People’s Republic of China—Hong Kong Special Administrative Region: Selected Issues

This Selected Issues paper examines the economic integration between Hong Kong Special Administrative Region (SAR) and the Mainland of China. Hong Kong SAR’s economic links with the Mainland expanded rapidly in the 1980s and in the first part of the 1990s, with Hong Kong SAR becoming the most important trade and international fundraising center for the Mainland. Since Hong Kong SAR’s return to China’s sovereignty, integration between the two economies has deepened, notwithstanding the Asian crisis.

Abstract

This Selected Issues paper examines the economic integration between Hong Kong Special Administrative Region (SAR) and the Mainland of China. Hong Kong SAR’s economic links with the Mainland expanded rapidly in the 1980s and in the first part of the 1990s, with Hong Kong SAR becoming the most important trade and international fundraising center for the Mainland. Since Hong Kong SAR’s return to China’s sovereignty, integration between the two economies has deepened, notwithstanding the Asian crisis.

I. Economic Integration Between Hong Kong SAR And the Mainland of China1

1. Hong Kong SAR’s economic ties with the Mainland, revived in the late 1970s, have strengthened further since its return to China’s sovereignty in 1997. After moving most of its manufacturing to the Mainland in the 1980s and early 1990s, the Hong Kong SAR economy is going through another structural transformation as its integration with the Mainland economy deepens. This paper reviews the process of economic integration between Hong Kong SAR and the Mainland, and the policy implications for Hong Kong SAR. The paper is organized as follows: Section I looks at how close economic and financial ties have already developed between Hong Kong SAR and the Mainland; Section II presents the outlook for further integration; and Section III discusses policy implications.

A. How Far has Integration Gone?

2. Hong Kong SAR’s economic links with the Mainland expanded rapidly in the 1980s and the first part of the 90s, with Hong Kong SAR becoming the most important trade and international fund raising center for the Mainland. Since Hong Kong SAR’s return to China’s sovereignty, integration between the two economies has deepened, notwithstanding the Asian crisis: Mainland-related entrepôt trade has continued to increase; a large share of China’s foreign currency financing is raised in the Hong Kong SAR financial market; a growing range of economic activities are integrating across the border; and Hong Kong SAR business has become increasingly centered around China-related activities.

Trade

3. Hong Kong SAR currently intermediates about 40 percent of China’s external trade. When China opened up beginning in the late 1970s, Hong Kong SAR’s role as an entrepôt was quickly revived, and it became the main intermediary of China’s external trade. Even after some decline in recent years, the share of China’s trade intermediated via Hong Kong SAR is still around 40 percent.

4. As manufacturing moved across the border, Hong Kong SAR gravitated toward intermediation, and its re-exports trade, almost all related to the Mainland of China, is now larger than its GDP. After the Mainland opened up, Hong Kong SAR businesses quickly moved their manufacturing base to southern China, while expanding their entrepôt activities. As a result, the share of manufacturing in Hong Kong SAR’s GDP dropped sharply (from 24 percent in 1984 to 6.5 percent by 1997), while that of re-exports in total exports more than doubled (to 88.5 percent in 2000). Almost all of Hong Kong SAR’s re-exports either originate from or are destined for the Mainland of China. As a share of GDP, re-exports more than tripled since 1984, to 110 percent in 2000.

5. Entrepôt trade with the Mainland and related services are thus critically important to the Hong Kong SAR economy. Total trade - excluding offshore trade - is equivalent to over 250 percent of GDP, and its contribution to GDP is close to 10 percent (Chart 1). In addition, Hong Kong SAR is handling an increasing amount of offshore trade.2 A 2001 survey estimated that the size of offshore trade is about the same as Hong Kong SAR’s re-exports, having doubled over the past decade. More than one in six people employed in Hong Kong SAR are engaged in import and export trading, contributing some 19 percent to GDP. This figure does not include trade-related services such as insurance and financing, sea and air transport, freight forwarding, and advertising and marketing, which together would increase the contribution significantly.

Chart 1.
Chart 1.

Importance of Entrepôt Trade for Mainland to Hong Kong SAR

Citation: IMF Staff Country Reports 2002, 099; 10.5089/9781451816839.002.A001

Sources: Data provided by the Hong Kong authorities and staff estimates.

Finance

6. Hong Kong SAR has been the most important source of international capital for the Mainland. The financing has come in the form of foreign direct investment, equity financing, bond, and bank lending.

