US Secretary of State Hillary Clinton Visited Asia in a Weeklong Trip

Hong Kong as a World Economic Giant

Aisling Dickenson

June 5, 2009

Professor Mushkat

Independent Study US secretary of State Hillary Clinton visited Asia in a weeklong trip. This was her first overseas visit in office and demonstrates the importance of Asia in the new administration’s foreign policy. Trade relations with Asia and China in particular are a top priority for the current administration as well as US business, legal, and academic experts. China and the US must lead the world forward in international trade relations.

China is not only America’s largest creditor, but it is also America’s only real global competitor. “American demand for Chinese goods has fueled growth in Chinese manufacturing, and Chinese savings, in turn, have enabled America to live beyond her means” (China, 1). This is the backbone to the countries’ symbiotic economic relationship.

US companies are establishing roots in China, bringing high quality global standards and business practices to China’s evolving economy. Meanwhile, the US trade deficit with China has increased because of shifts in export manufacturing from other

Asian economies to China. (China, 3) It seems like a given that China is the cause of massive US trade deficit. We buy more goods from China than we sell there. However, three key trends prove this assumption false. First, any of the goods the US used to get from Japan, Taiwan, and other Asian economies now come from China. Asian companies have shifted their export-manufacturing base to China. Second, a lot of China exports are simply manufactured in China. A significant amount of the goods are just assembled there from materials and components shipped into China from elsewhere including the United States. (China, 8)

For its size Hong Kong is and economic giant. Hong Kong is Asia’s leading financial center and third in the world after London and New York. It is ranked among the top ten largest in terms of banking and foreign exchanges transactions along with stock market capitalization but the city is home to 7 million. (Facts, 1) Hong Kong’s per capita GDP is among the highest in Asia and has even surpassed some industrialized economies like the United Kingdom. Hong Kong’s economic achievements enable it to play a major role in the international economy of East Asia. Economics is crucial but

Hong Kong’s significance extends beyond economics to politics and international relations

The British left a legacy of Administrative structure and most importantly rule of law. Hong Kong’s legal system is internationally respected and is constantly evolving to regulate business. The people of Hong Kong through hard work have improved their living conditions, expand entrepreneurial opportunities, and develop professional skills.

Hong Kong has efficient infrastructure, sound finances, low taxes, and a free port in which goods can flow freely in and out giving Hong Kong the competitive edge. While turmoil struck Mainland China Hong Kong achieved economic power. (Yahuda, 22)

It is Hong Kong’s internationally respected Rule of law and sound financial services that have made it the base to conduct business with China. Hong Kong’s rule of law and capitalistic economics challenges the traditional command economy and authority of the communist led state. Hong Kong is an agent of modernization, which aided China with legal and operational structures of modern capitalism. It allowed the country to carry out a socialist modernization program, through investment, transfer of technology, management, financial skills, and access to western markets. Hong Kong is a place for China’s key international and investment organization to gain expertise and experience dealing with international economics. China International Trust and Investment Corporation is established in Hong Kong so as to better its economic character. (Yahuda, 22)

Hong Kong is not recognized as a state with its own constitution, but has many state attributes. Despite its small size and population it has a well-developed bureaucratic administrative system allied to the effective rule of law and is self governing in its own domestic affairs. Hong Kong hosts many diplomatic offices. The USA treats Hong Kong as a non-severing entity distinct from China—a separate territory in economic and trade matters. “Compared with other autonomous trade entities Hong Kong’s formal authority to conduct its external economic and cultural relations and to take part in international organizations is unparalleled” The activities of the Hong Kong government in inter national affairs have are confined to economic matters. (Yahuda, 32)

The main significance of Hong Kong’s international identity is formed from its economic powers. Hong Kong’s identity as a past British Colony and current role as autonomous region of China make a unique city that the key link between Chinese economy and the rest of the world. It is the center for complex relations linking china with Greater China and is an important element in China’s foreign relations as a whole.

