Hong Kong vs. Mainland China: Understanding the Economic and Financial Differences (2023)

Hong Kong vs.Mainland China: An Overview

Many people know Hong Kong as an international financial hub, business center, shopping paradise, and tourist destination. However, it is also a Special Administrative Region (SAR) of the People's Republic of China (PRC). As such, Hong Kong is an inalienable part of China and, at times, has resisted Beijing's interference in its political life.

Pro-democracy activists in Hong Kong would like the region to remain distinct from other Chinese cities. That makes the relationship between Hong Kong and mainland China complex. However, mainland China and Hong Kong complement each other economically even if their political differences remain entrenched.

Key Takeaways

  • Hong Kong is a Special Administrative Region controlled by the People's Republic of China and enjoys limited autonomy.
  • Mainland China's principle of one country, two systems allows for the coexistence of socialism and capitalism within China.
  • The Hong Kong economy is characterized by low tax rates, free trade, and limited government interference.
  • The mainland Chinese stock markets are more conservative and restrictive than that of Hong Kong.
  • At the end of 2021, Hong Kong's stock market was the fourth largest in Asia and the seventh largest in the world.

Hong Kong

In 1898, Britain negotiated a 99-year lease with China on its Hong Kong colony. That lease ended in 1997. At that time, Britain returned Hong Kong to China and Hong Kong became the Hong Kong Special Administrative Region of the People's Republic of China (HKSAR).

Under the doctrine of one country, two systems, China will allow the former colony to continue to govern itself and maintain many independent systems for a period of 50 years. Owing to its colonial history, English is one of Hong Kong's official languages.

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Although diplomatically, Hong Kong has no separate identity from mainland China, it may attend as an associate member (not a member state) events of select international organizations such as the Asian Development Bank, the International Monetary Fund, the World Health Organization, and the United Nations World Tourism Organization. It can also participate in trade-related events and agreements under the name Hong Kong, China.

Mainland China

This East Asian country is the world's most populous, with more than 1.4 billion people. China is governed by the Chinese Communist Party, which has jurisdiction over 22 provinces, five autonomous regions, four direct-controlled municipalities, and the SARs of both Hong Kong and Macau.

Mainland China has the second-largest economy in the world at $17.73 trillion. It follows the United States, whose economy was valued at $23 trillion. China built its economy on heavy industry development, ramping up the country's industrial and service output over the years.

Of late, consumer demand has driven growth. However, after a tough 2018, in which the nation was embroiled in a trade war with the United States, the Chinese economy has grown at its slowest pace in 28 years.

Taxes and Money

Hong Kong is allowed to continue to use its free-enterprise system, rather than merge into the communistic structure of mainland China. Hong Kong has independent finances and China neither interferes in its tax laws nor levies any taxes on Hong Kong.

The region has its own policies related to money, finance, trade, customs, and foreign exchange. Hong Kong and mainland China even use different currencies. Hong Kong continues to use the Hong Kong dollar, which is pegged under a linked exchange rate system to the U.S. dollar. Mainland China uses the Chinese yuan as legal tender. Merchants in Hong Kong do not freely accept the yuan.

Economies

Overall, the Hong Kong economy is characterized by low tax rates, free trade, and limited government interference. While mainland China, as mentioned above, had the second largest economy in the world at $17.33 trillion as of 2021, Hong Kong had the 39th largest, with a gross domestic product (GDP) of $368.13 billion.

Hong Kong's economy was rated the freest in the world from 1995 to 2019 by The Heritage Foundation's annual index of the world's freest economies. However, it was removed from that list in 2021 due to the belief that it may be more directly controlled by China.

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The economy of Hong Kong has witnessed a tremendous transition over the past decade as services took a lead in the region. In fact, they made up 93.4% of GDP in 2020. The service sector includes services related to travel, trade, financial, and transportation.

As Hong Kong's manufacturing has shifted to the mainland, the manufacturing sector's contribution to Hong Kong's overall GDP has shrunk over the years to 1.0%. Agriculture contributes just 0.1% because Hong Kong is not rich in natural resources and depends on imports for food and raw materials. Construction contributes around 4.1%.

Hong Kong has a service economy, with over 90% of its GDP derived from this sector.

The economy of mainland China is more dependent on manufacturing although, in recent years, the service sector has started to pick up. However, the share of services in the GDP is much less than that of developed countries like the United States and Japan. Furthermore, it's less than that of developing countries such as Brazil and India. Agriculture constitutes around 8% of China's GDP, while it is a negligible part of Hong Kong's.