  • Cumulative FDI from Hong Kong SAR was estimated at about $171 billion as of 2000, or about half of China’s total FDI3. Although the share of FDI flows from Hong Kong SAR has decreased recently, it still accounted for more than one-third of total FDI flows to the Mainland in 2000;

  • All but one of the 58 Chinese SOEs listed abroad at end-2001 were listed in Hong Kong SAR4, having raised a cumulative of US$16.6 billion. In 2000, China-related companies (both so called “red-chip” and “H-shares” )5 raised a record US$44 billion in the Hong Kong SAR market (Jiang 2000);

  • China has raised more than US$23 billion in the Hong Kong SAR bond market (out of $28 billion placed outside the Mainland) in the last 10 years. Seven Mainland sovereign bonds were issued in Hong Kong SAR, and 18 Mainland issues of non-government bonds were listed on the Hong Kong SAR exchange at end-2000;

  • The stock of Hong Kong SAR banks’ direct lending to Mainland entities totaled some US$37 billion in 1999, or about 70 percent of total foreign bank lending to the Mainland6. Lending to the Mainland by Hong Kong SAR banks has since declined, in part due to the financial problems of some debtors;7.

  • Hong Kong SAR banks have also been active in arranging syndicated loans and floating rate notes for use in the Mainland. At the peak in 1998, syndicated loans to the Mainland of China arranged by Hong Kong SAR banks totaled $5.6 billion.

7. The growing presence of Mainland firms and capital raising activities has contributed to the development of Hong Kong SAR’s financial markets. For instance, the growing number of Mainland firms in the equity market has attracted an increasing amount of international funds to Hong Kong SAR, with good returns: during the period 1996–2000, the “red chip” index was up 36 percent, compared to a return of 15 percent of the rest of the market8.

Other Business Activities

8. After near full integration in the traded goods sector, low-end services have started to relocate across the border as well. Hong Kong SAR-funded firms now employ an estimated 5 million people in China, mostly in manufacturing. Some services, such as retail trade, recreation and leisure, accounting and back office operations of banks, and some trade-related services, have also started relocate across the border. As a result, the share of factor income from the Mainland has doubled from 7 percent in 1995 to 14 percent in 2000.

9. An increasing number of Hong Kong SAR residents visit Shenzhen and other nearby cities for shopping, entertainment and leisure, and the number of people who live and work on different sides of the border has also increased. Between 1990 and 2000, the number of Hong Kong SAR residents’ visiting the Mainland more than tripled, to 50 million departures (implying that each Hong Kong SAR resident made on average seven visits in 2000). It is estimated that Hong Kong SAR consumers spent HK$20 billion in connection with personal travel in Guangdong in 2000, equivalent to 11 percent of Hong Kong SAR retail sales. Moreover, an estimated 191,000 Hong Kong SAR residents worked in the Mainland in 2001 up from 52,000 in 1988.

The Mainland’s Presence in Hong Kong SAR

10. The Mainland of China has become a major source of FDI in Hong Kong SAR. By end-1999, the Mainland of China had invested over $100 billion in Hong Kong SAR (about one fourth of total inward FDI). Many firms and government entities have set up offices in Hong Kong SAR to gain international exposure and market opportunities. An estimated 2000 mainland-related companies are currently operating in Hong Kong SAR, with important presence in trading, real estate, insurance, transport, finance and construction. At end-2000, 24 Mainland bank branches accounted for 16 percent of total assets and 21 percent of deposits in Hong Kong SAR.

11. A rising number of visitors from the Mainland has helped sustain the Hong Kong SAR tourist industry. In 2000, mainland visitors contributed about one-third of Hong Kong SAR’s tourist receipts, with the number of visitors up by another 18 percent in 2001.

Correlations of Economic and Financial Developments

12. Hong Kong SAR’s economy is increasingly correlated with Mainland’s external sector, though not its overall economy. The correlation between Hong Kong SAR’s GDP and China’s external trade9 has been strong, and tended to increase in recent years (Chart 2). On the other hand, as integration of other sectors is still in an early stage, the correlation with the GDP of the Mainland has been much weaker.

Chart 2.
Chart 2.

Correlation of Hong Kong SAR GDP and China’s Trade Growth

Citation: IMF Staff Country Reports 2002, 099; 10.5089/9781451816839.002.A001

Sources: Staff estimate

13. Despite growing links, the financial markets of Hong Kong SAR and the Mainland remain largely independent from each other. Capital controls, though not watertight, still serve to insulate China’s domestic financial market from external developments. In contrast, the linked exchange rate system and absence of any capital controls in Hong Kong SAR have resulted in a high degree of global integration of its financial markets. As a result, correlations between the Hong Kong SAR and Mainland financial markets are weak (Chart 3 andChart 4).

