year history as a British colony was a model of stability and prosperity. In contrast during the same period China was in an almost constant state of civil war and chaos. Tai-Ping Rebellion, Punti–Hakka Clan Wars, Nien Rebellion, Dungan Revolt, and Panthay Rebellion, Wuchan Uprising, overthrow of the Qing Dynasty, Warlord Era, Chinese Civil War and the great man-made (Mao-made) famines of the Cultural Revolution.
In fact China only started to prosper when the Communist Party stopped shooting people for thinking differently. (Or at least not as many).
Is it any wonder the people of Hong Kong don't want to be dictated to from Beijing? It seems to me, that over the long term, Beijing does not have a good track record.
You can read it all on Wikipedia - no wait you can't, Page Reset.
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ccarrin reply to YoungWeberOct 1st, 19:55
'I understand they want universal suffrage and direct election of the legislature and Chief executive, but to what end?'
Yeah good point. Who wants universal suffrage? Silly Hong Kong.
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guest-snlslanOct 1st, 19:25
the article is definitely correct about china needing hk and hk needing china. hk needs to recognize the privilege that it enjoys; namely, firewalless internet. you honkies do not know how much the expats and mainlanders wish for that. but in the end, this comes down to how much the honkies disparage the mainlanders. sure, mainlanders might have bad social etiquette and behaviors(and i can say it is definitely improving from my experience in china), but think about who is backing your economy? i am sick of this belittlement of mainlanders.
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guest-snlooewin reply to guest-snlslanOct 2nd, 05:49
I'm from HK and please understand that not every HKer belittles or disparages mainlanders. Just like anywhere in the world we have racists here who don't like tourists at all, but the vast majority of HKers welcome civilized tourists from the mainland and everywhere else. It's not like we're not used to tourists! Tourism has always been a big industry in HK, long before the visa policy introduced in 2003 (post-SARS) that allowed mainland tourists from major Chinese cities to visit HK.
It's some of the tourists' irresponsible behavior that upset us, e.g. letting kids pee on trains, taking a dump in shopping malls (I've witnessed this myself. Twice. Once in Harbour City, and the other time Disneyland). Google it and you'll see these are not isolated cases! Another thing that pisses us off is that there's no cap on how many mainland tourists can enter in HK from the mainland - basically the more the merrier because the decision makers all have businesses that benefit from the nouveau riche Chinese spending money in HK. These govt officials all have chauffeurs and don't have to be stuck on the MTR with thousands of tourists and their suitcases! I don't think HKers are alone here since I've heard similar comments about mainland tourists' behavior from friends who live in Tokyo, Seoul, London, Paris and New York. Being Chinese myself, I've travelled to many places and receive ill treatment because, well, let's face it, I am/look Chinese.
We need China just as much of the West needs China (to various degrees). Most HKers are Chinese and most would say they love China, but that doesn't mean we have to agree with the policies of the governing party, which unfortunately there is only one. And what Beijing wants is for the HK government to become even more of a puppet government than it already is.
Obviously I can't speak for all protestors as to why they've joined, but this movement has nothing to do with the tourists. The vast majority of the people have taken to the streets because they want a real election, real universal suffrage as anyone with half a brain can define it.
What's interesting is that the people who are against this protest who label themselves the "Silent Majority" (they have a Facebook page I kid you not) often ask this question: "Why would Beijing give you real universal suffrage and allow an anti-China Chief Executive in HK?" … which I think reveals one thing: deep down they know who the majority of HKers are (and it's not them!).
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guest-snlooewin reply to guest-snlslanOct 2nd, 05:50
I'm from HK and please understand that not every HKer belittles or disparages mainlanders. Just like anywhere in the world we have racists here who don't like tourists at all, but the vast majority of HKers welcome civilized tourists from the mainland and everywhere else. It's not like we're not used to tourists! Tourism has always been a big industry in HK, long before the visa policy introduced in 2003 (post-SARS) that allowed mainland tourists from major Chinese cities to visit HK.
