Hong Kong is a special region for its history, its impact on global commerce, and trade, as well as being a key financial center in Asia. July 1, 1997 has become an unforgettable day in Chinese history. At midnight on this day, former Chinese Communist Party General Secretary Jiang Zemin announced the establishment of the Hong Kong Special Administrative Region of the People’s Republic of China. On this date, China officially took over the sovereignty of this land after 156 years of British colonial rule. According to People’s Daily, the official state newspaper of the Chinese central government, “the crowd was boiling with excitement, many of them glistened with tears of joy. The prolonged applause was exciting and enthusiastic.”
The day did not come easily. It took seven rounds of negotiations within two years to the signing of the Sino-British Joint Declaration. A major contribution to the conclusion of the negotiations is the “one country, two systems” principle proposed by then party chairman Deng Xiaoping. Deng also proposed that Hong Kong should have a high degree of autonomy, that “Hong Kong people administer Hong Kong.” As such, the Chinese government offered Hong Kong a high level of freedom to ensure a smooth transition.
Special policies and continuous government support played a crucial role in the development of Hong Kong, especially the construction of the local economy. Hong Kong, as a part of China, has an absolute edge in China’s tax system. In this special status, Hong Kong has no obligation to pay taxes to the central government. Hong Kong is also exempt from customs tax payments when importing to the Chinese mainland. This exemption was viewed as beneficial to both parties in order to encourage trade between the two regions. What’s more, the central government supports tourism in Hong Kong with retail commerce as a major goal.
However, it should be noted that one major benefit in this relationship was the financial impact that the Hong Kong financial industry brought to the region. The Hong Kong financial service industry has been pivotal in promoting the idea that Hong Kong corporations have privileges in investment on the mainland.
The prosperity of Hong Kong is impossible without economic support from the central government. After its return, Hong Kong has become one of the most active trading ports in China, and it also has the world’s third-biggest financial center. The international standing of Hong Kong in global finance and international trade made it an indispensable connection between China and the rest of the world. China’s Central Government values this region not only for its historical and cultural meanings but for its contribution to the economic development in the Greater China region as well.
However, the return of Hong Kong is not a happily ever after story. The relationship between mainland China and Hong Kong remains awkward. It is intensified by “Occupy Central with Love and Peace (OCLP),” the Umbrella Movement started in September 2014 and worsened by the protest beginning in March last year. This popular movement is believed to be a monumental factor that directly led to the launch of National Security Law. It appears that Hong Kong’s fight towards a higher level of independence may have resulted in a dramatic reduction of independence.
Besides the judicial restrictions, the Hong Kong economy is facing a very cold ‘winter.’ The level of violence of the 2019 protests have made Hong Kong an unfriendly tourist destination. Shopping activities generate high revenue for the HK tourism industry, and the violent protests have indirectly harmed the Hong Kong economy. At the same time, people of mainland China are bitterly disappointed and outraged by the attitudes of the radical activists, which makes them less willing to visit Hong Kong or to have business interactions.
In all of this, it is the coveted Hong Kong financial industry that could be the biggest loser in this fight. During this tumultuous time, mainland China has been developing its own global financial power globally. Shanghai and Beijing have been selected as the destinations for the first two mainland International Financial Centers (IFC) because of their rapid growth and increasing international influence. The Shanghai IFC is expected to be another global capital center that can compete for the same prestige that currently sits in Hong Kong, while the financial center in Beijing would involve more policy-making because of its political significance. A third financial center is now under construction in one of the most prosperous coastal cities, Shenzhen, which could be viewed as a final straw in breaking Hong Kong’s financial dominance in the region.
The financial system being built by the central government in mainland China is well-structured and has attracted the largest banks worldwide to build offices. Hong Kong still has its advantages: the tax policies help to attract international investors; however, its previous glory might not be retainable. Given the central government’s effort in building financial systems and international financial centers on the mainland, it is highly likely that these policies offer more favors to the mainland. Since Shenzhen is quite close to Hong Kong geographically, it is bold but reasonable to assume the possibility that it would replace Hong Kong on the global stage as the center of Asian economic power.
In recent years, the attitudes of many major foreign-owned enterprises have become either neutral on Hong Kong or lean towards favoring the central government. Many financial corporations have given vague official statements on the subject. Notably, two major British banks, HSBC and Standard Chartered, have demonstrated opposite positions from the government in London by showing support for China’s handling of this wave of protests. To add insult to injury, in 2019, some companies (mostly luxury fashion brands) have published official apologies for considering Hong Kong a country instead of a region after viral attacks from mainland citizens and the break-offs of their ambassadors from the Greater China region.
One other major factor, the perceived trade war between China and the US, has also directly affected Hong Kong. Recently, the United States suspended the treatment of high-technology products access to Hong Kong as it worries that the new National Security Law harms the independence and autonomous system. Under these economic and diplomatic pressures, US companies have been concerned and reluctant to continue business growth in Hong Kong.
It is quite evident that Hong Kong is under huge pressure right now with the restriction of the New National Security Law and strict controls from the Chinese Central Government. According to a poll conducted by Reuters, most Hong Kong citizens only ask for a higher level of independence instead of complete separation. However, the situation that went violent and viral in such a short time alarmed the central government and resulted in less freedom. The unexpected attack from COVID-19 makes the situation even more complicated. How the relationship between Hong Kong and mainland China develops requires close attention.