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Hong Kong as a World Economic Giant
Aisling Dickenson
June 5, 2009
Professor Mushkat
Independent Study
US secretary of State Hillary Clinton visited Asia in a weeklong trip. This was
her first overseas visit in office and demonstrates the importance of Asia in the new
administration’s foreign policy. Trade relations with Asia and China in particular are a
top priority for the current administration as well as US business, legal, and academic
experts. China and the US must lead the world forward in international trade relations.
China is not only America’s largest creditor, but it is also America’s only real global
competitor. “American demand for Chinese goods has fueled growth in Chinese
manufacturing, and Chinese savings, in turn, have enabled America to live beyond her
means” (China, 1). This is the backbone to the countries’ symbiotic economic
US companies are establishing roots in China, bringing high quality global
standards and business practices to China’s evolving economy. Meanwhile, the US trade
deficit with China has increased because of shifts in export manufacturing from other
Asian economies to China. (China, 3) It seems like a given that China is the cause of
massive US trade deficit. We buy more goods from China than we sell there. However,
three key trends prove this assumption false. First, any of the goods the US used to get
from Japan, Taiwan, and other Asian economies now come from China. Asian
companies have shifted their export-manufacturing base to China. Second, a lot of China
exports are simply manufactured in China. A significant amount of the goods are just
assembled there from materials and components shipped into China from elsewhere
including the United States. (China, 8)
For its size Hong Kong is and economic giant. Hong Kong is Asia’s leading
financial center and third in the world after London and New York. It is ranked among
the top ten largest in terms of banking and foreign exchanges transactions along with
stock market capitalization but the city is home to 7 million. (Facts, 1) Hong Kong’s per
capita GDP is among the highest in Asia and has even surpassed some industrialized
economies like the United Kingdom. Hong Kong’s economic achievements enable it to
play a major role in the international economy of East Asia. Economics is crucial but
Hong Kong’s significance extends beyond economics to politics and international
The British left a legacy of Administrative structure and most importantly rule of
law. Hong Kong’s legal system is internationally respected and is constantly evolving to
regulate business. The people of Hong Kong through hard work have improved their
living conditions, expand entrepreneurial opportunities, and develop professional skills.
Hong Kong has efficient infrastructure, sound finances, low taxes, and a free port in
which goods can flow freely in and out giving Hong Kong the competitive edge. While
turmoil struck Mainland China Hong Kong achieved economic power. (Yahuda, 22)
It is Hong Kong’s internationally respected Rule of law and sound financial
services that have made it the base to conduct business with China. Hong Kong’s rule of
law and capitalistic economics challenges the traditional command economy and
authority of the communist led state. Hong Kong is an agent of modernization, which
aided China with legal and operational structures of modern capitalism. It allowed the
country to carry out a socialist modernization program, through investment, transfer of
technology, management, financial skills, and access to western markets. Hong Kong is a
place for China’s key international and investment organization to gain expertise and
experience dealing with international economics. China International Trust and
Investment Corporation is established in Hong Kong so as to better its economic
character. (Yahuda, 22)
Hong Kong is not recognized as a state with its own constitution, but has many
state attributes. Despite its small size and population it has a well-developed bureaucratic
administrative system allied to the effective rule of law and is self governing in its own
domestic affairs. Hong Kong hosts many diplomatic offices. The USA treats Hong Kong
as a non-severing entity distinct from China—a separate territory in economic and trade
matters. “Compared with other autonomous trade entities Hong Kong’s formal authority
to conduct its external economic and cultural relations and to take part in international
organizations is unparalleled” The activities of the Hong Kong government in inter
national affairs have are confined to economic matters. (Yahuda, 32)
The main significance of Hong Kong’s international identity is formed from its
economic powers. Hong Kong’s identity as a past British Colony and current role as
autonomous region of China make a unique city that the key link between Chinese
economy and the rest of the world. It is the center for complex relations linking china
with Greater China and is an important element in China’s foreign relations as a whole.