Chart 3.
Chart 3.

Correlation of Hong Kong SAR and China’s Stock Market Movements

Citation: IMF Staff Country Reports 2002, 099; 10.5089/9781451816839.002.A001

Source: Data from CEIC database, Bloomberg, and staff calculations.
Chart 4.
Chart 4.

Correlations of Hong Kong dollar and RMB Forward Premium, 2000–2001

Citation: IMF Staff Country Reports 2002, 099; 10.5089/9781451816839.002.A001

Source: Data from CEIC database, Bloomberg, and staff calculations.

B. Outlook for Further Integration with the Mainland

14. Hong Kong SAR’s integration with the Mainland of China will deepen in the coming years, with the Mainland economy opening up further following WTO accession. This process is expected to spur additional re-alignment of output, trade and investment patterns, and financial flows in the region. In the near term, Hong Kong SAR will likely benefit from increased trade and investment activities between the Mainland of China and the rest of the world, given the excellent “starting position” that Hong Kong SAR companies already have in intermediating those activities. In the longer run, however, Hong Kong SAR’s role as a traditional “middleman” will likely diminish, with sources of growth shifting increasingly to higher value-added service sectors. These structural changes could pose challenges, in particular, for labor market, education, and fiscal policies.

Trade

15. In the next few years, Hong Kong SAR will benefit from increased trade between the Mainland of China and the rest of the world. Even after two decades of rapid growth, China’s exports still account for a relatively small share of world trade (Table 2). Given China’s large labor supply and cost competitiveness, significant scope remains for growth of labor-intensive industries. Staff estimates suggest that, spurred by WTO accession, China’s external trade will increase by about 80 percent in the next five years.

Table 2.

Selected Global Export Shares, 2000

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Source: IMF, Direction of Trade Stati sties.

Korea, Singapore, Taiwan province of China, Hong Kong SAR. Re-exports of Hong Kong SAR are excluded.

16. Hong Kong SAR’s efficient port facilities, trading experience, global network, and agglomeration of trading activities are hard to rival in the near future. Hong Kong SAR is endowed with a natural deep-water, silt free harbor, strategically located on major sea routes and with China’s export growth engine, the Pearl River Delta, as its hinterland. Nearby ports of the Mainland do not yet pose a serious challenge; rather, the about 20 small-to medium-sized ports in the region could complement the Hong Kong SAR port services, helping to lower their overall cost. Hong Kong SAR also has the advantage of major port agglomerations with extensive port and freight management experience, being able to provide complete services including insurance and financial services. A new terminal (to be phased in from 2003) will add significant capacity, providing a solid basis for handling additional China cargo.

17. Nonetheless, Mainland port facilities are improving, and the economy of the Yangtze River Basin is gaining importance. Ports in southern China have expanded rapidly, and Mainland exports handled by Hong Kong SAR companies are increasingly shipped directly from the Mainland rather than through Hong Kong SAR10. Growing competition will come especially from Shanghai and its surrounding ports, situated in the middle of China’s coast line, with easy access to the large economic zone along the Yangtze River. Given its location and large industrial base, the Yangtze River region will likely gain further importance as a major engine of growth and exports Box 1.

18. As China continues to liberalize trade and investment, direct access between the Mainland and rest of the world will increase, potentially bypassing Hong Kong SAR.Under China’s WTO commitments, more Chinese firms will be allowed to engage in direct external trade, distribution, and transportation services. At the same time, restrictions on foreign companies are being reduced or abolished. While Hong Kong SAR companies are also expected to benefit from such liberalization, they will face intensified competition from Mainland as well as foreign firms.

19. Therefore, Hong Kong SAR’s role as a traditional “middleman” for Mainland trade will likely diminish over time. Increasingly, re-exports will shift to off-shore trade (Table 3), or bypass the Hong Kong SAR connection altogether. While the initial increase in the Mainland of China’s overall trade will likely dominate the trade diversion effects, it will unlikely do so in the long run, and Hong Kong SAR will have to reduce its reliance on entrepot trade for the Mainland.

Table 3.

