Hong Kong under Chinese Sovereignty: Economic … · Hong Kong’s competitiveness builds on a sound legal and institutional framework, free mar-ket system, ... (Sit, 1989; Shen,

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Hong Kong under Chinese Sovereignty: Economic Relations with Mainland China, 1978–2007

Jianfa Shen1

Abstract: A Hong Kong–based economic geographer presents an array of statistical datathrough 2007 that place Hong Kong among the world’s leading financial, foreign trade, andair cargo handling centers. The paper’s main focus is the economic relationship with Main-land China, which has grown and expanded since the change of the city’s sovereignty in 1997.Included in the presentation is a review of economic integration before and after the handoverby the UK to China, the pattern of cross-border investments and foreign trade, the growth ofthe logistics and tourism industries, and the challenges posed by changing economic relations,partly due to the rapid development of Hong Kong’s hinterland. Journal of Economic Litera-ture, Classification Numbers: O16, O18, O20, R11. 2 figures, 5 tables, 64 references. Keywords: China, Hong Kong, Guangdong, Shenzhen, Pearl River Delta, “front shop and backfactory” model, FDI, exports, re-exports, imports, outsourcing, tourism, logistics, air cargo,container throughput.

he purpose of this paper is to add to the material on economic development of HongKong presented in the preceding paper by Yeung, Lee, and Kee (2008). Due to space lim-

itations, an all-embracing analysis of Hong Kong’s economic performance since its handoverto China in 1997 lies beyond the scope of this effort. I intend, however, to focus on the city’srelationship with Mainland China and examine the opportunities and challenges to its devel-opment and competitiveness in the context of this important relationship after the change ofsovereignty. In order to set the stage for the sections that will follow, this paper will begin withan outline of Hong Kong’s ranking as a competitive center. Next will come the narrative oneconomic integration, followed by sections on trade relations, growth of logistics and tourism,and finally on the challenges faced by the city in light of its ties to the Mainland.

HONG KONG’S RANKING AS A COMPETITIVE CENTER

With a territory as small as 1,099 km2 with ca. 7 million inhabitants in 2007, Hong Kongnonetheless reaches some of the highest rankings among the world’s 183 countries (with apopulation of at least 1 million and a GDP >1 billion) evaluated by the Economist (2007).The city is first (No. 1) in three categories,2 as the most energy efficient,3 the highest net

1Professor and Head of Graduate Division, Department of Geography and Resource Management, TheChinese University of Hong Kong, Shatin, NT, Hong Kong. e-mail: [email protected]. The research incorporatedinto this paper was supported by a Public Policy Research Grant from the Research Grants Council of the HongKong Special Administrative Region (RGC Project No. CUHK4005-PPR-4). Thanks are due to Mr. Gordon Kee ofthe Hong Kong Institute of Asia-Pacific Studies for his assistance in securing 2007 data.

2The world rankings of the Economist cover 103 major categories.3As measured by GDP per unit of energy use.

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Eurasian Geography and Economics, 2008, 49, No. 3, pp. 326–340. DOI: 10.2747/1539-7216.49.3.326Copyright © 2008 by Bellwether Publishing, Ltd. All rights reserved.

JIANFA SHEN 327


energy importer,4 and the least economically dependent on agriculture in the world. Its inter-national airport is the world’s second busiest (after Memphis) in terms of cargo tonnage han-dled, and the city ranks third in global competitiveness (after the U.S. and Singapore) andfifth with regard to business environment (after Denmark, Singapore, Canada, and Finland).5

The competitiveness of cities or regions is arguably rooted in the nature of the businessenvironment they offer to firms (Porter, 1998). Compared with cities in Mainland China,Hong Kong’s competitiveness builds on a sound legal and institutional framework, free mar-ket system, sophisticated business community, diligent and relatively well educated laborforce, efficient and clean government, solid infrastructure, and dense international networks(Shen, 2004a; Yeung et al. 2006). Based on its past role as a global center of trade, com-merce, shipping, and financial services, it has the advantage of being a leading city of Chinaand Asia poised to grow in the future. According to the Institute for Management Develop-ment’s World Competitiveness Index, Hong Kong’s ranking dropped from 3rd in 1997 to 14th

in 2000 but bounced back to 2nd in 2005 and 2006 (Enright/Scott, 2006). Similarly, accordingto World Economic Forum’s Growth Competitiveness Index,6 Hong Kong’s ranking droppedfrom second (1997) to 28th (2005) (ibid., 2006). However, the Global Competitiveness Indexintroduced in 2006 indicates that Hong Kong’s ranking improved from 14th in 2005 to 10th in2006, and 12th in 2007 (cf. third-place ranking by the Economist), rising to fourth in Asiaamong the continent’s countries/economies in 2007 (World Economic Forum, 2007).

