Hong Kong was supposed to be a world financial capital in a communist system. Contradiction?

Britain handed Hong Kong over to China 20 years ago. Now the fear is that Hong Kong "becomes just another Chinese city," says one Asia investment strategist.
(Kin Cheung / Associated Press)

From the beginning, the idea that capitalist Hong Kong could remain a thriving, prosperous city under Communist China may have been a tale doomed to an unhappy ending.

But as this city marks the 20th anniversary of its return to China’s control after 156 years of rule by Britain, it is beset by a host of problems that suggest its once-boundless promise could instead turn out to be a slow slide downhill.

And the surprise is that the threat to Hong Kong’s future stems less from heavy-handed meddling by Beijing than from a host of largely unrelated factors that are turning a once-unique economy into just another victim of globalization and the march of time.


Beijing has certainly made it clear that it won’t allow Hong Kong to become another Taiwan, a functionally independent state that Chinese leaders consider a renegade territory.

Lest there be any doubt, Chinese President Xi Jinping, speaking Friday in Hong Kong even as pro-democracy protesters were kept far away, suggested he was rethinking the “one country, two systems” agreement with Britain that promised broad autonomy to Hong Kong for 50 years.

Chinese President Xi Jinping raises a toast during a banquet in Hong Kong on Friday.
(Dale de la Rey / Associated Press)

Yet Hong Kong’s challenges run much deeper than threats of greater domination by Beijing. For one thing, China’s economy has grown so big over the last two decades — and its place among the nations of the world has become so accepted — that the city’s importance in the overall scheme of things has faded dramatically.

Gone are the days when Cold War politics required many developed nations to do business in China’s potentially huge but still backward markets only through Hong Kong middlemen, although many foreign firms still find it easier to set up in Hong Kong.

Today, China is moving to adopt more universally accepted practices and standards in the global economy, which raises questions about how long Hong Kong’s special services will be needed.

Similarly, Hong Kong’s overall importance in the Chinese economy has withered. In the year of the handover, Hong Kong accounted for just 0.5% of the mainland’s population but an enormous 16% of the country’s gross domestic product.

Now, that share of GDP is a mere 3%.

In 1997 and even through 2004, Hong Kong operated the busiest container port in the world. Today Shanghai’s port handles almost double the volume of Hong Kong’s, and two other Chinese cities, including Shenzhen — once a sleepy fishing village bordering Hong Kong — have bigger populations and busier ports.

“China is about size [and] Hong Kong is not that big,” said Andy Xie, an MIT-trained economist who has worked in Hong Kong and China since 1995. Hong Kong’s population is 7.4 million, making it about one-quarter the size of Shanghai.

Xie remembers when he arrived in Hong Kong for work at an Australian bank, fresh from a stint at the World Bank in Washington, a PhD in hand. The Shanghai native could hardly believe the euphoria in the financial community as it counted down to July 1, 1997, the day that Britain sailed out of Victoria Harbor and the Union Jack flag was replaced with a red Chinese banner.

“People were lining up for red-chip stocks,” Xie recalled of the hot demand for mainland companies. “Money was flowing freely. People were partying day and night.”

Twenty years on, Chinese mainland businesses now account for more than half of the companies listed on Hong Kong’s stock exchanges, but the mood is decidedly less buoyant inside the gleaming offices in Hong Kong’s financial district or on the gritty streets of the city.

“Life is getting tougher and tougher…. We don’t feel optimistic,” said Au Yueng Chi Sang, 56, whose family has run a tiny shop in a communal market near Causeway Bay for two generations.

Instead of bustling crowds flowing by, few people were walking past the long rows of eggplants, squash and empty fruit bins at his stand. Au looked up at the Chinese and Hong Kong flags he had strung up above him. “At least we’re trying to create a celebratory atmosphere,” he said with a shrug.