Survey of Traders on Prospects of Different Shipping Arrangements

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Source: Hong Kong SAR Trade Development Council

Ports and Economic Hinterland of Hong Kong SAR and Shanghai

Ports (2000):

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Source: Ministry of Communication of China, and staff estimates.

Hinterland:

Narrowly defined, Hong Kong’s hinterland is the Pearl River Delta; more broadly, it could be viewed to include the whole of Guangdong province. Shanghai’s hinterland is the Yangtze River Delta, or more broadly, including Jiangsu and Zbejiang provinces. Guangdong province has been the main export engine of China, but Jiangsu and Zhejiang provinces have a large potential to catch up given their large population and industrial base, and a vibrant non-state sector. Moreover, goods from other provinces along the Yangtze river area could easily reach Shanghai via the Yangtze river and its extensive branch network. This area would include much of Anhui, Hubei, and Hunan provinces, with a total population of 285 million people.

Comparison of Guangdong and Jiangsu plus Zhejiang, 1999

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Source: China statistical yearbook 2000.

Financial Services

20. With the Mainland opening up its financial sector, some foreign financial institutions will likely relocate their China-related activities from Hong Kong SAR to the Mainland, especially Shanghai. Lower business costs and proximity to business and clients would be the main attractions of moving to the Mainland. Shanghai is an industrial and commercial center where many foreign production facilities are located, and it has ample supply of relatively well-educated labor. In addition, the government has continued to invest heavily in Shanghai’s infrastructure, and the city is gaining expertise as a financial center.

21. Nonetheless, Hong Kong SAR has advantages that will likely preserve its role as a center for China’s international capital raising for the foreseeable future:

  • sound legal framework, and independent and efficient judiciary - while the Mainland’s legal system remains in need of development;

  • free flow of capital and information - while the Mainland will maintain capital controls for the foreseeable future;

  • a mature financial market and sound banking system - while China’s financial market is at a much earlier stage of development, with a financially weak banking system.

These factors will make it difficult for Shanghai or other cities in the Mainland to rival Hong Kong SAR’s position as a major international financial center in the near future.

22. Growing financing needs in the Mainland will likely benefit Hong Kong SAR as an international financial center. Given China’s high saving rate, much of the financing will be domestically raised. Nonetheless, a significant part will be raised abroad, and Hong Kong SAR - with its well-developed market infrastructure and experience, could benefit in the following areas:

  • Increasing placements by large Chinese SOEs and private firms in the. Hong Kong SAR stock market.

  • Restructuring and infrastructure projects in the Mainland should help boost Hong Kong SAR’. debt market (a 1997 World Bank report estimated that China’s infrastructure-related spending could exceed $700 billion over ten years, and preparation for the 2008 Olympics may require additional infrastructure spending);

  • Growin. corporate debt financing by Mainland firms (if China’s corporate debt to GDP ratio were to reach 4 percent - the level in Thailand before the crisis - by 2010, corporate bonds outstanding could total over $120 billion (from the current $10 billion);

  • FDI to China will likely increase with WTO-related liberalization of services sectors and the elimination of textile export quotas in 2005. Some of the FDI should continue to be channeled through Hong Kong SAR.

23. Hong Kong SAR firms could benefit from the opening up of China’s financial sector, although they will face entrance barriers and competition from international firms. Under China’s WTO commitments, banking, insurance, and asset management industries will gradually open up to foreign firms. Hong Kong SAR firms could potentially benefit from this liberalization, given their extensive experience in these areas. However, many Hong Kong SAR firms face high entrance barriers in the Mainland’s market (such as capital requirements for banks). Even in industries where such barriers are lower (such as asset management), Hong Kong SAR firms will compete with much larger and well-established international firms.

Business Services

24. Migration of certain trade-related services to the Mainland will likely continue. More than three-fourths of Hong Kong SAR-handled Chinese exports (of those surveyed by the TDC) now have freight forwarding and consolidation arranged in the Mainland, and over half of the testing and certification are also conducted there. As China opens up the services sector further, this trend is likely to continue.

25. Nevertheless, while some foreign companies may relocate to the Mainland, Hong Kong SAR is still very attractive as a business center. As foreign business expands in the Mainland of China, cheaper labor and office space may attract regional offices and China-related operations to move from Hong Kong SAR across the border. Hong Kong SAR could gradually lose its predominance as a center for China-related foreign businesses. However, currently Hong Kong SAR still has many advantages (described in the section that follows) that seem to justify a significant cost premium. The number of regional headquarters and offices in Hong Kong SAR increased by 20 percent in 2000, to over 3,000 (Table 3), and the presence of Chinese firms, falling in 1998–1999, has started to grow again.