Recent studies of the urban competitiveness of Chinese cities have concluded that HongKong was the most competitive city in China in 2006 and 2007 (Ni et al., 2006, 2007). Thecity scored highly on its infrastructure development, financial market, business environment,efficiency and flexibility, legal system, as well as government administration.

A relevant study by Huang et al. (2007), which analyzed data on 100 service firms in314 world cities, identified London, New York, Hong Kong, and Tokyo as the top four ser-vice centers, basing that conclusion on the degrees of their internationalization.7 In an earlierstudy undertaken by the Globalization and World Cities Research Network (GaWC) ofLoughborough University, UK (Beaverstock et al., 1999), the city’s rank was somewhatlower (behind Tokyo) due to the absence of headquarters of major transnational corporations.When first-level subsidiaries such as regional headquarters of the world’s 100 largest corpo-rations listed in Fortune’s Global 500 were considered, Hong Kong’s rank was fourthaccording to Godfrey and Zhou (1999). A more recent GaWC study also ranked Hong Kongas the third top city in terms of service value and global connectivity (Taylor et al., 2002).The city thus is a highly internationalized urban center with prominent regional commandfunctions, albeit differing from London and New York, where such global functions are mostfrequently headquartered.

In a different configuration, the Heritage Foundation’s Index of Economic Freedom, thecity has been regarded as the world’s freest economy for 13 consecutive years, from 1995 to2007 (Kane et al., 2007), underscoring Hong Kong’s high position as a world city. It is nowpositioned as an international financial center for China, because Shanghai, Hong Kong’snearest competitor, is largely renminbi based. The city has assumed a bridging role for

4In percent of commercial energy use.5Measured by scoring opportunities for, and hindrances to, the conduct of business in 10 categories, including

market potential, tax and labor-market policies, infrastructure, skills, and the political environment.6Better known as the Competitiveness Index prior to its name change in 2001.7Hong Kong ranked third, hosting 92 percent of the transnational service firms identified in that study.

328 EURASIAN GEOGRAPHY AND ECONOMICS


Mainland enterprises seeking to engage in global operations, as well as a similar role for for-eign investors exploring opportunities in the hinterland and beyond. In a recent evaluation ofglobal financial centers by the city of London, Hong Kong ranked third after New York andLondon among 46 cities (BBC, 2007), while Shanghai and Beijing ranked 24th and 36th,respectively. The city’s role as financial intermediary between China and the global systemhas become the key factor in its leadership.

Additional evidence of Hong Kong’s key role in Asia is provided by the stability of itsequities market. The city’s stock market, the world’s sixth largest (Economist, 2007), is sig-nificantly better developed and more mature than the bourses of Shanghai and Shenzhen. Inthe past few years, many large-scale banks8 and companies headquartered in Mainland Chinahave been listed on the Hong Kong exchange. A significant example is provided by theIndustrial and Commercial Bank of China (ICBC), listed simultaneously on both the HongKong and Shanghai stock exchanges on 27 October 2006, representing the world’s largestinitial public offering to date.9

The amount of capital raised by companies listed on the Hong Kong Stock Exchangewas the world’s second highest after London in 2006 (Ming Pao, April 27, 2007). The totalcapitalization of the city’s stock market increased from US$858.5 billion in 2004 toUS$1567.7 billion in November 2006, with the share of Mainland enterprises rising from 30to ca. 48 percent during the period (InvestHK, 2005, 2007). Noting that relatively few for-eign companies are listed on the Hong Kong Stock Exchange, Xu (2006) has aptly referred tothe city as “the national financial center of China.”

ECONOMIC INTEGRATION BEFORE AND AFTERTHE HANDOVER IN 1997

Close economic and trade relations between Hong Kong and the Mainland have existedsince the city’s colonial beginnings. From its transfer to Great Britain after the Opium War in1941 to the early 1950s, Hong Kong’s economy relied to a substantial extent on entrepôttrade with Mainland China. After 1950, however, the city’s links with the Mainland wereseverely curtailed due to the embargo on China imposed by the United Nations.

