China Perspectives 2016/2 | 2016 What Kind of International Order Does China Want? Sustaining Hong Kong’s Services amid the Changing Dynamics of China’s Economy Chiang Min-Hua Electronic version URL: http://journals.openedition.org/chinaperspectives/6978 DOI: 10.4000/chinaperspectives.6978 ISSN: 1996-4617 Publisher Centre d'étude français sur la Chine contemporaine Printed version Date of publication: 1 June 2016 Number of pages: 37-45 ISSN: 2070-3449 Electronic reference Chiang Min-Hua, « Sustaining Hong Kong’s Services amid the Changing Dynamics of China’s Economy », China Perspectives [Online], 2016/2 | 2016, Online since 01 June 2017, connection on 14 November 2019. URL : http://journals.openedition.org/chinaperspectives/6978 ; DOI : 10.4000/ chinaperspectives.6978 © All rights reserved Article China perspectives Sustaining Hong Kong’s Services amid the Changing Dynamics of China’s Economy CHIANG MIN-HUA ABSTRACT: Hong Kong’s greater economic integration with China has continued to underpin its service-oriented economy following the manufacturing sectors’ hollowing out since the 1990s. Hong Kong is an important transit hub for China’s external trade, especially for the Pearl River Delta Region. China’s deregulation of mainland visitors to Hong Kong under the Individual Visit Scheme since 2003 has contributed to Hong Kong’s bulging trade surplus in travel. Nonetheless, the tremendous business opportunities from China’s financial reform won’t unseat the US and the UK as Hong Kong’s top trade partners in financial services. Overall, Hong Kong’s service economy will continue to prosper in the near term with China’s continuous granting of special treatment. In the long run, strengthening Hong Kong’s bridging role between mainland China and the global market will be crucial for the viability of its services. KEYWORDS: Hong Kong’s economy, Hong Kong’s service sectors, Mainland-Hong Kong Closer Economic Partnership Arrangement (CEPA), China’s economy, trade in services. Introduction Hong Kong’s unique geographic location as a gateway between mainland China and other countries allowed the territory to benefit from China’s rel - ong Kong has played an important role in connecting China’s econ - atively closed economy. However, China’s economy today is much more omy with the rest of the world since the nineteenth century. Before open than it was several decades ago. From 1985, the Special Economic HWorld War II (WWII), Hong Kong mainly served as an entrepot be - Zones (SEZs) extended more widely from coastal cities in Guangdong and tween China and Western countries in merchandise trade. Hong Kong’s eco - Fujian to the Yangtze River Delta, Pearl River Delta, Shandong Peninsula, nomic ties with mainland China continued to grow despite the latter’s shift Liaodong Peninsula, Hebei, and Guangxi. Deng Xiaoping’s speech during his to a socialist economy since 1949. When the United Nations began to put a southern tour in China in 1992 accelerated the country’s economic reform. trade embargo on China during the Korean War (1950-1953), Hong Kong’s China’s trade and investment measures opened a step further after its ac - transit trade business fell sharply. The development of the manufacturing sec - cession into the World Trade Organisation (WTO) in 2001. Up to November tor since the 1950s saved Hong Kong’s economy from a major depression. 2015, China had already signed bilateral free trade agreements (FTAs) or Nonetheless, the export-led economic growth pattern did not last long. In quasi-FTAs with major economies (e.g. South Korea, Australia, Singapore, the 1970s, Hong Kong manufacturers encountered fierce competition from Taiwan, Hong Kong, and New Zealand) in the region. At the multilateral other developing countries as well as advanced countries’ growing protec - level, the China-ASEAN Free Trade Area has been in effect since 1 January tionism. The launch of China’s open-door policy at the end of 1978 came just 2010. China is also actively involved in the China-Japan-South Korea trilat - in time to alleviate the difficulties of Hong Kong’s manufacturing economy. eral FTA and t he Regional Comprehensive Economic Partnership (RCEP) n e- Since 1979, when China began to set out a series of preferential policies gotiations. With effect from 1 October 2016, the Chinese yuan will be for foreign investors aimed at exports, Hong Kong entrepreneurs quickly included in the International Monetary Fund’s reserve currency basket, a caught these opportunities. From 1979 to 1995, around half to two-thirds significant step in internationalising China’s financial market and its cur - of foreign direct investment (FDI) in China came from Hong Kong. However, rency. it was often argued that Hong Kong’s significant share in China’s total FDI China’s greater involvement in the global economy occurred as Hong was exaggerated, as it included not only Hong Kong’s investment but