Table 3.

Hong Kong SAR as a Regional Headquarter for Multinational Companies

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Source: Hong Kong SAR: Census and Statistics Department

26. The Hong Kong SAR tourism industry, although still relatively small, could be an important source of growth in the future. Tourist receipts were equivalent to 4.7 percent of Hong Kong SAR’s GDP in 2000, of which close to one-third came from Mainland Chinese visitors. Further relaxation of restrictions on visas/quotas for Mainland visitors to Hong Kong SAR could boost tourism significantly in the coming years.

C. The Challenge of Integration

27. To meet the challenge of integration, Hong Kong SAR must continue to enhance its competitive advantage and attract higher value-added business activities. As an advanced economy, Hong Kong SAR cannot compete with the Mainland in activities such as labor-intensive manufacturing and low-end services. It will have to “move up the value chain”, following the examples of some companies that have successfully adjusted their business structure (Box 2). As noted, China’s growth, rising financing needs, and further

“Moving up the Value Chain” - An Example

The evolution of Li&Fung Limited, one of the world’s leading trading companies of consumer products, provides an example of adjusting to the changing environment of Hong Kong SAR.

When manufacturing moved from Hong Kong to the Mainland in the 1980s, the company shifted its sourcing from local manufacturers to the Mainland of China while focusing its Hong Kong business on supply-chain management. Today, the company uses its experience and global network to provide a complete services package including product development, raw material sourcing, production planning and management, quality assurance and shipping. For example, when a client orders a line of leather jackets, the company can arrange to have the leather from India, tanning in South Korea, plated metal buckles from Japan, cutting and sawing in China, and export from China. Interactive services ensure that the client can change the order in terms of quantity, color, and cut as long as those steps are not completed.

Taking advantage of Hong Kong SAR’s location, openness, complete range of supporting services (financial, legal, transport), simple tax system, and human capital, the company manages its sales and marketing, contract negotiation, control, and information flow from its Hong Kong headquarter. At the same time, activities closer to manufacturing, such as molding and engineering, testing and quality control, and storage and shipment of cargo, have been moved closer to the factory floor in the Mainland of China and elsewhere.

The company has expanded its operations to some 40 countries, diversifying its supply sources and markets. This has allowed it to serve clients at the lowest cost and in the fastest time, and to reduce reliance on any one country. Modern telecommunications have enabled the company to manage its global business from Hong Kong SAR. For example, instead of in-kind inspection of design and production, it now mostly relies on digital camera and internet transmission. Thus, the company’s operation in Hong Kong SAR has continued to grow, even if virtually nothing is sourced from there any longer.

With the further opening of the Mainland, the company is likely to increase its sourcing from there, and views Hong Kong SAR as an ideal location for managing this expansion.

liberalization offer great opportunities for Hong Kong SAR - with such a vast and vibrant hinterland, Hong Kong SAR can further develop what it does best and consolidate its role as a major international financial, trade, and business center.

28. A recent survey on trade and trade-related services shows that many Hong Kong SAR companies are planning to change their business operations along those lines. Table 4 shows that companies plan to move lower value-added trade-related services to the Mainland while focusing Hong Kong SAR operations on the higher end.

Table 4.

Location of Major Operations of Hong Kong SAR Companies in the Next Five Year.

(Business location, in percent of total respondents)

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Source: Trade Development Council.

29. To take full advantage of this structural shift, Hong Kong SAR will need to further enhance its comparative advantage. A survey of foreign companies with regional representation in Hong Kong SAR identified the following major advantages (in order of importance):

  • (1) Low and simple tax system;

  • (2) Free flow of information;

  • (3) Political stability and security;

  • (4) Corruption-free government;

  • (5) Communication, transport and other infrastructure;

  • (6) Rule of law and independent judiciary;

  • (7) Business-friendly government economic policy;

  • (8) Absence of exchange controls;

  • (9) Free port status;

  • (10) Level playing field

30. The structural changes resulting from integration lead to higher structural unemployment and shortage of skilled workers. A recent study by the HKMA finds that the natural rate of unemployment has risen modestly in recent years, and there is evidence of increased skill mismatch in the services sector. The government’s 2000 manpower projection report estimates that by 2005, Hong Kong SAR will have a shortage of some 120,000 people with higher education, and a surplus of 160,000 with only secondary school education or less (Table 5).