Hong Kong’s special character of British inspired freedom, its openness as a free port,
and a place where people work with few restrictions have made it a gateway to the
economies of the Asia Pacific and beyond to the global international economy. (Yahuda,
Hong Kong is described my mainlanders as a very important Chinese
international city, but as an overtly British Colony at has pursued its own independent
path. It is a pivotal city for the most effective economic links with china. The Hong Kong
Shanghai Banking Corporation is among the strongest banks in the world, it is the most
important financial institution in Hong Kong with over 140 years of history is extremely
successful internationally and the largest bank in Europe. As an American I knew much
about the economic significance of Hong Kong in the world economy. However, it is
only through living here and this course that I have learned how crucial politics and
culture are to the Hong Kong economy. Hong Kong is the gateway to China; the city
provided a catalyst for modernization. The United States must keep relations with Hong
Kong strong not only for economic gains but as a means to improve diplomatic relations
with China.
The Hong Kong Shanghai Banking Corporation was established in 1865 at a time
of growing trade between China, India, and Europe. The main offices were in Hong
Kong, Shanghai, and London; through its emphasis on financing international trade, the
bank had opened early branches in Japan in 1866, India in 1867, the Philippines in 1875,
and Singapore in 1877. It was before the close of the 19th century. In recent years the
Hong Kong and Shanghai Banking Corporation had become a leading banker for
governments, including those of Hong Kong and China, in addition to many British
government interests. (HSBC)
The bank survived two world wars and episodes of civil unrest. Although many
Asian offices were closed and a significant number of staff members imprisoned by the
Japanese during World War II, the bank's Hong Kong headquarters reopened in 1946 and
became involved in postwar reconstruction. Within a few years, however, branches in
Mainland China were forced to close, owing to civil war and political and economic
change. To counter these limitations, the bank began expanding its operations beyond
China; it established the Hong Kong and Shanghai Banking Corporation of California as
a subsidiary in 1955, having already conducted business in San Francisco since 1865 and
New York City since 1880. Operations in the Middle East were established through the
purchase of the British Bank of the Middle East in 1959. In regions where it was already
conducting business, the bank diversified its services and investments by acquiring
interest in banks such as Hang Seng of Hong Kong in 1965, which soon became an
important mortgage lender. (HSBC)
Given its status as a diversified global banking corporation, Hong Kong and
Shanghai Banking Corporation reorganized as a holding company, HSBC Holdings PLC,
in 1991. Its 1992 acquisition of Midland Bank, which at the time was the United
Kingdom's largest commercial bank, made HSBC one of the largest bank and financial
companies in the world. Numerous acquisitions followed, including Household Financial,
a U.S. finance company that specialized in loans and mortgages to lower- and middlemarket clients, purchased in 2003. (HSBC)
Headquartered in London, HSBC is one of the largest banking and financial
services organizations in the world. HSBC's international network comprises around
9,500 offices in 86 countries and territories in Europe, the Asia-Pacific region, the
Americas, the Middle East and Africa. With listings on the London, Hong Kong, New
York, Paris and Bermuda stock exchanges, around 200,000 shareholders in some 100
countries and territories hold shares in HSBC Holdings plc. The shares are traded on the
New York Stock Exchange in the form of American Depositary Receipts. Through an
international network linked by advanced technology, including a rapidly growing ecommerce capability, HSBC provides a comprehensive range of financial services:
personal financial services; commercial banking; corporate, investment banking and
markets; private banking; and other activities. The HSBC corporate character defines the
values and principles inherent in their everyday dealings. (HSBC)
The HSBC Group has an international pedigree that is unique. Many of its
principal companies opened for business over a century ago and they have a history,
which is rich in variety and achievement. The HSBC Group is named after its founding
member, The Hong Kong and Shanghai Banking Corporation Limited, which was
established in 1865 to finance the growing trade between China and Europe. (HSBC)
The Government of the People’s Republic of China recovered the Hong Kong
July 1st 1997. However the following conditions were stipulated in the Joint Declaration
and have allowed for unaffected change of finance by the handover. Hong Kong upholds
its national unity and territorial integrity. The Hong Kong Special Administrative Region
has a degree of autonomy except in foreign and defense affairs, which are the
responsibility of the People’s Republic of China. Hong Kong is vested with executive,
legislative, and independent judicial power. So, the laws in place before the hand over
have remained basically unchanged.