Hong Kong’s special character of British inspired freedom, its openness as a free port, and a place where people work with few restrictions have made it a gateway to the economies of the Asia Pacific and beyond to the global international economy. (Yahuda,

Hong Kong is described my mainlanders as a very important Chinese international city, but as an overtly British Colony at has pursued its own independent path. It is a pivotal city for the most effective economic links with china. The Hong Kong Shanghai Banking Corporation is among the strongest banks in the world, it is the most important financial institution in Hong Kong with over 140 years of history is extremely successful internationally and the largest bank in Europe. As an American I knew much about the economic significance of Hong Kong in the world economy. However, it is only through living here and this course that I have learned how crucial politics and culture are to the Hong Kong economy. Hong Kong is the gateway to China; the city provided a catalyst for modernization. The United States must keep relations with Hong

Kong strong not only for economic gains but as a means to improve diplomatic relations with China.

The Hong Kong Shanghai Banking Corporation was established in 1865 at a time of growing trade between China, India, and Europe. The main offices were in Hong

Kong, Shanghai, and London; through its emphasis on financing international trade, the bank had opened early branches in Japan in 1866, India in 1867, the Philippines in 1875, and Singapore in 1877. It was before the close of the 19th century. In recent years the

Hong Kong and Shanghai Banking Corporation had become a leading banker for governments, including those of Hong Kong and China, in addition to many British government interests. (HSBC)

The bank survived two world wars and episodes of civil unrest. Although many

Asian offices were closed and a significant number of staff members imprisoned by the

Japanese during World War II, the bank's Hong Kong headquarters reopened in 1946 and became involved in postwar reconstruction. Within a few years, however, branches in

Mainland China were forced to close, owing to civil war and political and economic change. To counter these limitations, the bank began expanding its operations beyond China; it established the Hong Kong and Shanghai Banking Corporation of California as a subsidiary in 1955, having already conducted business in San Francisco since 1865 and

New York City since 1880. Operations in the Middle East were established through the purchase of the British Bank of the Middle East in 1959. In regions where it was already conducting business, the bank diversified its services and investments by acquiring interest in banks such as Hang Seng of Hong Kong in 1965, which soon became an important mortgage lender. (HSBC)

Given its status as a diversified global banking corporation, Hong Kong and

Shanghai Banking Corporation reorganized as a holding company, HSBC Holdings PLC, in 1991. Its 1992 acquisition of Midland Bank, which at the time was the United

Kingdom's largest commercial bank, made HSBC one of the largest bank and financial companies in the world. Numerous acquisitions followed, including Household Financial, a U.S. finance company that specialized in loans and mortgages to lower- and middle- market clients, purchased in 2003. (HSBC)

Headquartered in London, HSBC is one of the largest banking and financial services organizations in the world. HSBC's international network comprises around

9,500 offices in 86 countries and territories in Europe, the Asia-Pacific region, the

Americas, the Middle East and Africa. With listings on the London, Hong Kong, New

York, Paris and Bermuda stock exchanges, around 200,000 shareholders in some 100 countries and territories hold shares in HSBC Holdings plc. The shares are traded on the

New York Stock Exchange in the form of American Depositary Receipts. Through an international network linked by advanced technology, including a rapidly growing e- commerce capability, HSBC provides a comprehensive range of financial services: personal financial services; commercial banking; corporate, investment banking and markets; private banking; and other activities. The HSBC corporate character defines the values and principles inherent in their everyday dealings. (HSBC)

The HSBC Group has an international pedigree that is unique. Many of its principal companies opened for business over a century ago and they have a history, which is rich in variety and achievement. The HSBC Group is named after its founding member, The Hong Kong and Shanghai Banking Corporation Limited, which was established in 1865 to finance the growing trade between China and Europe. (HSBC)

The Government of the People’s Republic of China recovered the Hong Kong

July 1st 1997. However the following conditions were stipulated in the Joint Declaration and have allowed for unaffected change of finance by the handover. Hong Kong upholds its national unity and territorial integrity. The Hong Kong Special Administrative Region has a degree of autonomy except in foreign and defense affairs, which are the responsibility of the People’s Republic of China. Hong Kong is vested with executive, legislative, and independent judicial power. So, the laws in place before the hand over have remained basically unchanged.