During the three decades from 1950 to 1980, Hong Kong’s economic growth was largelybased on industrialization. In 1978, the share of its labor force employed in manufacturingwas as high as 47.8 percent (Sung and Wong, 2000, p. 211). Since that year, when Chinaadopted an open door policy, a spatial division of labor has emerged and became establishedacross the border with Guangdong Province, which has generally given rise to the modelknown as “front shop, back factory” (Sit, 1989; Shen, 2003). Relying on this model, HongKong began to relocate its manufacturing facilities and operations to the adjacent Pearl RiverDelta (PRD), employing a labor force of >11 million paid by Hong Kong investors in variousenterprises of the region. By 1996, the share of the city’s labor force employed in manufac-turing was no higher than 18.9 percent (CSD, 1997, p. 94), while the share of manufacturingin its GDP has declined from 22.8 percent in 1980 to 6.0 in 1997 (CSD, 2007a, p. 88).

8For a comprehensive survey of local banks in China, see Liu and Wu (2008).9According to Ming Pao (October 28, 2006), the ICBC had raised HK$140 billion in Hong Kong (H-shares)

and Shanghai (A-shares). The Hong Kong dollar is pegged officially to the U.S. dollar at the rate of 1$US = 7.73HKD. On 29 December, 2006, ICBC overtook Bank of America to become the second largest bank in the world bymarket value, after Citibank (Dyer, 2006). Yet according to the Economist (2007), the bank ranked 16th, with capitalof 31.7 billion vs. Citigroup’s $70.4 billion.

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At the same time Hong Kong emerged as a prominent service center, specializing indesign, marketing, trading, intermediation, transportation, communications, and finance. Theshare of labor force in the tertiary sector increased from 65.8 percent in 1991 to 76.4 percentin 1997 (CSD, 2001a, p. 25). The GNP per capita was US$24,540 after purchasing poweradjustment, ranking fourth in the world (US$25,280), but 13th at the current exchange rate(World Bank, 1998, p. 90).

After the handover in 1997, the officials and the general public in Hong Kong had seri-ous reservations about economic integration with Mainland China. Gradually, however,events such as the Asian Financial Crisis have underscored the need for careful economicplanning in order to ease the transition and facilitate greater economic integration (Shen,2004b). Major cooperation at the governmental level only began in earnest after China’sentry into the World Trade Organization (WTO) in 2001. During the interim period (1997–2001), however, economic integration and relations with Mainland China had already beenstrengthened by the city’s business sector, so that cross-boundary trade and investment con-tinued to flow and expand.

Overall, the political change prompted by Hong Kong’s return to China in 1997 did nothave a dramatic impact on cross-boundary economic integration. It was far less significantthan the effect of the initial open door policy introduced in China in 1978. Nonetheless, withthe explosive growth and increasing sophistication of the Chinese economy along withexpanded commercial and transport functions of China’s large cities, the previous “frontshop and back factory” model of Hong Kong’s development has been challenged. The fol-lowing sub-sections will outline the major elements of the cross-boundary interaction,namely investment, trade, and the growth of logistics and tourism during the period from1997 to 2007.

CROSS-BOUNDARY INVESTMENT BETWEEN HONG KONG AND MAINLAND CHINA

Foreign direct investment (FDI) flows between Hong Kong and Mainland China acceler-ated after the opening of China to the outside world. Since 1978 the large-scale investmentfrom Hong Kong to the Mainland has placed both regions at the top of the world list of lead-ing origins and destinations of FDI. Mainland China became the second largest destination forFDI (after the U.S.) in the world in 1993. In 1996, out of the US$175 billion FDI received bythe Mainland, 56.8 percent came from Hong Kong (Sung, 1998). In that year, the total FDIstock that originated in Hong Kong amounted to US$112 billion, of which 88.5 percent wentto the Mainland in 1996. Meanwhile, the Mainland was the second largest investor in HongKong (after the UK), sending to the city 82 percent of its total FDI of US$18 billion (ibid.).

The flow of FDI from Hong Kong to Mainland China declined in the period from 1997to 2005. From the peak year of 1997 when Hong Kong invested US$21.55 billion in theMainland, it declined to US$16.73 billion in 2000 due to the Asian Financial Crisis, butbounced back to US$19.80 billion in 2005. The share of Hong Kong in the total foreigninvestment received by Mainland China also declined from 45.9 percent in 1994 to 33.5 in1997 and 31.0 percent in 2005 (SSB, 1996, p. 598; 1998, p. 639; NBS 2001, p. 604; 2006, p.753). But despite the declining share, Hong Kong remains the largest source of FDI in Main-land China, more important than Japan (US$6.53 billion), Korea (US$5.17 billion), and theUnited States (US$3.06 billion) in 2005. Excluding tax heaven economies, Mainland Chinastood out as the largest destination of direct investment from Hong Kong in 2006, as shownin Table 1. Among the total outward direct investment from Hong Kong, the Mainland



received 40.2 percent of the total outward stock and more than 47.7 percent of new invest-ment in the same year (Xiao, 2007).

