Post-reunification Economic Strategies Between PRC and Hong Kong

By: Jackie Liu

There has been an increasingly robust economy performance of both PRC and Hongkong resulted from multiple integration policies. In the future, a closer relationship would further boost the economy of both sides.

Under the ‘one country, two systems’ principle agreed along with Britain’s handover of sovereignty to China, Hong Kong has been the world’s freest economy and leading international financial center for the past 22 years. Ensuing political integration, mainland China makes an impact in Hong Kong’s economic activities by issuing major trade liberalization policies, investing in the financial sector, and promoting tourism. Since 1997, Hong Kong’s gross domestic product has doubled from 177.353 billion to 362.99 billion dollars in 2019.

However, controversies arise when it comes to the discussion of whether the post-integration policy support from mainland China contributed to Hong Kong’s economic development. Criticism against integration states that policy intervention from the Mainland is dragging down Hong Kong’s efficiency, and diminishing the significance of its status. However, if we take a look at the effect of the policies on the economic progress in Hong Kong, we’d find out that it is largely the mutual-beneficiary economic relationship between Hong Kong and mainland China after integration that boosted the economic growth of both entities.

The substantial change in the economic relationship between Hong Kong and mainland China starts from the signing of the Closer Economic Partnership Arrangement (CEPA) in June 2003. The CEPA represents a closer trade and investment cooperation between the two regions. It highlights three major policy changes: tariff reductions on 273 categories of exported goods from Hong Kong to mainland China; a preferential opening of the Chinese market to Hong Kong service providers in 18 sectors; and a series of measures that facilitated bilateral trades, the labor market, and financial activities. The CEPA free trade agreement has brought numerous business opportunities to Hong Kong’s manufacturing and services sectors, helped its economy regain confidence, and strengthened its status as a global financial and commercial center. The tariff‐free access to goods, especially, stimulated the trade activities between mainland China and Hong Kong and therefore rose capital investment. Besides, related services aligned with the trade such as transportation, logistics, distribution, advertising, and construction services also grew significantly after the installation of CEPA.

Aside from the direct influence of the CEPA, the inflow of capital from mainland China also contributed to the economic boom of the two entities. Due to the well-developed infrastructure, stable financial market, flexible business environment, as well as the efficient governing in Hong Kong, its equity market attracts a large number of banks and companies headquartered in Mainland China to seek participating in global operation and list on the Hong Kong exchange. The total market capitalization of the Hong Kong stock market increased from US$858.5 billion in 2004 to US$ 3.7 trillion in 2018. Since there are only a few foreign companies other than mainland Chinese ones listed on the Hong Kong Stock Exchange, Hong Kong is also called “the national financial center of China.” In 2015, mainland Chinese companies constituted about 51% of the firms listed on the Hong Kong Stock Exchange and accounted for about 62.1% of the exchange’s market capitalization. The boom of Hong Kong’s capital market relies heavily on the inflow capital from mainland China, while a large number of Chinese firms also benefit from raising capital in a well-regulated and world-class market. Besides the stronger presence of Mainland companies in the Hong Kong equity market, there also has been a close-knit relationship in terms of cross-border direct investment after handover since 1997. Mainland China becomes one of the largest investors in Hong Kong by sending 82 percent of Hong Kong’s total FDI of US$18 billion, which critically uphold Hong Kong’s economy.

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Liu, J. (2019),  “Central-Mid-Levels Escalator,  One of the Most Popular Tourist Attractions in Hong Kong”

The tourism industry also becomes increasingly prosperous after the announcement of CEPA, ensuing the issuance of an Individual Visit Scheme (IVS) for Hong Kong travel from Mainland China. The (IVS) has led to a substantial increase in tourism from China to Hong Kong and greatly promoted the development of the tourism industry in Hong Kong. The number of tourists from Mainland China has dramatically increased from 2.4 million in 1997, to 8.5 million in 2003, to 65 million in 2018. IVS visitor spending also increased greatly, which boosted the service sector of the economy. Therefore, the expediency of the travel documents issuance results in the formation of a close and cooperative relationship between Hong Kong and China, economically and culturally.

In all, The cooperative economic activities carried out by Hong Kong and mainland China after the integration suggests a strong cross-border network of firms, trade, culture and development strategies. Despite political and regional conflicts that may exist between two entities, mutual support facilitates the economic development for both entities. The integration has built tighter economic ties that bound the two entities to be utterly inseparable. In the future, a deeper economic integration between the two entities should be implemented for a further progress.

Work Cited

Cabrillac, & Bruno. (2007, April 19). A Bilateral Trade Agreement Between Hong Kong and China: CEPA. Retrieved from https://journals.openedition.org/chinaperspectives/3002#tocto1n6.

Hong Kong. (n.d.). Retrieved from https://www.heritage.org/index/country/hongkong.

Hong Kong Economy – overview. (2018, January 20). Retrieved from https://www.indexmundi.com/hong_kong/economy_overview.html.

Hsiao, C., Ching, H. S., & Wan, S. K. (2011). A Panel Data Approach For Program Evaluation: Measuring The Benefits Of Political And Economic Integration Of Hong Kong With Mainland China. Journal of Applied Econometrics, 27(5), 705–740. doi: 10.1002/jae.1230

Shen, J. (2008). Hong Kong under Chinese Sovereignty: Economic Relations with Mainland China, 1978-2007. Eurasian Geography and Economics, 49(3), 326–340. doi: 10.2747/1539-7216.49.3.326

Image Sources:

Liu, J. (2019),  “Victoria  Harbour, A Key Gateway to Trade with China”

Liu, J. (2019),  “Central-Mid-Levels Escalator,  One of the Most Popular Tourist Attractions in Hong Kong”