The current social and economic systems in Hong Kong have remained unchanged and so has the lifestyle, rights, and freedoms, including those of person, of speech, of the press, of association, of travel, of movement, of correspondence, of strike, of choice of occupation, of academic research and of religious belief will be ensured by law in the Hong Kong Special Administrative Region. So Hong Kong has retained the status of a free port and a separate customs territory, the status of international finance center, and its markets for foreign exchange, gold, securities, and futures will continue. There is free flow capital. The Hong Kong dollar has continued to circulate and remain freely convertible. Hong Kong has independent finances. The central People’s

Government does not levy taxes on the Hong Kong. Hong Kong has mutually beneficial economic relations with the United Kingdom and other countries whose economic interest in Hong Kong did not waver with the handover. Hong Kong may maintain and develop economic and cultural relations ad conclude relevant agreements with states, regions, and relevant international organizations. Hong Kong’s government has autonomy over its borders and may issue travel documents for entry into and exit from

Hong Kong. (Great)

Lastly, the maintenance of the public order in Hong Kong will be the responsibility of the Government of the Hong Kong Special Administrative Region.

Hong Kong has always been a land of hope, where with luck and industry the individual could succeed. Chan Hon way was a native of Guangdong who came to Hong Kong with a meager sum of four dollars; after paying one for passage he had, as the usual Chinese custom required, to send home two dollars as lucky money in his first letter announcing safe arrival at his destination; then he had a dollar left. After forty years he had many branches in most big cities of Southern Asia. (Yahuda, 28)

The expatriate largely British merchants are credited with much of the early achievements are the Chinese who flocked to this trading out post were not entirely laborers. Thirty years after modern Hong Kong was established, the Chinese had become the biggest ratepayers; through their hands went 21% of China’s total exports and 37% of imports. Hong Kong had also become the centre of China’s coastal trade. This economic growth is to be found in the changed character of business activities. From a mere entrepot port, Hong Kong had rapidly become a centre of managerial services and of accounting, banking, and various agency services together with shipping. (Meyer, 30-42)

Those early traders and managers were as nimble-footed as today’s entrepreneurs, seizing opportunities. Most significant for Hong Kong’s future was the rapid expansion of trade with the United States and Europe, making the territory less dependent on

Britain. By this time half of China’s total imports and almost 40% of its exports passed through Hong Kong. In the 1950’s when Hong Kong was in the doldrums, with refugees everywhere, emphasis was laid on education. When the boom came a decade later, there was an adequate supply of literate manpower. (Meyer, 65)

Hong Kong has the only deep-water harbor along China’s Coast. This combined with the geographic location are the foundations of the Hong Kong economy. There is no comparable infrastructure in the whole region and not likely to be. Infrastructure refers to the human resource and it wide range or skills, the laissez faire policy which is well tried and tested, the banking, financing, insurance and brokerage network; the whole educational setup, the extensive housing program, and the hard-working labor force.

Hong Kong has been useful because it made itself so as an exchange earner for China, and outlet for it’s manufactures, a training ground for managers and technocrats, a source of loans, and investment capital. In the 1980’s Hong Kong became the World’s busiest container port. It is Asia’s leading financial centre and the third in the world after London and New York. Hong Kong’s considerable economic achievement have enabled it to play a major role in the international economy of East Asia and a crucial role in the rapid development of China itself. (Meyer, 85) The significance of Hong Kong extends beyond the realm of economics; it plays a vital role in providing China with a gateway to the economies of the Asia Pacific and beyond to the global international economy. Hong has become an important element in china’s foreign relations as a whole. It has played an important role as the agent of modernization of the country through investment, transfers of technology, management, financial skills, and access to western markets. Hong Kong. Hong Kong was China’s principal gateway to the capitalist world. (Meyer, 56)

As China changed course at the end of 1978 to embrace the politics of economic reform and openness to the international economy, some thought that Hong Kong’s significance would decline has China would no longer use it as its main point of access to the capitalist world. But Hong Kong adapted to the situation to become even more important to the Chinese economy and to its engagement with the international economy.