FDI flow to Hong Kong showed an enhanced relation between Hong Kong and Main-land China after the handover in 1997, with the latter replacing the UK as the largest sourceof direct investment in Hong Kong in 2006. It contributed over 35 percent of the total inwardstock and 31 percent of the new investment to Hong Kong in 2006 (CSD, 2008a, 2008b),investing in the city a total of HK$108.7 billion.

Table 1. Stock and Flow of Direct Investment (DI) from Hong Kong in 2006a

Major country/territory DI stock(HK $billion)

Share(percent)

DI outflow/inflow(HK $billion)

Share(percent)

Outward DIBritish Virgin Islands 2,467.6 46.9 78.0 22.3Mainland China 2,117.2 40.2 166.6 47.7Bermuda 137.8 2.6 -5.0 -1.4UK 62.1 1.2 -0.2 -0.1Japan 60.8 1.2 34.7 9.9Cayman Islands 41.1 0.8 7.9 2.3India 37.1 0.7 28.9 8.3Thailand 34.7 0.7 6.4 1.8Singapore 33.1 0.6 2.1 0.6USA 29.1 0.6 3.1 0.9Others 2,467.6 46.9 78.0 22.3Total 5,264.5 100.0 349.4 100.0

Inward DIMainland China 2,024.3 35.1 108.7 31.1British Virgin Islands 1,950.6 33.8 78.8 22.5Netherlands 390.9 6.8 28.1 8.0Bermuda 350.1 6.1 23.8 6.8USA 277.9 4.8 51.3 14.7Japan 151.4 2.6 18.0 5.1UK 105.6 1.8 15.4 4.4Cayman Islands 101.3 1.8 18.4 5.3Singapore 85.2 1.5 8.1 2.3Taiwan 33.7 0.6 8.7 2.5Others 300.9 5.2 -9.4 -2.7Total 5,771.9 100.0 350.0 100.0

aCountry/territory here refers to the immediate destination (outward) or source (inward) economy. It does not nec-essarily reflect the country/territory in which the funds are ultimately used or initially mobilized. Significant circu-lar flow of capital between Hong Kong and the tax-heaven economies and between Hong Kong and MainlandChina is evident. Negative outflows were mainly repayment of loans by non-resident affiliates.Source: Compiled by author from CSD 2008a, 2008b.

JIANFA SHEN 331


TRADE BETWEEN HONG KONG AND MAINLAND CHINA

While Hong Kong plays an important role as a trade agent for Mainland China (Yeungand Shen, 2007), it did not become major export agent until 1979. During the period 1959–1987, the city’s domestic export was greater than its re-export, as shown in Table 2.

Since 1978, re-exports rose more rapidly than domestic exports, which have been over-taken by re-exports in 1988. Re-exports grew from HK$182.8 billion in 1987 to a peak ofHK$1,244.5 in 1997, then declined to HK$1,159.2 billion in 1998 before increasing to reacha new peak of HK$2,578.4 billion in 2007. Re-exports accounted for over 68 percent of theeconomy’s foreign trade in 1991, and the share increased to 77 percent in 1997 and 89 per-cent in 2007.

Mainland China has been the largest trading partner of Hong Kong except for domesticexports in 1991, 1999, and 2002 (Fig. 1 and Table 3). The shares of the Mainland in HongKong’s total imports and re-exports increased significantly during the period from 1997 to2007, indicating that the economic relationship between Hong Kong and Mainland Chinabecame substantially closer. Since the handover to China, the Mainland’s share in HongKong’s total imports increased from 37.7 percent in 1997 to 46.4 in 2007. The Mainland’sshare of Hong Kong’s re-exports increased from 35.7 percent to 49.2 during the period,remaining at the level of 30 percent of the domestic export of products made in Hong Kongthrough 2006, but increasing to 37.2 percent in 2007. All of this suggests a fundamentalrestructuring of the terms of trade and the role of Hong Kong in facilitating the distributionand transit of Chinese-made goods through Hong Kong.

