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

[ad_1]

Hong Kong vs. Mainland China: An Overview

Many people know Hong Kong as an international financial center, business center, shopping paradise and tourist destination. However, it is also a Special Administrative Region (SAR) of the People’s Republic of China. As such, Hong Kong is an inalienable part of China and has at times 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. This makes the relationship between Hong Kong and mainland China complex. However, Mainland China and Hong Kong complement each other economically, even as their political differences remain entrenched.

Key things

  • Hong Kong is a special administrative region controlled by the People’s Republic of China and has limited autonomy.
  • Mainland China’s one country, two systems principle allows socialism and capitalism to coexist within China.
  • Hong Kong’s economy is characterized by low tax rates, free trade and limited government intervention.
  • Stock markets in mainland China are more conservative and restrictive than those in Hong Kong.
  • The Shanghai and Hong Kong stock exchanges are the two largest in the world.

Hong Kong

In 1898, Britain negotiated a 99-year lease of its Hong Kong colony with China. This lease ended in 1997 when Britain returned Hong Kong to China. Hong Kong then became the Hong Kong Special Administrative Region of the People’s Republic of China.

Under the one country, two systems doctrine, China allows the former colony to continue to govern itself and maintain many independent systems for 50 years. Due to its colonial history, English is one of Hong Kong’s official languages.

Although diplomatically, Hong Kong has no identity separate from mainland China, it can participate in the events of selected international organizations such as the Asian Development Bank, the International Monetary Fund (IMF), the World Health Organization, and the United Nations World Tourism Organization, as an associate member rather than a member state. It may also participate in trade-related events and agreements under the Hong Kong, China name.

mainland China

This East Asian country is the second most populous in the world after India, with 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 directly governed municipalities, and the Hong Kong and Macau Special Administrative Regions.

China has the second largest economy in the world at $17.96 trillion. It is followed by the United States, whose economy was valued at $25.46 trillion. China has built its economy on the development of heavy industry and over the years has increased industrial output and service output.

Recently, consumer demand has driven growth. However, after a difficult 2018 in which the nation was embroiled in a trade war with the United States, China’s economy grew at its slowest pace in 28 years.

Taxes and money

Hong Kong is allowed to continue using its free enterprise system, rather than being integrated into the communist structure of mainland China. Hong Kong has independent finances and China does not interfere with its tax laws or collect any taxes from Hong Kong.

The region has its own policies on 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 (HKD), which is pegged to the US dollar exchange rate system. Mainland China uses the Chinese Yuan (CNY) as legal tender. Traders in Hong Kong do not freely accept yuan.

Economics

Hong Kong’s economy is characterized by low tax rates, free trade and limited government intervention. As mentioned above, China had the second largest economy in the world in 2022 at $17.96 trillion. Hong Kong had the 43rd largest economy with a gross domestic product (GDP) of $359.83 billion.

Hong Kong’s economy was ranked as the freest in the world from 1995 to 2019 by The Heritage Foundation’s annual World’s Freest Economies Index. However, it was removed from this list in 2021 due to the belief that it may be directly controlled by China.

Hong Kong’s economy has seen a huge transition since its transition from a British colony, as the service sector has taken the lead in the region. In fact, they accounted for 93.4% of GDP in 2020. The services sector includes services related to travel, trade, finance, and transportation.

As Hong Kong manufacturing has shifted to the mainland, the manufacturing sector’s contribution to Hong Kong’s total GDP has shrunk to 1.0% over the years. Agriculture contributes only 0.1% as Hong Kong is not rich in natural resources and depends on imports of food and raw materials. Construction contributes roughly 4.1%.

Hong Kong has a service economy, with more than 90% of its GDP coming from this sector.

Mainland China’s economy depends primarily on manufacturing. However, the country’s service sector has begun to pick up, although the share of services in GDP is much smaller than in developed countries such as the United States and Japan. In fact, it is less than in developing countries such as Brazil and India. Agriculture accounts for around 8% of China’s GDP, while in Hong Kong it is a negligible part.

Hong Kong’s GDP per capita in current US dollars is much higher than mainland China’s – US$48,983.6 vs. $12,720.2. However, China’s annual GDP per capita growth rate was 3%, while Hong Kong’s was -2.6% in 2022.

In 2022, Hong Kong’s annual GDP growth was -3.5%, compared to 3% in mainland China.