Hong Kong manufactures were quick to take advantage of the cheaper land and labor force across the border. The huge growth of the service sector in Hong Kong is indicative of the scale of the service that the territory provides for the mainland. (Yahuda, 23)

Hong Kong plays a crucial economic role for China. First, it is China’s most important provider of business services and its key agent in contributing to modernization. Curiously, Chinese officials are reluctant to acknowledge this publicly.

Instead they prefer to emphasize how dependent Hong Kong is upon the Chinese economy. Hong Kong has continuously demonstrated a significant for the Chinese economy and for the modernization of the country that would be difficult to exaggerate.

Hong Kong is a member or associate member of international and regional organizations, including the Asia Development Ban, the General Agreement on Tariffs and Trade (GATT) and it’s successor the World Trade Organization, the United National Economic and Social Commission for Asia and the Pacific, the Asia Pacific Economic Cooperation forum (APEC), Interpol and many others. (Yahuda, 42)

The main significance of Hong Kong’s international identity springs from its economic prowess. Tiny Hong Kong is the world’s eight largest trader; it ranks fourth as an international banking centre and it hold the sixth largest amount of foreign trade resorts. The territory is the most important center that combines finance communications and transport in the Asia Pacific. It is also the key link between the Chinese economy and the rest of the World. Hong Kong contributed greatly to the economic development of

China.

Hong Kong has remained the global metropolis for Asia since it’s founding in the

1840s following the Opium Wars between Britain and China. David Meyer traces its vibrant history from the arrival of the foreign trading firms, when it was established as one of the leading Asian business centers, to its celebrated handover to China in 1997.

Throughout this period, Hong Kong has been prominent as a pivotal meeting place of the

Chinese and foreign social networks of capital and as such has been China’s window on to the world economy, dominating other financial centers such as Singapore and Tokyo.

Hong Kong's highly favorable geographical position and entrepot trading opportunities are wealth-generating assets. It has a superb sheltered natural harbor. For centuries, this had made Hong Kong a major haven for pirates before it became a British colony in

1841. Under British administration, it soon developed into a thriving legitimate international port. (Meyer, 28-56) By the late 20th century, Hong Kong was the seventh largest port in the world and second only to New York and Rotterdam in terms of container throughput. The Kwai

Chung container complex was the largest in Asia; while Hong Kong shipping owners were second only to those of Greece in terms of total tonnage holdings. In addition to geographical position, another major natural industrial-commercial asset of Hong Kong has been human resources. The population of the territory was less than six million in the late 20th century. However, there was an abundance of labor close by in the region that could be readily tapped through direct external investment and outsourcing. In Hong

Kong itself, a skilled, adaptable, and hard-working labor force coupled with the adoption of modern British/ Western business methods and technology ensured that opportunities for external trade, investment, and recruitment were maximized. (Meyer, 45)

Since the 1970s, the economy of Hong Kong has been governed both under

British and Chinese rule under an economic policy dubbed Positive non-interventionism espoused by former financial secretary John James Cowperthwaite. Traditionally, the

Hong Kong government has raised revenue from the sale and taxation of land but not engaged in industry and commerce for profit. From its revenues, the government has built roads, schools, hospitals, and other public infrastructure facilities and services. It has also operated a welfare insurance scheme. However, the authorities have generally avoided owning and running business enterprises, engaging in trade protectionism, or imposing regulatory controls. There has been relatively little popular pressure for higher government spending. Over the decades, successive political administrations have managed to avoid running up large budget deficits; and by restraining public borrowing, credit expansion and inflation have been held in check. (Meyer, 78-100) Measuring discrepancies between the rich and poor with the Gini Coefficient indicates that the wealth gap continues to widen in Hong Kong since the new millennium.