Much trading between Hong Kong and Mainland China is related to outward processingor to outsourcing (Table 4). Figure 2 shows that 44.7 percent of the Mainland’s imports viaHong Kong and 81.2 percent of its exports to Hong Kong resulted from such outsourcingactivities in 1997. There was little change until 2007, when these shares declined to 34.1

Table 2. Foreign Trade in Hong Kong 1959–2007 (HK$ billion)

Year Import DomesticImports Re-exports Domestic

exportsTotal

exports

Re-exporters’ share in imports

(percent)

Re-exporters’ share in exports

(percent)

1959 4.9 4.0 1.0 2.3 3.3 20.1 30.41961 6.0 5.0 1.0 2.9 3.9 16.6 25.21971 20.3 16.8 3.4 13.8 17.2 16.9 19.91981 138.4 96.6 41.7 80.4 122.2 30.2 34.21987 377.9 195.2 182.8 195.3 378.0 48.4 48.41991 779.0 244.2 534.8 231.0 765.8 68.7 69.81996 1535.6 349.8 1185.8 212.2 1397.9 77.2 84.81997 1615.1 370.6 1244.5 211.4 1455.9 77.1 85.51998 1429.1 269.9 1159.2 188.5 1347.6 81.1 86.02001 1568.2 240.7 1327.5 153.5 1481.0 84.7 89.62006 2599.8 273.3 2326.5 134.5 2461.0 89.5 94.52007 2868.0 289.6 2578.4 109.1 2687.5 89.9 95.9

Sources: Compiled by author from Holmes, 1965, p. 1; CSD, 2006; 2007c, p. 46; 2008c; and Yeung and Shen,2007.



percent and 58.6 percent, respectively. About 95 percent of the total exports involving out-sourcing from Hong Kong to the Mainland actually originated in Guangdong in 1991 andextended into the new century due to the emergence of a regional production system in theHong Kong–PRD region (Shen, 2003).

Not unlike FDI, the importance of Hong Kong in the international trade of MainlandChina has actually declined. Although exports from Mainland China to Hong Kongincreased from US$15.4 billion in 1984 to $43.8 billion in 1997 and $124.5 billion in 2005,the city’s share in the total exports from Mainland China declined from 58.9 percent in 1984to 24.0 in 1997 and 16.3 in 2005 (SSB, 1998, p. 626; 1985, p. 496; NBS, 2006, pp. 735 and740).

Table 3. Hong Kong’s Main Trading Partners, 1991–2007 (HK$ billion)a

Country/territory 1991 1997 2006 2007

Imports, of which from: 779.0 1615.1 2599.8 2868.0Mainland China 293.4 608.4 1193.0 1329.7Japan 127.4 221.6 268.1 284.3Taiwan 74.6 124.6 194.9 205.1United States 58.8 125.4 123.6 138.8

Domestic exports, of which to: 231.0 211.4 134.5 109.1Mainland China 54.4 63.9 40.3 40.6United States 62.9 55.1 33.2 23.9United Kingdom 13.7 10.7 7.9 5.8Germany 19.3 10.3 4.9 3.0

Re-exports 534.8 1244.5 2326.5 2578.4Mainland China 153.3 443.9 1115.9 1267.7United States 110.8 261.4 338 344.3Japan 29.6 77.7 115.5 116.7Germany 32.1 46.3 70.8 78.1

aUK ranked fourth as the destination of the city’s re-exports in 1999. Singapore ranked fourth in 2006 as the sourceof imports to Hong Kong. Regarding the destination of domestic exports from Hong Kong, Japan ranked fourth in1997, the Netherlands third, and the UK fourth in 2006. Sources: Compiled by author from CSD, 2001a, p. 52;2007c, pp. 46-49; and Yeung and Shen, 2007.

Table 4. Outward Processing Trade between Mainland China and Hong Kong, 1991–2007 (HK$ billion)

Trade indicator 1991 1997 2006 2007

Mainland China’s direct imports from Hong Kong 40.4 47.1 20.7 19.2Mainland China’s imports via Hong Kong 73.6 197.81 389.2 432.4

Subtotal 113.9 244.9 409.9 451.5Mainland China’s exports to Hong Kong 197.4 491.1 769.3 780.0Guangdong’s exports to Hong Kong 186.6 430.8 753.7 735.2

Sources: Compiled by author from CSD, 1992; 1998; 2007d, 2008d; and Yeung and Shen, 2007.