It's some of the tourists' irresponsible behavior that upset us, e.g. letting kids pee on trains, taking a dump in shopping malls (I've witnessed this myself. Twice. Once in Harbour City, and the other time Disneyland). Google it and you'll see these are not isolated cases! Another thing that pisses us off is that there's no cap on how many mainland tourists can enter in HK from the mainland - basically the more the merrier because the decision makers all have businesses that benefit from the nouveau riche Chinese spending money in HK. These govt officials all have chauffeurs and don't have to be stuck on the MTR with thousands of tourists and their suitcases! I don't think HKers are alone here since I've heard similar comments about mainland tourists' behavior from friends who live in Tokyo, Seoul, London, Paris and New York. Being Chinese myself, I've travelled to many places and receive ill treatment because, well, let's face it, I am/look Chinese.
We need China just as much of the West needs China (to various degrees). Most HKers are Chinese and most would say they love China, but that doesn't mean we have to agree with the policies of the governing party, which unfortunately there is only one. And what Beijing wants is for the HK government to become even more of a puppet government than it already is.
Obviously I can't speak for all protestors as to why they've joined, but this movement has nothing to do with the tourists. The vast majority of the people have taken to the streets because they want a real election, real universal suffrage as anyone with half a brain can define it.
What's interesting is that the people who are against this protest who label themselves the "Silent Majority" (they have a Facebook page I kid you not) often ask this question: "Why would Beijing give you real universal suffrage and allow an anti-China Chief Executive in HK?" … which I think reveals one thing: deep down they know who the majority of HKers are (and it's not them!).
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LubumbashiOct 1st, 18:16
China could easily defuse this crisis without backing down (much).
Just throw C.Y under a bus (metaphorically speaking, fire him) and blame him for incompetence, which no-one can deny. Then put some face saving process in place to allow everything to cool down.
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LuoWKOct 1st, 17:26
Regarding the typical accusations of being paid 50 cents that's seen here and elsewhere.
I'm usually pro-China for my own personal reasons/beliefs and I have gotten accused of being a wumao or part of the "50-cent" party. While I don't deny that they exist, there are lots of comments throughout TE and the internet that outright accuse all pro-China language of being part of the propaganda arm of the Chinese army, that is just plain ignorant. It stifles free exchange of ideas and advocates for a black and white world that doesn't reflect our nuanced world.
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Mickey Mao aka Chairman Mousein reply to LuoWKOct 1st, 19:19
REALLY ! say it ain't so.
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The Buddhain reply to LuoWKOct 1st, 19:35
When you have a veritable army of government paid individuals online engaged in mass Pro-China propaganda, it's certainly understandable that unpaid individuals espousing the same would be accused of being the same.
It's certainly not ignorance to accuse someone of being a member of a certain group when that individual's behaviors match that of the group's in question.
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Spiwe MphuthiOct 1st, 17:06
I disagree with the notion that "...Hong Kong is fading towards economic relevance.", last time i checked Hong Kong was in the top Ten for the most trading Partners of the Chinese Mainland with a $401 billion,and China's GDP for 2014 was reported by The National Bureau of Statistics of China to be 9240.27 Billion US Dollars which is a 0.1 Percent increase in the second quarter expanding it to 7.5 percent and the GDP Annual Growth Rate Averaged 9.10 Percent from 1989 to 2014.China Continues to be the fast growing and emerging economy in terms of Trade, all that because of its main source of Growth(Hong Kong) representing a .44 percent of the World economy and reported by the World Bank Group at being at a GDP of 274.01 Billion US Dollars a most significant expansion as compared to the 2013 GDP.it can be said that china without the contribution of Hong Kong would have suffered a "great depression" of their own with no country willing to Trade with it.
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Alan MacDonaldOct 1st, 16:47
The only distinction left in all the world is not; geography, race, religion, ethnicity, ideology, nationalism, et al., but between those oppressed 'subjects' who are inside the Disguised Global Empire, that highly integrated (but well hidden) and six-sectored; financial, corporate, militarist, media/propaganda, extra-legal, and dual-party Vichy-political 'Empire of the Rich' (which is now both Global and Disguised as no historical Empire has ever achieved) and those < 0.1% who are the Invisible Rulers of all the 99.9% of we global 'subjects' of this Empire of the Rich!
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Motmaitrein reply to Alan MacDonaldOct 1st, 17:13
What?