As of 2006 Hong Kong's measurement is at 53.3, which means the difference between the rich and poor is far greater than that of the People's Republic of China. Many of the financial tycoons also oppose universal suffrage, since the large number of poor would vote for populists who promise costly social programs. Hong Kong seems likely to remain a highly free market-enterprise society. Such things as political production planning and price and import controls are fundamentally incompatible with the kind of globally open, competitive economic environment in which Hong Kong firms and industries operate. (Meyer, 120-135)

The ever-rising landscape is a reflection of the growing economy. Hong Kong has little arable land and few natural resources within its borders, and must therefore import most of its food and raw materials. Hong Kong is the world's 11th largest trading entity, with the total value of imports and exports exceeding its gross domestic product. As of

2006, there are 114 countries that maintain consulates in Hong Kong, more than any other city in the world. Much of Hong Kong's exports consists of re-exports, which are products made outside of the territory, especially in Mainland China, and distributed through Hong Kong. Even before the transfer of sovereignty to the People's Republic of

China, Hong Kong has established extensive trade and investment ties with Mainland

China. The territory's autonomous status enables it to serve as a point of entry for investments and resources flowing into the mainland. (Meyer, 155)

During Hong Kong's time as a British Colony, Positive non-interventionism was the economic policy of Hong Kong. John James Cowperthwaite, who observed that the economy was doing well in the absence of government intervention, first officially implemented it in 1971. Subsequent Financial Secretaries, including Sir Philip Haddon-

Cave, continued the policy. Hong Kong's model allowed for the flexibility and renovation of any given industry in a very short time. Because of this, a 1994 World Bank report stated that Hong Kong's GDP per capita grew in real terms at an annual rate of 6.5% from

1965 to 1989. This consistent growth percentage over a span of almost 25 years is remarkable for any economic analysis. By 1990 Hong Kong's per capita income officially surpassed that of the ruling United Kingdom.

Most Hong Kong residents were also first- or second-generation immigrants (and often refugees). Like the United States of a century or so earlier, the society was essentially a new one. In such societies, political cultural orientations tend to be towards individualism – thus reinforcing the generally favorable environment for enterprise and economic growth. By the late 20th century, many other countries in Asia and elsewhere had effectively made the transition from statistic-collectivism to modern market capitalism. However, Hong Kong still stood out in terms of its high levels of business- economic freedom, growth, and prosperity. Not just foreign direct investors but indigenous firms have been greatly aided by Hong Kong's international openness and dependence on trade.

After a slump caused by the region wide Asian financial crisis that began in 1997,

Hong Kong's economy had been on the rebound. Real GDP growth was 4% in 1999 and reached double digits in the first half of 2000. However, the dot-com bubble in the second half of 2000, the 9/11 terrorists attacks upon the United States in 2001 and the

SARS outbreak in 2003 had severely damaged the economy of Hong Kong. In 2004 and 2005, real GDP grew by 8.5% and 7.1% respectively. The unemployment rate increased from 2.2% to 6.3% due to the Asian financial crisis. After peaking at 7.9% in 2003, the unemployment rate eased back to 4.0% in 2007. In August 1998, the government intervened in the stock, futures, and currency markets to fend off "manipulators." The banking sector remains solid, and the government is committed to the US-Hong Kong linked exchange rate.

Hong Kong's economy has transformed and re-adapted itself to different periods of time. In 1895 Hong Kong's trading port was 4th largest in the world the economy revolved around international trading. From the 1950’s to the 1970’s Manufacturing was the largest share of the economy, led by textiles. Business services such as wholesaling, retailing, foreign trade and hotels and restaurants were the second largest sector, followed by finance. In 1981, financial services including real estate, insurance, brokering and banking, moved into the lead for the first time. Business services again took the lead in

1984 and retained that position until the end of the colonial era. Since 1997, two engines have led the economy, the business and financial services sectors which together account for half of all economic activity. (Meyer) Hong Kong deliberately began collecting and regularly publishing economy-wide data much later than its East Asian peers. The earliest gross domestic product estimates (for 1961 and subsequent years) were only released in

1973 and other basic data such as for the balance of payments were not compiled until