JIANFA SHEN 333


GROWTH OF HONG KONG’S LOGISTICS AND TOURISM INDUSTRIES

Hong Kong’s outsourcing in the PRD region and induced re-export activities havedriven the dramatic growth of air cargo and container throughput. A large amount of freightand many containers are regularly transported between the city and the expanding urban sitesin the PRD. The volume of cross-boundary vehicles between Hong Kong and Shenzhenincreased from 1.7 million in 1985 to 9.5 in 1997 and 15 million in 2006 (CSD, 2001a, p.165; 2007c, pp. 110–111).

Fig. 1. Share of Mainland China in Hong Kong’s foreign trade, 1991–2007 (percent).

Fig. 2. Share of outward processing trade in the total between Mainland China and Hong Kong,1991–2007 (compiled from CSD, 1992, 1998, 2007d, 2008d; and Yeung and Shen, 2007). GuangdongProvince’s share in total exports from Mainland China to Hong Kong were 94 and 95 percent in 1991and 1997, respectively, and climbed to 98 percent in 2006 before falling back to 94 percent in 2007.



Container throughput in the port of Hong Kong increased from 5.1 million TEUs (20-foot equivalent units) in 1990 to 14.6 million in 1997. Hong Kong was the busiest containerport in the world during the period from 1992 to 200410 (Port, 2006, 2007; Hong Kong SAR,1998). Container throughput in Hong Kong amounted to 23.3 million TEUs in 2006, rankingsecond in the world (Shenzhen, 2007).

Similarly, air cargo handled by Hong Kong International Airport increased from 1.79million tons in 1997 to 3.58 million tons in 2006.11 The number of passengers also rose from28.3 million in 1997 to 43.3 million in 2006. In that year, Hong Kong ranked second in han-dling air cargo and 14th in the world’s passenger throughput (Civil Aviation, 2007; Port,2007; Ming Pao, March 9, 2007). Air cargo accounted for as little as 1.2 percent by weight ofall cargo handled by Hong Kong in 2004 (CSD, 2007b, p. 125), but the share of its value wasas high as 21.3 percent in 1997 and 34.5 in 2006 (CSD, 1999, p. 104; 2001b, pp. 1 and 104;2007b, p. 104; 2007c, p. 46).

The population exchange and interaction between Hong Kong and the Mainland alsoaccelerated after the opening of China in 1978. The volume of cross-boundary passengersbetween Hong Kong and Shenzhen increased from 20.69 million in 1985 to 64.9 in 1997,and more than doubled during the post-handover period from 1997 to 2006, reaching 150.8million in 2006 (CSD, 2001a, p. 183; 2007c, pp. 123–124). Most of these passengers areHong Kong residents who can travel to Mainland China freely with home visit permits issuedby the Mainland authority.

The travel of Mainland people to Hong Kong is subject to the policies of the immigra-tion department of Hong Kong. There have been important policy changes to ease the travelof Mainland visitors to Hong Kong since 2002. The quota on the number of tourists fromMainland China to Hong Kong (2000 tourists daily) was abolished on January 1, 2002,whereupon individual tourists from major cities have been allowed to apply for travel per-mits to visit Hong Kong after July 2003. The number of tourists from Mainland China hasthus increased from 2.4 million in 1997 to 8.5 in 2003 and 15.5 million in 2007 (Table 5). Its

Table 5. Visitor Arrivals to Hong Kong, 1991–2007 (millions)

Country/territory of origin 1991 1997 2006 2007

Mainland Chinaa 0.9 2.4 13.6 15.5Taiwan 1.3 1.9 2.2 2.2Macao 0 0.5 0.6 0.6South and Southeast Asia 1.2 1.6 2.7 2.9North Asia 1.4 2 2 2.2Europe, Africa and the Middle East 0.9 1.3 1.9 2.2North and South America 0.8 1.1 1.6 1.8Australia, New Zealand, and South Pacific 0.3 0.4 0.7 0.8Total 6.8 13 25.3 28.2

aThe share from Mainland China rose from 12.9 percent in 1991 to 18.4 in 1997, whereupon it exceeded one-half ofthe total at 53.8 percent in 2006 and 55.0 in 2007.Sources: Compiled by author from CSD, 2001a, p. 184; 2007c, p. 126; and 2008e, p. 128.

10Except in 1998.11Cf. Los Angeles Inernational Airport at 1.91 million tons (Economist, 2007, p. 74).