Hong Kong's GDP per capita in current U.S. dollars is vastly higher than that of mainland China's—$49,660 vs. $12,556. However, as of 2021, China's GDP per capita growth rate was 8%, while Hong Kong's was 7.4%.

For 2021, Hong Kong's annual GDP growth was 6.4% while mainland China's was 8.1%.

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Stock Markets

TheHong Kong Stock Exchange has been the preferred choice for most Chinese companies looking to raise capital. That's because mainland Chinese stock markets are more restrictive and have higher financial requirements. Hong Kong's stock market also attracts more overseas investors. As Tianlei Huang, research analyst at the Peterson Institute for International Economics, wrote:

"Hong Kong has multiple advantages that are missing in China. First, a registration-based IPO system, which enables listing to be relatively faster and easier than in the mainland. Second, the absence of capital controls and greater international exposure, which allows Hong Kong to serve as an anchor point for global expansion. Third, a sound financial infrastructure, which mitigates operational costs. Fourth, an effective regulatory framework, which focuses on transparency and prudent minimum standards"

Access to Capital and Investments

In mid-November 2014, a programtitled "Shanghai-Hong Kong Stock Connect" was launched. It established a cross-border channel for access to stock markets and investment.

This arrangement allowed investors in these regions to trade specified companies listed on each other’s stock exchange through their local securities firms.

Prior to the program, individual investors in Hong Kong (or worldwide) had no direct access to Chinese stocks. In December 2016,a similar program titled "Shenzhen-Hong Kong Stock Connect" was launched, as well.

Market Capitalization

At the end of 2021, the Hong Kong Stock Exchange listed 1,368 mainland Chinese companies, slightly over 50% of the total number of listed companies on the exchange. By market capitalization, these companies accounted for almost 79% of the stock market in Hong Kong.

Also at that time, Hong Kong's stock market was the fourth largest in Asia and seventh largest in the world by market capitalization, at $5.4 trillion.

Economic Interdependence

Even though diplomatic relations can sometimes be strained, the economic ties between Hong Kong and mainland China remain strong. In fact, Hong Kong and China boost each other's economies. The two had annual bilateral trade valued at over $562.5 billion in 2021.

Hong Kong can be seen as a gateway to China for those who are interested in doing business on the mainland or in accessing Chinese stocks or investments. As of June 2021, 32 of the 160 licensed banks in Hong Kong were mainland interests.

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Mainland China is Hong Kong's largest trading partner and its second-largest source of inward direct investment. The mainland's non-financial direct investment in Hong Kong was $501.9 billion in 2020. That accounted for 27.1% of the total, according toHong Kong's Trade and Industry Department.

Moreover, the Trade and Industry Department also noted that Hong Kong directs 39% of its domestic exports to mainland China. China is also the biggest supplier of imports to Hong Kong (45.8%).

Hong Kong is a major supplier of entrepôt services to China. In 2021, the value of goods re-exported through Hong Kong from and to the Mainland was $562.5 billion and accounted for 89.5% of Hong Kong's total re-export trade value.

However, some argue that Hong Kong's economic importance and relevance to China's growth story is rapidly fading.

Quick Reference

Hong Kong vs. China: Economic and Financial Differences
Free-enterprise capitalist systemSocialistic economic system
Controls its own taxation and financesDoes not interfere in Hong Kong's finances and levies no taxes on it
Manages its own trade and foreign exchange; uses the Hong Kong dollarUses the yuan currency
Has the 39th largest economy in the worldHas the second largest economy in the world
Service sector contributed 93% to GDPManufacturing sector contributes greatly to GDP; services sector contribution is growing
39% of direct exports go to ChinaSupplies over 45% of Hong Kong's imports
GDP per capita growth: 7.4%GDP per capita growth: 8%
GDP annual growth: 6.4%GDP annual growth: 8.1%

Why Is Hong Kong Competing Separately From China?

Hong Kong is a special administrative region of China. Due to this status, Hong Kong is able to enjoy a high degree of economic and financial autonomy (as well as executive, legislative, and independent judicial power). Supposedly, Hong Kong can direct its trade and commerce wherever it wishes.

Is the Hong Kong Economy Dependent on China?

Hong Kong and China have strong economic ties to each other. China is Hong Kong's biggest trading partner. In 2021, their bilateral trade value amount to more than $560 billion. Hong Kong is certainly more dependent on China than China is on Hong Kong.

