Academic journal article China Perspectives

Sustaining Hong Kong's Services amid the Changing Dynamics of China's Economy

Academic journal article China Perspectives

Sustaining Hong Kong's Services amid the Changing Dynamics of China's Economy

Article excerpt

Introduction

Hong Kong has played an important role in connecting China's economy with the rest of the world since the nineteenth century. Before World War II (WWII), Hong Kong mainly served as an entrepot between China and Western countries in merchandise trade. Hong Kong's economic ties with mainland China continued to grow despite the latter's shift to a socialist economy since 1949. When the United Nations began to put a trade embargo on China during the Korean War (1950-1953), Hong Kong's transit trade business fell sharply. The development of the manufacturing sector since the 1950s saved Hong Kong's economy from a major depression. Nonetheless, the export-led economic growth pattern did not last long. In the 1970s, Hong Kong manufacturers encountered fierce competition from other developing countries as well as advanced countries' growing protectionism. The launch of China's open-door policy at the end of 1978 came just in time to alleviate the difficulties of Hong Kong's manufacturing economy.

Since 1979, when China began to set out a series of preferential policies for foreign investors aimed at exports, Hong Kong entrepreneurs quickly caught these opportunities. From 1979 to 1995, around half to two-thirds of foreign direct investment (FDI) in China came from Hong Kong. However, it was often argued that Hong Kong's significant share in China's total FDI was exaggerated, as it included not only Hong Kong's investment but also substantial amounts of capital intermediated through Hong Kong. In addition, a substantial portion of the mainland's exports to other countries was also channelled through Hong Kong. While Hong Kong accounted for a major share of China's total exports, China's imports from the territory were relatively less noteworthy.

Hong Kong's unique geographic location as a gateway between mainland China and other countries allowed the territory to benefit from China's relatively closed economy. However, China's economy today is much more open than it was several decades ago. From 1985, the Special Economic Zones (SEZs) extended more widely from coastal cities in Guangdong and Fujian to the Yangtze River Delta, Pearl River Delta, Shandong Peninsula, Liaodong Peninsula, Hebei, and Guangxi. Deng Xiaoping's speech during his southern tour in China in 1992 accelerated the country's economic reform. China's trade and investment measures opened a step further after its accession into the World Trade Organisation (WTO) in 2001. Up to November 2015, China had already signed bilateral free trade agreements (FTAs) or quasi-FTAs with major economies (e.g. South Korea, Australia, Singapore, Taiwan, Hong Kong, and New Zealand) in the region. At the multilateral level, the China-ASEAN Free Trade Area has been in effect since 1 January 2010.China is also actively involved in the China-Japan-South Korea trilateral FTA and the Regional Comprehensive Economic Partnership (RCEP) negotiations. With effect from 1 October 2016, the Chinese yuan will be included in the International Monetary Fund's reserve currency basket, a significant step in internationalising China's financial market and its currency.

China's greater involvement in the global economy occurred as Hong Kong's economy was becoming closer to China's. The quick catching up of other mainland cities further raised concerns about the sustainability of Hong Kong's unique position as a bridge between China and other countries. How has Hong Kong's service-oriented economy been impacted by China's growing linkage with the world over the last decade? It is often argued that the implementation of the Closer Economic Partnership Arrangement (CEPA) was a "helping hand" to Hong Kong's economy. Nonetheless, as China gradually opens up its market in order to fulfil its obligations under the WTO and other FTAs, the special treatments given to Hong Kong through CEPA is expected to dissipate. In this regard, how can Hong Kong sustain its economic development in the future? …

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