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Mickey Mao aka Chairman Mousein reply to Alan MacDonaldOct 1st, 19:21
Huh ?
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guest-snlsjelOct 1st, 15:46
Thanks to the Chinese Communist Party for showing it's true color here. This should give the Taiwanese an idea of what will happen to them if they let the communists take over there island.
History has Proven that A Free and sovereign people will never accept limited rights that lead them into slavery.
Won't be long before we see this level of oppression here in the states. Look at NSA spying. Look at forced health insurance coverage. My health insurance is now up to $400/month. Before the government touched it, it was $250/month! My auto insurance, which the government has yet to ruin, is thankfully only $25/month (from Insurance Panda). Please, Uncle Sam! Don’t try to socialize auto insurance!
Won't be long before the Chinese government sends in the troops and cracks heads. They cannot and will not let civil unrest usurp their authority.
... Coming soon to the USA.
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bernardpalmerOct 1st, 15:31
The CCP is in no position to do anything about Honkers even if they wanted . Monday's release of the latest findings of the CEPR paint a poor outlook for the whole world and an even poorer one for China.
http://www.cepr.org/content/deleveraging-what-deleveraging-16th-geneva-r...
Now is the time for cool tempered thought with regards to the need for bold changes to be made in the world monetary system. China is standing outside opportunity door. It should reach out and open it before it crashes down on them. Backing the yuan with gold could possibly be a good start. Soon the value of their gold holdings could eclipse that of the total yuan which is just colored bits of paper anyway and maybe close to reaching its true value. Zero.
So who's going to be first to issue a gold backed currency?
Even better who's going to go straight for gold?
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J.p.morganOct 1st, 15:07
Hong Kong is alway important to China , CHINA,I don't mean goverment of mainland China.HongKong has huge advatages in terms of business environment,goverment efficience,democracy.
No matter how rich you are in mainland ,you have no freedom.and i would like to have the right to vote the leader too.
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ssyyOct 1st, 12:25
GDP (nominal) of Hong Kong in 2013 was about US$274 billion (by IMF), it was slightly ahead of Egypt, Finland and Greece. But we all know the importance of a country cannot be measured by GDP alone. The case in point is Russia, whose GDP is about the size of Italy, but Russia is definitely punching well above its weight and giving EC and Nato countries a bloody nose.
Hong Kong is not about to give communist China a bloody nose, but its importance is much greater than its relatively small size to the Chinese economy. For example, the Chinese corrupt and powerful will have a much harder time laundering their ill-gotten gain without the financial centre of Hong Kong; and the Chinese armed forces will not be able to import all the high-tech components from Europe and US for the modernisation of armament via the free port of Hong Kong.
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a manin reply to ssyyOct 1st, 15:16
Russia has an enormous stockpile of soviet era nuclear weapons, quite a strong punch indeed.
China is in a constant state of war with its people. Billions are spent silencing and jailing its own citizens. I don't know if it can keep this up indefinitely, Hong Kong could be a destabilizing event if it isn't handled well.
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jonasin reply to a manOct 1st, 15:46
If China as you put it ' is in a constant state of war with its people' how come that more people support its central government than in any democratic European or North American (or any other) nation? How come more Chinese than in any Western nation see their future in a positive light?
It's easy to throw some vague statements but I would like to hear some more in-depth explanations because, in fact, it seems to be the opposite of what you claim.
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guest-lsmmmemOct 1st, 12:20
Brace yourselves, paid mainland Chinese internet comment army is coming.
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a manin reply to guest-lsmmmemOct 1st, 15:09
How does a pro-HK article make it across the great firewall? It must be quite a privilege to have free access to the web.
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MagicMoneyFrogin reply to a manOct 1st, 17:03
If you ever went to China, you'd be able to see for yourself that the Economist and most foreign media is not blocked in China. You could think of access to this information as a privilege for the people educated well-enough to know a foreign language.
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ko_ahmOct 1st, 11:35
So many CCP trolls here!! :D
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a manin reply to ko_ahmOct 1st, 15:05
I disagree, so far most comments have been fairly well written. The trolls can't write in english.
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guest-snlnmooin reply to a manOct 2nd, 09:49
Oh please, why can't CCP trolls write in English? Are you not aware that most CCP officials send their families aboard?
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