How economically important is Hong Kong to mainland China today?

Is it still credible to argue that it is in China’s economic self-interest to respect and preserve Hong Kong’s special constitutional status? Ben Chu looks at the numbers

Hong Kong has been a route for a growing number of Chinese to move their savings out of the mainland (AFP/Getty)

One of the reasons the Chinese government was willing to accept a high degree of political autonomy for Hong Kong when it was negotiating the 1997 handover of the territory was that the communist leadership understood its economic importance to the mainland.

Hong Kong was a hyperconnected global financial and commercial hub on China’s doorstep.

This was an era when China was itself opening up to the world, attempting to increase exports and welcoming foreign investment and expertise into the country.

China’s leaders calculated that Hong Kong could help the mainland economy grow and develop more rapidly.

And this promise has been fulfilled.

A huge amount of foreign investment flowed into mainland China through Hong Kong’s banks and other financial institutions.

In the years before China was allowed into the World Trade Organisation in 2011, Hong Kong also helped China to integrate into global trading networks.

Some argue that the best hope to persuade Beijing not to trample over Hong Kong’s Basic Law constitution is to emphasise its continuing economic value to China.

But how economically valuable is Hong Kong to China nowadays? Is it still credible to argue that it is in China’s economic self-interest to respect and preserve Hong Kong’s special constitutional status?

The relative raw economic size of Hong Kong has clearly fallen dramatically since the handover.

In 1997 Hong Kong’s GDP was a fifth of China’s. Last year it was less than 2 per cent.

This was, of course, inevitable given China’s extraordinarily rapid catch-up growth over the past 20 years.

What about trade? The Hong Kong government stresses that after the US and Japan Hong Kong was the mainland’s third largest trading partner in 2019, with their total trade value accounting for 6.3 per cent of the mainland’s total.

But statistics from the International Monetary Fund tell a story of Hong Kong’s declining importance in this area.

In 1997 Hong Kong accounted for 23 per cent of China’s exports and 3 per cent of its imports. By last year that had fallen to 11 per cent of exports and 0.5 per cent of imports.

Yet it would be wrong to conclude from the figures that Hong Kong is now economically irrelevant to the mainland.

On trade there is evidence that mainland Chinese firms have been able to avoid some of the impact of Donald Trump’s trade tariffs by routeing their exports via subsidiaries in Hong Kong.

If Hong Kong loses its special separate customs status in the eyes of the US government this loophole would be closed, harming Chinese exporters.

Official Chinese data suggests that a great deal of mainland money – around $1 trillion – is invested in Hong Kong. This represents more than half of China’s entire stock of foreign investment outside the mainland.

In reality much of this mainland money does not stay in Hong Kong. “It is either repatriated to China as profits and funds or sent elsewhere in the rest of the world,” explains Tianlei Huang of the Peterson Institute think tank in Washington.

Yet this serves to underline the importance of Hong Kong to mainland Chinese interests, not diminish it.

“Mainland companies take such a detour with their investments via Hong Kong to take advantage of the territory’s favourable regulatory environment and available professional services,” says Mr Huang.

In other words, it is Hong Kong’s commercial and legal infrastructure that makes it attractive to Chinese investors as a way of moving money into and out of mainland China.

Those investors would likely be worse off if this infrastructure were to be damaged, either because of a brain drain of western workers and Hong Kong professionals or through the undermining of the rule of law in the territory.

A large number of mainland Chinese companies – many of them controlled by the Chinese government – continue to issue shares in Hong Kong when they attempt to raise outside money. The Chinese e-commerce leviathan Alibaba listed there last year.

Mr Huang calculates that mainland Chinese controlled or related companies account for a third of the Hong Kong stock exchange’s total capitalisation, up from 16 per cent at the time of the 1997 handover.

Foreign investors are more comfortable buying shares in Chinese mainland companies via Hong Kong. Chinese officials might hope that ultimately its rival stock exchanges in Shanghai and Shenzhen will be able to take over that role as places where foreign investors will stump up their money – but it’s by no means clear that they will succeed in this.

Conversely, Hong Kong has been a route for a growing number of Chinese to move their savings out of the mainland – something that has been facilitated by the connection between the Hong Kong and domestic Chinese stock exchanges since 2014.

If Hong Kong declines as a financial hub that will become more difficult.

Hong Kong is also a major offshore hub for trading in the mainland Chinese currency, the renminbi, which Beijing has, in recent years, been keen to see used more in global commerce.

From an economic and financial perspective, Hong Kong might not matter as much to China as it once did but wiser heads in Beijing – many of them with personal financial interests in Hong Kong – will understand that it does remain important as both a financial gateway and entry point to the rest of the world.

That might give some leverage to the UK and the US against Beijing as they seek to preserve Hong Kong’s freedoms and special status. But that, of course, hinges on how much influence those wiser heads around Chinese president Xi Jinping now have. Hong Kong’s fate could depend, in no small part, on the answer.