The economic implications of the reunification of Hong Kong with China.

• Author: Lai, Edwin L.-C.
• Position: Symposium: Hong Kong's Reintegration into the People's Republic of China

1. INTRODUCTION

   On July 1, 1997, Hong Kong reunified with China, ending 156 years of British colonial rule. This reunification took place under the concept of "one country, two systems," a concept unprecedented in history. According to the Sino-British Joint Declaration signed in 1984, China promises to maintain the status quo of Hong Kong for fifty years by establishing a highly autonomous "special administrative region" (hereinafter Hong Kong SAR) in Hong Kong.(1) Specifically, Hong Kong is to maintain the existing British-style legal system, establish its own court of final appeal, retain fiscal independence from the central government, and retain its own currency. Hong Kong is to remain an independent customs territory, a free port, and a separate entity in most international economic and cultural organizations, such as the World Trade Organization, the Multi-fiber Agreement, and the Asian-Pacific Economic Co-operation forum.(2)

   Under the "one country, two systems" concept, although Hong Kong cannot be an independent political entity, it can be a highly economically independent entity from the rest of China. The first reason China is willing to allow such a special status for Hong Kong is the vast economic importance of Hong Kong to China. After Deng Xiaoping adopted the open-door policy for China in 1978, Hong Kong emerged as the most important source of foreign investment in China. About sixty percent of foreign. direct investment in China between 1979 and 1995 came through Hong Kong.(3) Hong Kong also serves as an important bridge connecting China to the rest of the world and is a source of managerial technology transfer into China. Maintaining the economic status quo of Hong Kong ensures that China can continue to benefit from it. Second, China hopes to lure Taiwan to reunify with the mainland under the "one country, two systems" concept. China's leaders think that, if all goes well with Hong Kong, it will be difficult for Taipei to reject Beijing's offer to reunify under an even more generous package than Hong Kong's.

   China is a developing country with an authoritarian government and largely rudimentary economic infrastructure: in contrast, Hong Kong is a modern capitalistic society with a British-style legal system, the rule of law, and one of the most free-wheeling economies in the world. In fact, it is widely believed that the pillars of Hong Kong's past economic successes are the rule of law, the freedom to transmit information and conduct economic activities, and a small, clean, efficient, and noninterventionist government. China is grossly inadequate in these aspects. Given such a big gap between the two systems, it is natural for one to doubt the feasibility of a smooth integration as promised by China.

   The fact is, whether one likes it or not, China is in control. Given that China is very sensitive to any potential challenge to its regime, one should be pessimistic about Beijing permitting any real democratic reform. Moreover, civil liberties in Hong Kong will very likely be rolled back. The new Hong Kong SAR government has already reversed some laws that have been modified in accordance with the Bill of Rights introduced by the British shortly before July 1, 1997.(4) In short, what the highest leadership in China would like to implement in Hong Kong is the Singapore model--economically free but politically paternalistic. The question is, putting aside political pessimism, how optimistic can one be about Hong Kong's economy after 1997?

   In this essay, the author attempts to identify the conditions under which Hong Kong's economy can prosper, in the short term as well as the long term. Part II reviews Hong Kong's recent economic performance. Part III analyzes the factors that will affect Hong Kong's short-term prosperity. Part IV suggests a scenario that would support long-term economic prosperity in Hong Kong. Finally, Part V present the author's assessment of Hong Kong's short-term and long-term prospects for economic success.

2. HONG KONG'S RECENT ECONOMIC PERFORMANCE

   One must realize that, political reintegration or not, economic integration of Hong Kong with China began in 1978, when Deng Xiaoping opened China's door. As a result of such economic integration, the structure of Hong Kong's economy underwent tremendous change:

   1. Hong Kong re-emerged as a major entrepot, with trade in

   goods expanded by forty-four times and trade in services

   by twenty-six times over the two decades from 1975 to

   1995.(5) In 1995, re-export was eighty-three percent of the

   total value of exports, and eighty-eight percent of re-exports

   involved China as either a source or destination.(6)

   2. Of the total $133.2 billion worth of foreign direct

   investment in China between 1979 and 1995, 58.8% was

   channeled through Hong Kong, followed by 8.7% through

   Taiwan.(7) Most of these firms produce goods for export.

   By 1995, 31.5% of China's exports was from...