- NBR - The National Bureau of Asian Research

The Economic Integration of Hong Kong and Mainland China

Yasheng Huang

The lowering of the Union Jack in Hong Kong on July 1, 1997, will close a long chapter in China’s troubled relations with Britain, but unfortunately it will immediately be followed by another difficult chapter focused on China’s relations with the United States. It is all but certain that China and the United States are heading toward a collision course over what the United States sees as its duty to help maintain democracy and freedom in post-1997 Hong Kong and what China sees as its prerogative to shape the future of Hong Kong when it assumes sovereignty from the British.

This article discusses the transition of sovereignty in Hong Kong and how it may impact U.S.-China relations. The argument here is that much of the policy focus in the United States on the political status of Hong Kong is simply misguided. Until as recently as 1991, the political system in Hong Kong was never as free and democratic as the Chinese are now held responsible for maintaining. The United States is imposing a standard on China that Great Britain would have routinely failed in much of its 150-year rule of the territory.

While the United States is fixated on political developments in Hong Kong, profound changes are occurring in the way the territory’s economy is governed. These changes could be quite detrimental to U.S. economic and commercial interests. The most significant change is the potential erosion of the laissez-faire character of the Hong Kong economic system, a very likely possibility given the fundamental differences in the economic philosophy and institutions between Hong Kong and China.

This essay first examines political status in Hong Kong and explains why the U.S. emphasis on politics is misguided. This is followed by a discussion of laissez-faire in Hong Kong and the increasing Chinese economic presence in the territory. Then the reasons that Chinese business activities may erode Hong Kong’s laissez-faire economy are evaluated. The essay concludes by offering some policy implications.