The current social and economic systems in Hong Kong have remained
unchanged and so has the lifestyle, rights, and freedoms, including those of person, of
speech, of the press, of association, of travel, of movement, of correspondence, of strike,
of choice of occupation, of academic research and of religious belief will be ensured by
law in the Hong Kong Special Administrative Region. So Hong Kong has retained the
status of a free port and a separate customs territory, the status of international finance
center, and its markets for foreign exchange, gold, securities, and futures will continue.
There is free flow capital. The Hong Kong dollar has continued to circulate and remain
freely convertible. Hong Kong has independent finances. The central People’s
Government does not levy taxes on the Hong Kong. Hong Kong has mutually beneficial
economic relations with the United Kingdom and other countries whose economic
interest in Hong Kong did not waver with the handover. Hong Kong may maintain and
develop economic and cultural relations ad conclude relevant agreements with states,
regions, and relevant international organizations. Hong Kong’s government has
autonomy over its borders and may issue travel documents for entry into and exit from
Hong Kong. (Great)
Lastly, the maintenance of the public order in Hong Kong will be the
responsibility of the Government of the Hong Kong Special Administrative Region.
Hong Kong has always been a land of hope, where with luck and industry the individual
could succeed. Chan Hon way was a native of Guangdong who came to Hong Kong with
a meager sum of four dollars; after paying one for passage he had, as the usual Chinese
custom required, to send home two dollars as lucky money in his first letter announcing
safe arrival at his destination; then he had a dollar left. After forty years he had many
branches in most big cities of Southern Asia. (Yahuda, 28)
The expatriate largely British merchants are credited with much of the early
achievements are the Chinese who flocked to this trading out post were not entirely
laborers. Thirty years after modern Hong Kong was established, the Chinese had become
the biggest ratepayers; through their hands went 21% of China’s total exports and 37% of
imports. Hong Kong had also become the centre of China’s coastal trade. This economic
growth is to be found in the changed character of business activities. From a mere
entrepot port, Hong Kong had rapidly become a centre of managerial services and of
accounting, banking, and various agency services together with shipping. (Meyer, 30-42)
Those early traders and managers were as nimble-footed as today’s entrepreneurs,
seizing opportunities. Most significant for Hong Kong’s future was the rapid expansion
of trade with the United States and Europe, making the territory less dependent on
Britain. By this time half of China’s total imports and almost 40% of its exports passed
through Hong Kong. In the 1950’s when Hong Kong was in the doldrums, with refugees
everywhere, emphasis was laid on education. When the boom came a decade later, there
was an adequate supply of literate manpower. (Meyer, 65)
Hong Kong has the only deep-water harbor along China’s Coast. This combined
with the geographic location are the foundations of the Hong Kong economy. There is no
comparable infrastructure in the whole region and not likely to be. Infrastructure refers to
the human resource and it wide range or skills, the laissez faire policy which is well tried
and tested, the banking, financing, insurance and brokerage network; the whole
educational setup, the extensive housing program, and the hard-working labor force.
Hong Kong has been useful because it made itself so as an exchange earner for China,
and outlet for it’s manufactures, a training ground for managers and technocrats, a source
of loans, and investment capital. In the 1980’s Hong Kong became the World’s busiest
container port. It is Asia’s leading financial centre and the third in the world after London
and New York. Hong Kong’s considerable economic achievement have enabled it to play
a major role in the international economy of East Asia and a crucial role in the rapid
development of China itself. (Meyer, 85)
The significance of Hong Kong extends beyond the realm of economics; it plays a
vital role in providing China with a gateway to the economies of the Asia Pacific and
beyond to the global international economy. Hong has become an important element in
china’s foreign relations as a whole. It has played an important role as the agent of
modernization of the country through investment, transfers of technology, management,
financial skills, and access to western markets. Hong Kong. Hong Kong was China’s
principal gateway to the capitalist world. (Meyer, 56)
As China changed course at the end of 1978 to embrace the politics of economic
reform and openness to the international economy, some thought that Hong Kong’s
significance would decline has China would no longer use it as its main point of access to
the capitalist world. But Hong Kong adapted to the situation to become even more
important to the Chinese economy and to its engagement with the international economy.