Exchanges

The Hong Kong Stock Exchange is the preferred choice for most Chinese companies looking to raise capital. This is because mainland China’s stock markets (like the Shanghai and Shenzhen stock exchanges) are more restrictive with higher financial requirements. Hong Kong’s stock market is also attracting more foreign investors. As Tianlei Huang, a research analyst at the Peterson Institute for International Economics, wrote:

“Hong Kong has a number of advantages that China lacks. First, the registration-based IPO system, which allows the listing to be relatively faster and easier than on the mainland. Second, the absence of capital controls and greater international exposure, which allows Hong Kong will serve as an anchor point for global expansion. Third, a sound financial infrastructure that will reduce operating costs. Fourth, an effective regulatory framework that focuses on transparency and prudent minimum standards.”

Access to capital and investment

In mid-November 2014, a program called Shanghai-Hong Kong Stock Connect was launched. It established a cross-border channel for access to stock markets and investments. This arrangement allowed regional investors to trade specific companies listed on mutual exchanges through their local securities firms.

Before the program, individual investors in Hong Kong (or worldwide) did not have direct access to Chinese stocks. In December 2016, a similar program called Shenzhen-Hong Kong Stock Connect was launched.

Market capitalization

At the end of 2022, the Hong Kong Stock Exchange listed 1,409 mainland Chinese companies, slightly over 50% of the total number of listed companies. By market capitalization, these companies accounted for nearly 77% of the Hong Kong stock market.

Hong Kong’s stock market was the fourth largest in Asia and the seventh largest in the world by market capitalization, at $4.1 trillion in September 2023. Compare that to the Shanghai Stock Exchange, which is the third largest stock exchange in the world with a market capitalization of $6.6 trillion at the end of September 2023.

Economic interdependence

While diplomatic relations can sometimes be strained, economic ties between Hong Kong and mainland China remain strong. In fact, Hong Kong and China are strengthening each other’s economies. Both had annual bilateral trade worth more than $593.5 billion in 2022.

Hong Kong can be seen as a gateway to China for those interested in doing business on the mainland or accessing Chinese stocks or investments. As of 2022, 31 of Hong Kong’s 155 licensed banks 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 $543.8 billion in 2021. According to the Hong Kong Department of Trade and Industry, this represented 27.7% of the total.

In addition, the Ministry of Trade and Industry also noted that Hong Kong sends 37.1% of its domestic exports to mainland China. China is also the largest supplier of imports to Hong Kong (42.2%) in 2022.

Hong Kong is a major supplier of entrepĂ´t services to China. In 2022, the value of goods re-exported via Hong Kong to the mainland was $487.4 billion, accounting for 85.4% of Hong Kong’s total re-export value.

However, some argue that Hong Kong’s economic importance and its importance to China’s growth story is fast disappearing.

Key differences

The table below shows some of the key differences between Hong Kong and Mainland China discussed above.

Hong Kong vs. China: Economic and financial differences
Hong Kong mainland China
Capitalist system of free enterprise Socialist economic system
He controls his own taxes and finances It does not interfere with Hong Kong’s finances and does not collect any taxes from it
Manages own trade and foreign exchange; uses the Hong Kong dollar It uses the yuan currency
It has the 43rd largest economy in the world He has a second onethe largest economy in the world
The service sector is a major contributor to GDP The manufacturing sector contributes significantly to GDP; the contribution of the service sector is growing
More than 37% of direct exports go to China It supplies more than 42% of Hong Kong’s imports
GDP growth per capita: -2.6% GDP growth per capita: 3%
Annual GDP growth: -3.5% Annual GDP growth: 3%

Why does Hong Kong compete separately from China?

Hong Kong is a special administrative region of China. Thanks to this status, Hong Kong can enjoy a high degree of economic and financial autonomy (as well as an executive, legislative and independent judiciary). It is believed that Hong Kong can direct its trade and commerce wherever it wishes.

Is Hong Kong’s economy dependent on China?

Hong Kong and China have strong economic ties. China is Hong Kong’s largest trading partner. In 2022, their bilateral trade value will reach more than 593 billion dollars. Hong Kong is certainly more dependent on China than China is on Hong Kong.

How much does Hong Kong contribute to China’s economy?

As a percentage of China’s GDP, Hong Kong accounted for approximately 2.0% in 2022.

Bottom Line

Hong Kong is one of the world’s leading centers for trade and finance. Its importance has grown since Britain handed it back to China in the late 1990s, although the two remain separate entities. In fact, Hong Kong is a special administrative region of China. This allows Hong Kong to enjoy a different economic and governance system based on the principle of one country, two systems.

[ad_2]

Source link

Leave a Comment