JIANFA SHEN 335


share of the total number of tourists rose from 18.4 percent in 1997 to 55.0 in 2007. As aresult, the total number of tourists coming to Hong Kong more than doubled, from 13.0 mil-lion in 1997 to 28.2 million in 2007 (CSD, 2001a, p. 184; 2008e).12

CHALLENGES POSED BY CHANGING ECONOMIC RELATIONS

The opening and reform policy implemented in China since 1978 has resulted in closeeconomic relations between Hong Kong and Mainland China, particularly involving thePRD region in Guangdong Province. In the pre-handover period from 1978 to 1997, the eco-nomic relationship between Hong Kong and Guangdong was characterized (as noted earlier)by the “front shop and back factory” model. The outsourcing and trade-led economic interac-tion continued to grow in the post-handover period of 1997–2006, but the rapid developmentof Guangdong since the late 1990s has altered the character and prospects for future eco-nomic relationship between the two regions. The following illustrates five major challengesnow facing Hong Kong.

First, the economic growth of Mainland China and some of the country’s provinces andcities have expanded dramatically since the mid-1990s, and have narrowed between HongKong and these Mainland neighbors. This in turn has reduced Hong Kong’s economic influ-ence on the economies of Guangdong and other cities. Hong Kong’ GDP as a percentage ofthe GDP of Mainland China declined from 24.2 percent in 1994 to 18.5 percent in 1997, slid-ing to 8.0 percent in 2005. In terms of GDP, Hong Kong was overtaken by Guangdong in2003 and the PRD in 2004 (CSD, 2007a, p. 14; GDPBS, 2006, p. 91; NBS, 2006). Guang-zhou and Shenzhen’s GDP as percentages of Hong Kong’s increased from 11.5 and 8.9 per-cent, respectively, in 1997 to 35.4 and 34.0 percent, in 2005.

Second, with the entry of China into the WTO in 2001, the share of FDI from foreigncountries has risen dramatically. Hong Kong’s share in the total FDI of China declined from69.9 percent in 1986 to 45.6 percent in 1997 and 29.8 percent in 2005. With declining FDIfrom Hong Kong to Guangdong, from US$8.4 billion in 1997 to US$5.8 billion in 2005,Guangdong’s FDI share in China’s total also declined from 41.7 percent in 1984 to 25.9 in1997 and 20.5 percent in 2005, an important cause of slower growth in Guangdong than inYangtze River Delta (SSB, 1988, p. 734; 1998, p. 639; NBS, 1999, p. 596; 2006, pp. 752–753; GDPBS, 1998, p. 505; 2006, pp. 510, 514, and 591; 2004, pp. 484 and 567). On theother hand, Japan, Korea, and the United States have transferred many manufacturing andeven R&D facilities to Mainland China, resulting in the increasing role of the transnationalcorporations of these countries in the economy of Mainland China.

Third, according to the 11th Five-Year Plan (FYP), Guangdong’s new industrializationstrategy will focus on the electronic and information industry, as well as the petrochemical,automobile, equipment manufacturing, and steel industries. This effort is intended to upgradeits industrial structure from light to heavy industry. Because Hong Kong’s industrialists havelittle experience in these industries, and their participation will be limited, the prospectiveeffort may weaken the economic ties between Hong Kong and Guangdong.

Fourth, Hong Kong aims to provide more producer and professional services, but this isalso under challenge as the service sector in Guangdong has grown rapidly. For example, theold division of labor under the “front shop and back factory” model has competition.

12According to the Economist (2007), Hong Kong ranked 16th in the world in the number of tourist arrivals,and 17th in tourist spending.



Guangdong has invested heavily in seaports, airports, and exhibition and convention facili-ties, thus posing a new challenge to Hong Kong’s key service industries. More and moretrade and services have been conducted by domestic enterprises and Hong Kong’s share is indecline. The most outstanding example is the dramatic rise of Shenzhen’s port. Its containerthroughput grew from 0.04 million TEUs in 1990 to 18.50 million in 2006 (GDPBS 1998;2004; Shenzhen, 2007), following closely Hong Kong’s 23.3 million TEUs in 2006 (Port,2007). It is expected that Hong Kong’s container throughput will be taken over by Shenzhenin 5 to 10 years.

Fifth, Hong Kong is also facing increasing challenges from several rapidly risingMainland cities including Shanghai, Beijing, and Shenzhen (Shi and Hamnett, 2002; Zhao etal. 2004). For example, Shanghai aims to enhance its position as an international economiccenter, as well as an international center for trade, shipping, and finance in the 11th Five-YearPlan. For another example, according to Shenzhen’s 2030 Urban Development Strategy, thatcity’s vision is to become a pioneering global urban center in the area of sustainable develop-ment. Some new measures have been proposed to achieve efficient and smart growth, such asupgrading infrastructure, enhancing innovation, industrial upgrading, and improving envi-ronmental conservation.