Hong Kong manufactures were quick to take advantage of the cheaper land and labor
force across the border. The huge growth of the service sector in Hong Kong is indicative
of the scale of the service that the territory provides for the mainland. (Yahuda, 23)
Hong Kong plays a crucial economic role for China. First, it is China’s most
important provider of business services and its key agent in contributing to
modernization. Curiously, Chinese officials are reluctant to acknowledge this publicly.
Instead they prefer to emphasize how dependent Hong Kong is upon the Chinese
economy. Hong Kong has continuously demonstrated a significant for the Chinese
economy and for the modernization of the country that would be difficult to exaggerate.
Hong Kong is a member or associate member of international and regional organizations,
including the Asia Development Ban, the General Agreement on Tariffs and Trade
(GATT) and it’s successor the World Trade Organization, the United National Economic
and Social Commission for Asia and the Pacific, the Asia Pacific Economic Cooperation
forum (APEC), Interpol and many others. (Yahuda, 42)
The main significance of Hong Kong’s international identity springs from its
economic prowess. Tiny Hong Kong is the world’s eight largest trader; it ranks fourth as
an international banking centre and it hold the sixth largest amount of foreign trade
resorts. The territory is the most important center that combines finance communications
and transport in the Asia Pacific. It is also the key link between the Chinese economy and
the rest of the World. Hong Kong contributed greatly to the economic development of
Hong Kong has remained the global metropolis for Asia since it’s founding in the
1840s following the Opium Wars between Britain and China. David Meyer traces its
vibrant history from the arrival of the foreign trading firms, when it was established as
one of the leading Asian business centers, to its celebrated handover to China in 1997.
Throughout this period, Hong Kong has been prominent as a pivotal meeting place of the
Chinese and foreign social networks of capital and as such has been China’s window on
to the world economy, dominating other financial centers such as Singapore and Tokyo.
Hong Kong's highly favorable geographical position and entrepot trading opportunities
are wealth-generating assets. It has a superb sheltered natural harbor. For centuries, this
had made Hong Kong a major haven for pirates before it became a British colony in
1841. Under British administration, it soon developed into a thriving legitimate
international port. (Meyer, 28-56)
By the late 20th century, Hong Kong was the seventh largest port in the world and
second only to New York and Rotterdam in terms of container throughput. The Kwai
Chung container complex was the largest in Asia; while Hong Kong shipping owners
were second only to those of Greece in terms of total tonnage holdings. In addition to
geographical position, another major natural industrial-commercial asset of Hong Kong
has been human resources. The population of the territory was less than six million in the
late 20th century. However, there was an abundance of labor close by in the region that
could be readily tapped through direct external investment and outsourcing. In Hong
Kong itself, a skilled, adaptable, and hard-working labor force coupled with the adoption
of modern British/ Western business methods and technology ensured that opportunities
for external trade, investment, and recruitment were maximized. (Meyer, 45)
Since the 1970s, the economy of Hong Kong has been governed both under
British and Chinese rule under an economic policy dubbed Positive non-interventionism
espoused by former financial secretary John James Cowperthwaite. Traditionally, the
Hong Kong government has raised revenue from the sale and taxation of land but not
engaged in industry and commerce for profit. From its revenues, the government has built
roads, schools, hospitals, and other public infrastructure facilities and services. It has also
operated a welfare insurance scheme. However, the authorities have generally avoided
owning and running business enterprises, engaging in trade protectionism, or imposing
regulatory controls. There has been relatively little popular pressure for higher
government spending. Over the decades, successive political administrations have
managed to avoid running up large budget deficits; and by restraining public borrowing,
credit expansion and inflation have been held in check. (Meyer, 78-100)
Measuring discrepancies between the rich and poor with the Gini Coefficient
indicates that the wealth gap continues to widen in Hong Kong since the new millennium.
