While it is true that Hong Kong has in the past mattered to Mainland China, and still does so to some extent, it may matter much less or even become irrelevant in future.
First, historical data show that, although Hong Kong remains a dynamic economy with a high living standard, its status relative to Mainland China has been generally declining during recent decades. For example, in terms of economic output: whereas Hong Kong’s economy accounted for nearly 17% per cent of China’s total economic output forty years ago, in 2018 the proportion was only 2.7%. This was less than the output of the nearby city of Shenzhen.
In the past, Hong Kong has played a significant role in equity financing for Mainland Chinese firms, but this role has been weakened recently. Hong Kong’s role as a debt financing source has always been insignificant, and this has not changed. Bilateral trade, including imports and exports, is also becoming relatively weaker. Although the data show that Hong Kong was, and is still, playing a significant role in capital flow in and out of China, the overall relationship is more complicated. The positive aspect is that Hong Kong has been playing a major role in renminbi internationalisation. However, this role cannot be simply taken for granted as other financial centres, including London, are also taking greater interest in the Chinese currency.
Looking at industrial trends, China is in the process of transition from an emphasis on labour-intensive exports and investment to an emphasis on consumption and innovation. Consequently, Hong Kong’s role as a re-exporter and processing trader and a major source of exported-oriented Foreign Direct Investment has become less important. While at present Hong Kong plays an important role in helping international portfolio investments in Chinese financial markets, this role is facilitating rather than decisive, and may be less necessary in future.
The relation between Mainland China and Hong Kong is now more than ever defined by the clash between two different ideologies. President Xi Jinping’s New China Model downplays the role of civil society, while rights protection, heritage preservation activism and the enormous growth of its civil society are unique facets of Hong Kong.
The essence of Mainland China’s neo-socialism is a stratified political order led by the Communist Party of China, while the rule of law is widely considered as very important for Hong Kong’s free society and dynamic economy. The government of Mainland China shows no sign of moderating its preference for state control and intervention, while Hong Kong continues to adhere to the free market principles of a small state. This clash of ideologies is the biggest worry in the long term, as Hong Kong’s economic significance to the Mainland dwindles. Economic imperatives may no longer be a reason to hold China back from direct intervention.
The relation between Hong Kong and Mainland China is explored in greater depth in Kerry Liu’s article ‘Hong Kong: Inevitably irrelevant to China?’ in the latest issue of Economic Affairs. This is available here.