1999. Any GDP formed prior to this period was based on international trade statistics that came after 1971.

Hong Kong's inflation rate is markedly varying, up and down in a roller coaster ride between the 1960s and 1990's. In the early 21st C., Hong Kong became one of the few developed economies to have experienced deflation in the post-WW2 period; the other main example is Japan. Just how much prices are affected, however, depends on what’s being measured. The currency used in Hong Kong is the Hong Kong dollar. Since

1983, it has been pegged at a fixed exchange rate to the United States dollar due to the event of Black Saturday. The currency is allowed to trade within a range between 7.75 and 7.85 Hong Kong dollars to one United States dollar. The government's fiscal year is from April 1 to March 31 of the next year. (Meyer)

Lai King Estate, one of many public-housing structures. Culturally speaking, the city view is a draw and marketing point. Hong Kong has always had an imbalance of supply and demand where the population far outstrips the available land. Almost 7 million people live on about 1,104 square kilometers (426 mi²) of space. In the high-end market, the Peak is ranked the 3rd most expensive city in the world in 2007 with a square foot per unit pricing of US $2,008 behind London and Monaco. The classification of

Hong Kong as a "free economy" also means anyone with money can buy real estate property. Many foreigners have invested heavily in the territory, making real estate one of the biggest contributors to economic statistics. The land is essentially rented from the government under a lease, even if one owns the property. Prior to 1997, lease terms were

75, 99 or 999 years. As of Hong Kong's return to China, new grants last for 50 years.

(Meyer)

The Hong Kong Stock Exchange is the 6th largest in the world, with a market capitalization of about US$2.97 trillion. In 2006, the value of initial public offerings conducted in Hong Kong was second highest in the world after London. The rival stock exchange of the future is expected to be the Shanghai Stock Exchange. As of 2006, Hong Kong Exchanges and Clearing (HKEX) has an average daily turnover of 33.4 billion dollars, which is 12 times that of Shanghai.

Since the 1997 handover Hong Kong's economic future became far more exposed to the challenges of economic globalization competition directly from Mainland China.

Shanghai claimed in particular to have a geographical advantage, and a municipal government that dreams of turning the city into China's main economic center by as early as 2010. The target is to allow Shanghai to catch up to New York by 2040-2050; with the eventual projection that China will be Asia's most prosperous economy by 2040. Hong

Kong, on the other hand, continues to have a more positive and realistic approach. It will sustainable be the international financial center in China. Until then, Hong Kong is expected to have higher overall economic figures yearly. Hong Kong's principal trading partners remain to be China, United States, Japan, Taiwan, Germany, Singapore, and

South Korea. (Meyer)

This policy has often been cited by economists such as Milton Friedman and the

Cato Institute as an example of the benefits of laissez-faire capitalism. However others have argued that the economic strategy was inadequately characterized by the term laissez-fair. They point out that there are still many ways in which the government is involved in the economy. The government has intervened to create economic institutions such as the Hong Kong Stock Market and has been involved in public works projects and social welfare spending. All land in Hong Kong is owned by the government and leased to private users. By restricting the sale of land leases, the Hong Kong government keeps the price of land at what some would say are artificially high prices and this allows the government to support public spending with a low tax rate. (Meyer) Hong Kong has ranked as the world's freest economy in the Wall Street Journal and Heritage Foundation's Index of Economic Freedom for 15 consecutive years, since the inception of the index in 1995. The Index measures restrictions on business, trade, investment, finance, property rights and labor and considers the impact of corruption, government size and monetary controls in 183 economies. Hong Kong is the only one to have ever scored 90 points or above on the 100 point scale. Bibliography

Great Britain. Joint Declaration of the Government of the United Kingdom of Great

Britain and Northern Ireland and the Government of the People's Republic of

China on the Question of Hong Kong.

China and the US Economy: Advancing a Winning Trade Agenda. The US China

Business Council. Jan 2009.

Meyer, David R.. Hong Kong as a Global Metropolis. Cambridge University Press, 2000.

Yahuda, Michael. Hong Kong: China's Challenge. Routledge, 1996.