As of 2006 Hong Kong's measurement is at 53.3, which means the difference between
the rich and poor is far greater than that of the People's Republic of China. Many of the
financial tycoons also oppose universal suffrage, since the large number of poor would
vote for populists who promise costly social programs. Hong Kong seems likely to
remain a highly free market-enterprise society. Such things as political production
planning and price and import controls are fundamentally incompatible with the kind of
globally open, competitive economic environment in which Hong Kong firms and
industries operate. (Meyer, 120-135)
The ever-rising landscape is a reflection of the growing economy. Hong Kong has
little arable land and few natural resources within its borders, and must therefore import
most of its food and raw materials. Hong Kong is the world's 11th largest trading entity,
with the total value of imports and exports exceeding its gross domestic product. As of
2006, there are 114 countries that maintain consulates in Hong Kong, more than any
other city in the world. Much of Hong Kong's exports consists of re-exports, which are
products made outside of the territory, especially in Mainland China, and distributed
through Hong Kong. Even before the transfer of sovereignty to the People's Republic of
China, Hong Kong has established extensive trade and investment ties with Mainland
China. The territory's autonomous status enables it to serve as a point of entry for
investments and resources flowing into the mainland. (Meyer, 155)
During Hong Kong's time as a British Colony, Positive non-interventionism was
the economic policy of Hong Kong. John James Cowperthwaite, who observed that the
economy was doing well in the absence of government intervention, first officially
implemented it in 1971. Subsequent Financial Secretaries, including Sir Philip HaddonCave, continued the policy. Hong Kong's model allowed for the flexibility and renovation
of any given industry in a very short time. Because of this, a 1994 World Bank report
stated that Hong Kong's GDP per capita grew in real terms at an annual rate of 6.5% from
1965 to 1989. This consistent growth percentage over a span of almost 25 years is
remarkable for any economic analysis. By 1990 Hong Kong's per capita income officially
surpassed that of the ruling United Kingdom.
Most Hong Kong residents were also first- or second-generation immigrants (and
often refugees). Like the United States of a century or so earlier, the society was
essentially a new one. In such societies, political cultural orientations tend to be towards
individualism – thus reinforcing the generally favorable environment for enterprise and
economic growth. By the late 20th century, many other countries in Asia and elsewhere
had effectively made the transition from statistic-collectivism to modern market
capitalism. However, Hong Kong still stood out in terms of its high levels of businesseconomic freedom, growth, and prosperity. Not just foreign direct investors but
indigenous firms have been greatly aided by Hong Kong's international openness and
dependence on trade.
After a slump caused by the region wide Asian financial crisis that began in 1997,
Hong Kong's economy had been on the rebound. Real GDP growth was 4% in 1999 and
reached double digits in the first half of 2000. However, the dot-com bubble in the
second half of 2000, the 9/11 terrorists attacks upon the United States in 2001 and the
SARS outbreak in 2003 had severely damaged the economy of Hong Kong. In 2004 and
2005, real GDP grew by 8.5% and 7.1% respectively. The unemployment rate increased
from 2.2% to 6.3% due to the Asian financial crisis. After peaking at 7.9% in 2003, the
unemployment rate eased back to 4.0% in 2007. In August 1998, the government
intervened in the stock, futures, and currency markets to fend off "manipulators." The
banking sector remains solid, and the government is committed to the US-Hong Kong
linked exchange rate.
Hong Kong's economy has transformed and re-adapted itself to different periods
of time. In 1895 Hong Kong's trading port was 4th largest in the world the economy
revolved around international trading. From the 1950’s to the 1970’s Manufacturing was
the largest share of the economy, led by textiles. Business services such as wholesaling,
retailing, foreign trade and hotels and restaurants were the second largest sector, followed
by finance. In 1981, financial services including real estate, insurance, brokering and
banking, moved into the lead for the first time. Business services again took the lead in
1984 and retained that position until the end of the colonial era. Since 1997, two engines
have led the economy, the business and financial services sectors which together account
for half of all economic activity. (Meyer) Hong Kong deliberately began collecting and
regularly publishing economy-wide data much later than its East Asian peers. The earliest
gross domestic product estimates (for 1961 and subsequent years) were only released in
1973 and other basic data such as for the balance of payments were not compiled until
1999. Any GDP formed prior to this period was based on international trade statistics that
came after 1971.