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How Much Does Hong Kong Contribute to China's Economy?

As a percentage of China's GDP, Hong Kong represented approximately 2.1% in 2021.

FAQs

Why Hong Kong is important to the foreign economy in mainland China? ›

Given its strategic geographical location, well-developed infrastructure and international communication network, Hong Kong plays an important entrepot role for the trade between the Mainland and the rest of the world.

What type of economy does Hong Kong have explain this type of economy? ›

The economy of Hong Kong is a highly developed free-market economy. It is characterised by low taxation, almost free port trade and a well-established international financial market.

Why does Hong Kong and China have different currency? ›

The Hong Kong dollar is the currency of Hong Kong —China's special administrative region— since 1863, when it was first minted by the British Empire. Although five years later it was removed from circulation, the old British colony would have its own currency reintroduced and it is its legal tender today.

What does Hong Kong have a comparative advantage in? ›

Hong Kong's status as a global financial center and business hub is built on its competitive advantage in providing a world-class business environment and infrastructure to efficiently and prudently connect the Chinese mainland's rapidly growing market with the rest of the world.

How much does Hong Kong contribute to China GDP? ›

In 2021, Hong Kong's GDP was equivalent to 2.1% of mainland China's, down from 18.4% in 1997 when it reverted to Chinese rule.

How did Hong Kong become financial center? ›

After being ceded by China to the British under the Treaty of Nanking in 1842, the colony of Hong Kong quickly became a regional center for financial and commercial services based particularly around the Hongkong and Shanghai Bank and merchant companies such as Jardine Matheson.

What does Hong Kong economy rely on? ›

Hong Kong has a free market economy, highly dependent on international trade and finance - the value of goods and services trade, including the sizable share of reexports, is about four times GDP.

How strong is Hong Kong's economy? ›

The Hong Kong economy improved in overall terms in the second quarter of 2022, but the extent of improvement was weaker than expected. Real GDP decreased at a moderated pace of 1.3% from a year earlier, after contracting by 3.9% in the preceding quarter.

Is Hong Kong a developed or developing country? ›

Hong Kong is a highly developed territory and ranks fourth on the UN Human Development Index. The city has the largest number of skyscrapers of any city in the world, and its residents have some of the highest life expectancies in the world.

What do Hong Kong and Singapore have in common? ›

Both Hong Kong (the Special Administrative Region of the People's Republic of China) and the Republic of Singapore are former British colonies which have maintained trade relations since the 19th century, and have both become important financial centre, maintaining diplomatic missions and trade offices to further their ...

What does Australia import from Hong Kong? ›

Major domestic exports to Australia included non-ferrous metals; miscellaneous edible products and preparations; and petroleum, petroleum products and related materials.

What does Australia trade with Singapore? ›

The main products that Australia exported to Singapore were Iron Ore ($2.13B), Gold ($988M), and Petroleum Gas ($659M). During the last 25 years the exports of Australia to Singapore have increased at an annualized rate of 4.04%, from $2.64B in 1995 to $7.1B in 2020.

Why does Hong Kong still have its own currency? ›

The Hong Kong dollar is the currency of Hong Kong —China's special administrative region— since 1863, when it was first minted by the British Empire. Although five years later it was removed from circulation, the old British colony would have its own currency reintroduced and it is its legal tender today.

Does Hong Kong and China use the same currency? ›

Important Things to Know about Hong Kong Currency

Hong Kong has its own currency called the Hong Kong dollar (HKD). HK uses a different currency to Chinese mainland's yuan (RMB) or the Macau pataca (MAP).

How did Hong Kong become so rich? ›

A great seaport and commercial center, Hong Kong grew to prosperity on the entrepôt trade with China, its location convenient for transshipment of goods to and from the West.

Does Hong Kong pay taxes to China? ›

In addition, under Article 106 of the Hong Kong Basic Law, Hong Kong has independent public finance, and no tax revenue is handed over to the Central Government in China.

Is Hong Kong still a financial hub? ›

Hong Kong has raised its standing as a financial center, thanks to China's economic prowess. Financial services now account for 23% of the territory's gross domestic product, up from 10% in 1997.

Why is Hong Kong so important to the world? ›

Hong Kong's status as a global financial and business center has also helped China to promote greater global use of its currency, the renminbi or Chinese yuan. The territory — which has its own currency, the Hong Kong dollar — is one of the few places where the yuan is traded outside the mainland.

