How important is Hong Kong for China

Why Hong Kong is so important to China

China no longer needs Hong Kong quite as badly as it did in 1997, when the city was returned to the People's Republic by Great Britain. But the Special Administrative Region remains an important part of China's economy, one that China cannot afford to weaken.

Over the past four decades, China has become the world's second largest economy and an integral part of the global financial system. This rise was only made possible by Hong Kong. Because the People's Republic has yet to tackle many economic reforms, Hong Kong is vital for Beijing as the gateway to the capitalist world.

Unloved "child"

Even before the current protests broke out in Hong Kong, the relationship between Hong Kong and Beijing was not free of tension - despite the government's regular assurances that it was particularly fond of compatriots in the south. Hong Kong is perceived by many mainland Chinese, including senior officials, as a spoiled and naughty child.

But tough repression of the city by Beijing would endanger the stability of China much more than the masked demonstrators ever could. The impact would quickly spill over to mainland China and the resulting negative image would scare off investors and affect China's ability to trade internationally.

 

Pressure from the trade dispute with the US

Beijing's hands are tied as a result of the trade dispute and the boycott of telecom giant Huawei. Chinese companies are instructed to reduce their dependency on foreign money and technology - and that in turn means to focus more on Hong Kong.

As terrifying as the policemen appear, Beijing could do otherwise and yet has good reasons not to

Chinese direct investment in Hong Kong is $ 620 billion, 70 percent more than Hong Kong's gross domestic product. Of the ten largest new issues on the stock exchange since 1986, nine came from China. Around half of all companies listed on the Hong Kong Stock Exchange come from the mainland, including 50 of the largest state-owned companies.

Mainland companies raised $ 47 billion in capital in Hong Kong in the stock market and $ 66 billion in the bond market in 2017.

Despite years of promises to change that, the yuan is still not freely convertible. Capital controls hinder the flow of money across borders. Hong Kong yuan deposits add up to $ 100 billion. Almost 60 percent of Chinese foreign investments, including those for President Xi Jinping's prestigious "New Silk Road" project, go through Hong Kong.

Key to the "Greater Bay Area" project

It's not even about the money: Hong Kong is an important part of the "Greater Bay Area", which includes Hong Kong as well as Macau and the nine large cities of the Guangdong province. 70 million people live in this region, which has an economic power of $ 1.5 trillion.

China needs Hong Kong to lighten an increasingly gray economic outlook: the years of double-digit growth rates are over. Recent data shows that growth in industrial production and retail sales - both key parameters of China's economic wellbeing - declined in July.

Shenzhen and Shanghai instead of Hong Kong

China is already spreading itself in areas that are actually determined by Hong Kong, for example in trade via the container ports. The Communist Party is also building alternatives, especially in the financial metropolis of Shanghai and the innovation center in Shenzhen - both of which are not yet ready to replace Hong Kong.

In July, 25 companies made their debut on the Shanghai Stock Exchange on the newly created Science and Technology Innovation Board (STAR). The aim is to attract capital back to China from overseas and at the same time to promote Shanghai's competitive position vis-à-vis Hong Kong

Hong Kong offers the flexibility that mainland competitors can only dream of. In addition, the financial market of the former British crown colony is an important point of contact for companies from the People's Republic if they want to raise money from IPOs. This is ensured by a dense regulatory environment that some consider to be the best and most open in the region.

Year after year - and for a quarter of a century - the Washington think tank "The Heritage Foundation" calls Hong Kong the freest economic zone in the world. For comparison: China ranks 100th on this list.

Xi Jinping's dream of the New Silk Road would also not be possible without Hong Kong

The rest of the world also needs Hong Kong

Investors like the "one country, two systems" deal that Britain and China made in 1997. It guarantees the continuity of legal framework conditions as well as its own currency and a guarantee of existence for a "capitalist economy" until 2047.

The Hong Kong Monetary Authority (that is, the Central Bank) and its regulators, the Security and Future Commissions, have a reputation for being progressive and reliable.

That is why Hong Kong is the base for more than 1500 multinational companies looking for an uncomplicated way into the Chinese market. 60 percent of foreign investments in China find their way via Hong Kong.

The city offers investors security. Among them are some very high cadres of the Communist Party who would not like to see the current crisis unsettling the economy. The Chinese leadership has invested enough in Hong Kong apartment buildings and stock market stocks to keep the armed people's police in their barracks longer.