also Kong’s economy was becoming closer to China’s. The quick catching up of substantial amounts of capital intermediated through Hong Kong. In addi - other mainland cities further raised concerns about the sustainability of tion, a substantial portion of the mainland’s exports to other countries was Hong Kong’s unique position as a bridge between China and other countries. also channelled through Hong Kong. While Hong Kong accounted for a How has Hong Kong’s service-oriented economy been impacted by China’s major share of China’s total exports, China’s imports from the territory were growing linkage with the world over the last decade? It is often argued that relatively less noteworthy. the implementation of the Closer Economic Partnership Arrangement N o. 2016/2 • china perspectives peer-reviewed article 37 Article Table 1 – Hong Kong’s GDP by sector 2000-2014 (As % of total GDP) 2004 (Implementation 2000 of CEPA) 2008 2014 • Import/export trade, wholesale retail, 24 28 28 28 • accommodation and food services • Financial, insurance, real estate, 22 22 28 27 • and professional business services • Transportation, storage and postal services, 11 12 9 10 • information and communication • Public administration, social, and 19 19 17 17 • personal services • Ownership of premises 11 10 11 11 Subtotal in services 87 91 93 93 • Manufacturing 5 3 2 1 • Construction 5 3 3 4 • Electricity, natural gas and water supply, and waste management 3 3 2 2 Economic growth rate 7.7 8.7 2.1 2.9 Source: Census and Statistics Department, Hong Kong SAR, Gross Domestic Product 2014, February 2015, pp. 82-84; Census and Statistics Department, Hong Kong SAR, “National Income,” www.censtatd.gov.hk/hkstat/sub/sp250.jsp?tableID=035&ID=0&productType=8 (accessed on 7 December 2015). (CEPA) was a “helping hand” to Hong Kong’s economy. Nonetheless, as CEPA accelerated Hong Kong’s shift towards China gradually opens up its market in order to fulfil its obligations under services the WTO and other FTAs, the special treatments given to Hong Kong through CEPA is expected to dissipate. In this regard, how can Hong Kong China and Hong Kong signed “The Mainland and Hong Kong Closer Eco - sustain its economic development in the future? nomic Partnership Arrangement,” or “ Closer Economic Partnership Arrange - The purpose of this article is to investigate the structural changes in Hong ment” (CEPA) on 29 June 2003. Initiated by the territory’s business Kong’s service economy and the development of its economic relations with community, CEPA provides Hong Kong with priority entry into China’s mar - China over the last decade. In the face of China’s dynamic development, ket. Under CEPA, some 273 goods produced in Hong Kong, which comprise this article also addresses concerns and prospects for Hong Kong’s economy two-thirds of Hong Kong’s domestic exports to China, have enjoyed zero in the future. Macro-economic data is assessed to explore Hong Kong’s serv - tariffs since January 2004. All imports from Hong Kong to mainland China ice-oriented economic profile. Hong Kong’s official statistics in the service were exempted from tariffs as of 2006. This special treatment extends to industry are extensively employed as a major indicator of the territory’s products with 30% value-added, more advantageous than the conventional connection with China in services. Service trade statistics incorporate a total requirement of 40%-50% domestic content. In terms of investment, China of 12 service items as indicated in Annex 1. Owing to the large presence of agreed to open 18 service sectors for Hong Kong companies to invest in, transport, travel, and financial services in Hong Kong’s service trade, statis - which is more favourable than the measures based on WTO rules. CEPA also tics for these three service items will be the main focus when analysing eases requirements for professionals (e.g. accountants, surveyors, and Hong Kong’s service trade relations with China. The implementation of CEPA lawyers) from Hong Kong to operate their business in the mainland, (1) thus is considered a turning point in Hong Kong’s economic transformation. allowing Hong Kong professionals to explore this emerging market. Hence, the opening up measures between Hong Kong and the mainland Between 2004 and 2013, Hong Kong and China broadened the scope of through CEPA, particularly in transport services, financial services, and travel CEPA with an additional 10 supplements. Under CEPA and previous supple - services, will also be reviewed. ments, 28 sectors (2) were already partially liberalised for Hong Kong. Since The article is structured as follows. First, the development of Hong Kong’s 1 January 2014, conditions for market access for the 28 sectors have been structural changes in terms of gross domestic product (GDP) and employ - further relaxed under Supplement X. Supplement X to CEPA also included ment by sector is analysed.