Protests in Chinese Financial Center:What Is Behind Hong Kong's Turbulence?

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Despite what would appear to be a rapidly decreasing share of China’s overall GDP, Hong Kong, then, remains extremely vital as a place for affordable consumer goods, secure investment opportunities, and access to debt, capital, and equity markets.

PHILADELPHIA, October 6 (RIA Novosti) – The recent unrest in Hong Kong has, quite understandably, captured the world’s attention. For a place with a somewhat dour and business-focused image, the city is famously one of the world’s largest and most lucrative financial centers, the scenes of dramatic confrontations between police and young protesters seem unexpected, unnatural, and even surreal.

While it might seem as if the unrest sprang out of nowhere, the roots of the current situation go deep, back to the agreement that China concluded with Hong Kong’s then colonial master, the United Kingdom, in the mid 1980’s. In this treaty, in exchange for resuming sovereignty over all of Hong Kong’s territory, the Chinese government promised that it would allow the city’s tradition of (mostly) democratic self-rule to continue without direct interference. This agreement quickly became known by the popular slogan “one country, two systems.” Much of the tension is due to the perception in Hong Kong that the central government is trying to unilaterally modify the terms of the deal.

But does any of this matter? How important can one city of 8 million people be in a massive continent-spanning country of 1.3 billion?

At first glance, you could be forgiven for thinking that Hong Kong’s best days were behind it. As Timothy Lee noted for Vox, China's meteoric economic rise has diminished Hong Kong's relative importance: according to data from the World Bank, Hong Kong's GDP went from being almost 20 percent of China's in 1997 to just 3 percent by 2013. Relative rates of growth (Hong Kong grew by 2.9 percent in 2013 versus a little over 7 percent in China) suggest that this trend will only continue. 10 years from now, in pure dollar terms, Hong Kong could account for as little as 1 percent of China’s total GDP.

Measuring Hong Kong’s influence on China purely through its GDP, however, is unduly narrow-minded: such an approach fails to capture what is unique and important about the city.

First of all, Hong Kong is beneficial to China because it provides Chinese companies with ready access to a competitive, liquid, and widely respected equity and capital markets. Hong Kong is a tier-one financial center, widely recognized as being the third most significant in the world after New York and London (ranking narrowly ahead of Tokyo and Singapore). Hong Kong, in short, is one of the world’s single most powerful centers of money, one of a very small number of places in which a company can receive any variety of financial service imaginable. The benefits of having a domestic world financial center, one that speaks a local language no less, to China are difficult to calculate. They certainly won’t show up in the headline GDP figures. But this is something of enormous and lasting value, as the aggressive attempts of other developing markets to create their own financial centers testiy.

People from mainland China also flock to Hong Kong in shockingly large numbers (more than 50 million a year!) to take advantage of the relatively more favorable tax and tariff regime: Western-made goods are available more widely and more cheaply in Hong Kong than in other Chinese cities. It's never a good idea to get between a consumer and a good they want, and Hong Kong functions as a vital "steam valve" to help release some of the pressure from China's still-regulated domestic market. 

Hong Kong, with its respected legal system and reputation for safety and security, is also vital as place where successful entrepreneurs from the mainland can invest. Hong Kong real-estate prices have gone through the roof over the past several years, more than doubling just since 2009, showing that demand among Chinese for Hong Kong assets remains as strong as it has ever been. If this capital were not being invested in Hong Kong it would likely end up leaving the country entirely, creating further headaches for China's financial authorities.

Despite what would appear to be a rapidly decreasing share of China’s overall GDP, Hong Kong, then, remains extremely vital as a place for affordable consumer goods, secure investment opportunities, and access to debt, capital, and equity markets. As China has become ever more integrated into the broader global economy it has become more dependent on trade, and large-scale global trade is only possible with the sorts of complicated legal, financial, and contractual instruments in which Hong Kong specializes.

The views expressed in this article are solely those of the author and do not reflect the official position of Sputnik.

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