Table 5.

Projected Manpower Resources Balance in 2005

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Source: HKSAR, Report on Manpower Projection to 2005.

31. These labor market pressures will continue to challenge education and other social policies. As discussed in Chapter 2, structural change is the main factor behind the rise in income inequality in the last two decades. To meet the growing demand for high-skilled workers, Hong Kong SAR will have to further strengthen its education and training programs, and may also consider revising its immigration policies.

32. Meeting these challenges has fiscal implications. Upgrading the education system, infrastructure development, and higher unemployment could create pressures for higher public expenditures, calling for measures to contain costs and/or offsetting savings elsewhere. At the same time, relocation of more economic activities from Hong Kong SAR to the Mainland could result in lower revenues given the territorial-source principle of income taxation11 - pointing to the need for measures to strengthen the revenue base.

D. Conclusions

33. Structural adjustment to Hong Kong SAR’s further integration with the Mainland has important macro economic and structural policy implications.

  • Substantial restructuring is required to preserve and upgrade Hong Kong SAR’s competitiveness as an intermediating economy:

    • Training and education systems need to be upgraded and expanded to meet the demand for higher-skilled workers resulting from the shift to high-end services;

    • Immigration policy may need to be modified to allow highly-qualified mainland personnel to work in Hong Kong SAR;

    • Transport, telecommunication and other infrastructure needs to be further upgraded;

    • To ensure stability and further development of Hong Kong SAR’s financial markets, market infrastructure and the regulatory framework need to be continuously upgraded.

  • Fiscal pressures will need to be met through a combination of private sector participation and offsetting savings as well as efforts to broaden the revenue base;

34. As integration progresses, policy makers and regulatory authorities will have to increasingly look beyond developments in Hong Kong SAR to ensure effective surveillance. Hong Kong SAR authorities will need to monitor closely economic developments in the Mainland of China, and as Hong Kong SAR financial institutions become ever more involved in the Mainland economy, supervision will need to pay further increasing attention to cross-country risk.

35. Current indicators of economic developments may become increasingly inadequate:

  • Hong Kong SAR will depend increasingly on repatriated income flows from operations in the Mainland, as economic activities relocate across the border. As a result, Gross National Product (GNP) will become an important indicator of activity, in addition to GDP;

  • Traditional measures of external competitiveness are becoming less relevant. The real effective exchange rate is currently based on relative consumer prices or unit labor cost in manufacturing, weighted by the direction of trade in goods. However, Hong Kong SAR’s main production and trade has shifted to services. Thus, alternative measures of Hong Kong SAR’s competitiveness would include estimates of relative prices of services, weighted by the direction of service trade (or compared with services prices competitor countries or localities offering similar services).

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1

Prepared by Tao Wang.

2

Defined as merchandise trade handled by Hong Kong companies or their subsidiaries, but not going through import-export declaration in Hong Kong SAR. It thus includes both “transshipment” and “offshore trade” as classified in the 5th BOP manual.

3

Some of the FDI may be “round tripping” from the Mainland to take advantage of the preferential treatment of foreign investors in China.

4

A number of them are dual listings (in New York).

5

“H-shares” are shares of Mainland-incorporated companies listed in Hong Kong, while the red-chips are shares of Hong Kong SAR-incorporated companies with a controlling stake held by state-owned organizations of provincial/municipal authorities in the Mainland.

6

Hong Kong banks’ direct exposure to the Mainland is relatively small, amounting to less than 3 percent of total assets of the banking sector, although indirect exposure is likely to be higher, as a portion of loans booked for use in Hong Kong SAR is used by the borrowers for their Mainland operations.

7

In particular, the problems of International Trust and Investment Corporations (ITICs). The net liabilities of Hong Kong banks to Mainland clients have increased sharply recently, largely reflecting the ample liquidity conditions in the Mainland and the shrinking exposure of Hong Kong banks to the Mainland. Although from a very small base, there has also been increased lending by Mainland banks to Hong Kong SAR companies, in part to finance the latter’s Mainland operations.

8

Excluding HSBC (a large participant in the market that has seen its share price rise by more than 40 percent during this period).

9

Measured by the correlation of estimated deviations from trends over moving sub-periods.

10

A recent survey by the TDC shows that such direct shipment doubled between 1994–2000.

11

The Task Force on Review of Public Finance, March 2002.

People’s Republic of China—Hong Kong Special Administrative Region: Selected Issues
Author: International Monetary Fund