The changing relations and circumstance of Hong Kong mentioned above have alsoraised the issue of whether the city is being marginalized in the 11th FYP. The answer is notsimply yes or no. The overall trend is that Hong Kong will still be a leading world city inAsia and China. But other cities are catching Hong Kong quickly as the service and commer-cial gaps narrow, so that Hong Kong will no longer be the only city to dominate the economyof Mainland China. While Hong Kong may still lead in certain core economic sectors such asinternational financial activities and air-cargo services, other cities also may take the lead incertain indicators such as volume of air passengers (Beijing ahead of Hong Kong in 2006),cargo throughput (Shanghai ahead of Hong Kong in 2006), and container throughput(Shanghai ahead of Hong Kong in 2007). This suggests that Hong Kong will not become amarginalized city in the future, but will have to compete and cooperate vigorously with othermajor cities in China and Asia to remain prosperous.

DISCUSSION AND CONCLUSION

Studies on urban competitiveness have inevitably focused on internal factors, althoughurban economic performance is often used as an important reference of urban competitive-ness. Urban performance depends on both urban competitiveness (internal factors) and theexternal environment (external factors). Different external environments present differentdevelopment opportunities for various cities and thus affect their urban performance differ-ently. In addition to augmenting the preceding paper by Yeung et al. (2008), this paper hasused Hong Kong as a case study to show how its hinterland, the Pearl River Delta region andMainland China in general, has provided favorable investment and trade opportunities forHong Kong and stimulated its economic transformation from an industrial to a major worldcity. This paper also has examined and assessed both the opportunities and challenges toHong Kong’s urban development and competitiveness in the context of dynamic and far-reaching changing relations between Hong Kong and Mainland China.

While Hong Kong benefited from a favorable position in the division of labor in theHong Kong–PRD regional production system before the change in sovereignty in 1997(Shen, 2003), such an advantage is being challenged by the rise and upgrading of the eco-nomic structure of Guangdong and the neighboring cities in the hinterland after 2001. Even

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with a favorable institutional framework and government policy for active regional coopera-tion and economic integration, Hong Kong is facing increasing competitive pressure in thepost-handover period due to the narrowing gap between Hong Kong and the Mainland ineconomic terms. In addition to approaches emphasizing the political economy and regionalgovernance (Shen, 2004b; Yang, 2004), a review and explanation of economic indicators isneeded to reveal fundamental changes in economic relations as sought in this paper.

Compared with other cities in Mainland China, Hong Kong’s competitiveness builds ona sound legal and institutional framework, a free market system, sophisticated business com-munity, diligent and relatively well educated labor force, efficient and clean government,good infrastructure, and dense international networks. According to World EconomicForum’s Global Competitiveness Index, the city’s world ranking has improved quite substan-tially (see above), rising to fourth in Asia 2007. And according to studies of urban competi-tiveness of Chinese cities, Hong Kong was ranked as the most competitive city in China in2006 and 2007 (Ni et al., 2006; 2007).

Economic growth in Hong Kong was based on industrialization during the three decadesfrom 1950 to 1980. Yet it had transferred the majority of its manufacturing to the PRD andemerged as a world city in Asia by 1997. Political change as seen in the return of Hong Kongto China in 1997 had little initial dramatic impact on the cross-boundary economic integra-tion. It was far less significant than the effect of the open door policy and economic reformsintroduced in China in 1978. Increasing economic relations between Hong Kong and Main-land China were driven by the goal of reducing production costs in manufacturing during the1978–1997 period. Thus, even with the conservative attitude of the government in the imme-diate post-handover period from 1997 to 2001, cross-boundary investment and trade contin-ued to grow after 1997, following the pre-1997 model.

The overall trend suggests that Hong Kong will continue as a leading world city in Asiaand Mainland China. But other cities such as Shanghai and Beijing are catching up veryquickly. Hong Kong will no longer be the only city to dominate the economy of MainlandChina, which means that it will have to compete aggressively while also cooperating closelywith other major Chinese and Asian cities to remain dynamic and prosperous.

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Hong Kong under Chinese Sovereignty: Economic … · Hong Kong’s competitiveness builds on a sound legal and institutional framework, free mar-ket system, ... (Sit, 1989; Shen,