Why is Hong Kong a free market economy? ›

Hong Kong has been ranked as the world's freest economy for the past 18 years, a title bestowed on it by the Heritage Foundation, a conservative Washington think tank. The city's advocates praise the former British territory's low tax rates, lack of trade tariffs, thriving financial markets and small government.

Is Hong Kong still a financial hub for Asia? ›

Hong Kong has always maintained a long-celebrated status as an Asian financial hub. However, new visas issued to foreign workers in the financial sector dipped by 49 per cent, thanks to the strict COVID guidelines.

What is the financial center of Asia? ›

Singapore has overtaken Hong Kong to become Asia's top financial center — and the third in the world — according to a new report that puts New York and London in the first and second spots.

Why is Hong Kong so important? ›

Hong Kong's status as a global financial and business center has also helped China to promote greater global use of its currency, the renminbi or Chinese yuan. The territory — which has its own currency, the Hong Kong dollar — is one of the few places where the yuan is traded outside the mainland.

Why Hong Kong is so special? ›

Hong Kong is best known as a shoppers' paradise. There is, however, so much more to Hong Kong than shopping. Visitors can enjoy views of the city from high altitude, sample local food, celebrate festivals, watch sports competitions, and visit movie settings in the city.

Why do Western companies increasingly use Hong Kong to showcase their products? ›

The high number of visitors inHong Kong creates an opportunity for western companies to showcase their products to a globalaudience. Besides, many customers from Mainland regularly visit Hong Kong for a shopping spree.

Is Hong Kong mainland China? ›

Hong Kong and Macau are both sovereign territories of the People's Republic of China. However, due to the One Country, Two Systems policy, the two regions maintain a high degree of autonomy, hence they are considered not to be part of mainland China.

What is different about Hong Kong and China? ›

Hong Kong and China differ on several substantial issues: China has a one-party, communist system while Hong Kong is partially democratic; Hong Kong has independent executive, judicial and legislative systems; Hong Kong has the HKD (Hong Kong Dollar) while China has the Chinese yuan (or renminbi);

Is Hong Kong economy dependent on China? ›

Context in source publication. ... shown in figure 1, China plays an increasingly important role in Hong Kong's economic development-77% of tourists were from China, while Hong Kong's imports to and exports from China are 49% and 43% of their respective total amount.

Is Hong Kong still a financial hub? ›

Hong Kong has raised its standing as a financial center, thanks to China's economic prowess. Financial services now account for 23% of the territory's gross domestic product, up from 10% in 1997.

How would you describe Hong Kong? ›

Energetic, vibrant, flexible - these are the words most often used to describe Hong Kong. Pluralistic and tolerant, Hong Kong has a rich culture and traditions, and a modern cityscape that contrasts with a rural landscape full of varied plant and animal life.

What are characteristics of Hong Kong? ›

Hong Kong's attributes, reflected in the core values, are: innovative, cosmopolitan, enterprising, leader, connected. ) as well as the letters 'HK', to signify a blend of East and West. The visual identity is complemented by the brandline 'Asia's world city'.

What does China export to Hong Kong? ›

China-Hong Kong In 2020, China exported $262B to Hong Kong. The main products that China exported to Hong Kong are Integrated Circuits ($47.9B), Broadcasting Equipment ($36.7B), and Office Machine Parts ($20.3B).

What role has re exporting played in the economy of Hong Kong? ›

Re-exports generate economic activity contributing to GDP for the Hong Kong economy. There is a value-adding marketing service provided even though the process of re-exporting of goods does not involve the transformation of merchandise.

What goods does Hong Kong export? ›

Exports The top exports of Hong Kong are Gold ($33B), Broadcasting Equipment ($7.28B), Gas Turbines ($6.57B), Integrated Circuits ($5.94B), and Telephones ($4.58B), exporting mostly to China ($25.9B), United Kingdom ($14.8B), India ($14.2B), Switzerland ($12.1B), and Netherlands ($5.72B).

What's the difference between mainland China and Hong Kong? ›

Hong Kong is a Special Administrative Region controlled by the People's Republic of China and enjoys limited autonomy. Mainland China's principle of one country, two systems allows for the coexistence of socialism and capitalism within China.

How did Hong Kong become so rich? ›

A great seaport and commercial center, Hong Kong grew to prosperity on the entrepôt trade with China, its location convenient for transshipment of goods to and from the West.

What does mainland China consist of? ›

Mainland China means the People's Republic of China (excluding Hong Kong, Macau and Taiwan).

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