Hong Kong's inflation rate is markedly varying, up and down in a roller coaster
ride between the 1960s and 1990's. In the early 21st C., Hong Kong became one of the
few developed economies to have experienced deflation in the post-WW2 period; the
other main example is Japan. Just how much prices are affected, however, depends on
what’s being measured. The currency used in Hong Kong is the Hong Kong dollar. Since
1983, it has been pegged at a fixed exchange rate to the United States dollar due to the
event of Black Saturday. The currency is allowed to trade within a range between 7.75
and 7.85 Hong Kong dollars to one United States dollar. The government's fiscal year is
from April 1 to March 31 of the next year. (Meyer)
Lai King Estate, one of many public-housing structures. Culturally speaking, the
city view is a draw and marketing point. Hong Kong has always had an imbalance of
supply and demand where the population far outstrips the available land. Almost 7
million people live on about 1,104 square kilometers (426 mi²) of space. In the high-end
market, the Peak is ranked the 3rd most expensive city in the world in 2007 with a square
foot per unit pricing of US $2,008 behind London and Monaco. The classification of
Hong Kong as a "free economy" also means anyone with money can buy real estate
property. Many foreigners have invested heavily in the territory, making real estate one
of the biggest contributors to economic statistics. The land is essentially rented from the
government under a lease, even if one owns the property. Prior to 1997, lease terms were
75, 99 or 999 years. As of Hong Kong's return to China, new grants last for 50 years.
The Hong Kong Stock Exchange is the 6th largest in the world, with a market
capitalization of about US$2.97 trillion. In 2006, the value of initial public offerings
conducted in Hong Kong was second highest in the world after London. The rival stock
exchange of the future is expected to be the Shanghai Stock Exchange. As of 2006, Hong
Kong Exchanges and Clearing (HKEX) has an average daily turnover of 33.4 billion
dollars, which is 12 times that of Shanghai.
Since the 1997 handover Hong Kong's economic future became far more exposed
to the challenges of economic globalization competition directly from Mainland China.
Shanghai claimed in particular to have a geographical advantage, and a municipal
government that dreams of turning the city into China's main economic center by as early
as 2010. The target is to allow Shanghai to catch up to New York by 2040-2050; with the
eventual projection that China will be Asia's most prosperous economy by 2040. Hong
Kong, on the other hand, continues to have a more positive and realistic approach. It will
sustainable be the international financial center in China. Until then, Hong Kong is
expected to have higher overall economic figures yearly. Hong Kong's principal trading
partners remain to be China, United States, Japan, Taiwan, Germany, Singapore, and
South Korea. (Meyer)
This policy has often been cited by economists such as Milton Friedman and the
Cato Institute as an example of the benefits of laissez-faire capitalism. However others
have argued that the economic strategy was inadequately characterized by the term
laissez-fair. They point out that there are still many ways in which the government is
involved in the economy. The government has intervened to create economic institutions
such as the Hong Kong Stock Market and has been involved in public works projects and
social welfare spending. All land in Hong Kong is owned by the government and leased
to private users. By restricting the sale of land leases, the Hong Kong government keeps
the price of land at what some would say are artificially high prices and this allows the
government to support public spending with a low tax rate. (Meyer)
Hong Kong has ranked as the world's freest economy in the Wall Street Journal
and Heritage Foundation's Index of Economic Freedom for 15 consecutive years, since
the inception of the index in 1995. The Index measures restrictions on business, trade,
investment, finance, property rights and labor and considers the impact of corruption,
government size and monetary controls in 183 economies. Hong Kong is the only one to
have ever scored 90 points or above on the 100 point scale.
Great Britain. Joint Declaration of the Government of the United Kingdom of Great
Britain and Northern Ireland and the Government of the People's Republic of
China on the Question of Hong Kong.
China and the US Economy: Advancing a Winning Trade Agenda. The US China
Business Council. Jan 2009.
Meyer, David R.. Hong Kong as a Global Metropolis. Cambridge University Press, 2000.
Yahuda, Michael. Hong Kong: China's Challenge. Routledge, 1996.