To be sure, Hong Kong remains an important financial hub for Asia, thanks to its openness, rule of law, transparency and intolerance for corruption — a notch above Singapore, analysts say, and far above Shanghai, its closest China rival as a financial center.

Hong Kong’s waterfront vista overlooking the South China Sea and its prevalence of English draws a steady supply of talent. The city’s central district is a global hodgepodge of food and accents. Its glass towers give way to lush green hillsides, a welcome escape from Beijing and Shanghai’s sooty gray air.

The Heritage Foundation, a conservative think tank, has ranked Hong Kong the world’s freest economy for more than two decades. Taxes are low.

“I wouldn’t be surprised if 10 years down the line, Hong Kong is still the key conduit for foreign investment into China,” said Julian Evans-Pritchard, China economist at Capital Economics in Singapore.

In more recent years, Hong Kong has also been a place for China’s increasingly large wealthy class to funnel its money out of the mainland, partly to hedge against political risk. But that has been a double-edged sword. Chinese mainland investors have accounted for an increasing share of Hong Kong’s property purchases, contributing to soaring prices and a stifling housing shortage that has added to the discontent among young and old alike.

The city’s economy is the strongest it’s been in nearly six years, but that is largely thanks to a steadying of China’s economy, to which Hong Kong, like Taiwan, is now tightly connected — a source of opportunities and social tension in the city.

Richard C. Bush, a Brookings Institution scholar and author of “Hong Kong in the Shadow of China,” says young, talented university graduates from mainland China are coming into Hong Kong seeking jobs, providing competition for locals. Hong Kong attracts millions of Chinese mainland tourists as well, who come to visit sites such as Hong Kong Disneyland, but there’s now a much bigger Disneyland in Shanghai, and Tokyo, with its cheaper currency, has become a rival for Chinese shoppers.

Hong Kong’s mainstay banking and financial sector has withstood crises and cutbacks, and is still a big draw for global talent, but the heyday of Chinese stock offerings in Hong Kong bourses appears to be over. And Shanghai, while today far behind Hong Kong as a financial center, is a vastly bigger city and has vastly narrowed the pay gap with Hong Kong, from about one-twentieth in 1997 to one-half today, Xie said.

Amid these shifting economic forces, many worry that political troubles will only make things harder for Hong Kong.

Student protest leader Joshua Wong, left; pro-democracy lawmaker Leung Kwok-hung, also known as "Long Hair"; and pro-democracy lawmaker Nathan Law protest against their recent arrests and detention in Hong Kong on Friday.
(Jayne Russell / AFP/Getty Images)

“The direct impact of political, social unrest is increasing uncertainty and diminishing confidence, which could challenge Hong Kong’s standing as an Asian global financial center,” said Tianjie He, an economist at Oxford Economics in Hong Kong.

That hasn’t reached a point yet where it has effected Hong Kong’s financial stability. For now, there is still no Chinese city like it — and there won’t be until Beijing liberalizes its capital markets and currency. That unique financial role may even serve as a layer of protection, preventing Beijing from going too far in its quest to bind Hong Kong closer to the mainland.

Beijing supporters “point to how economically well Hong Kong has done,” said Anson Chan, the former No. 2 official under both the British and Hong Kong governments. “They forget, and even seasoned economists point out, that economic vitality rests on the rule of law.”

Xi, who arrived Thursday for his first visit to the territory as president, vowed Beijing will “continue to support the development of Hong Kong.” The next day, however, he also spoke about “new challenges” in the “one country, two systems” formula, which gives Hong Kong its special status and greater freedoms than on the mainland. The Chinese Foreign Ministry was more blunt, stating that it “no longer has any practical significance.”

That will certainly add to worries among many in Hong Kong about Beijing’s creeping encroachment on civil liberties. Five booksellers who sold salacious material about top Chinese officials disappeared in 2015 and reappeared in custody on the mainland. In January, Chinese secret police abducted a sleeping billionaire with ties to China’s elites from Hong Kong’s Four Seasons Hotel.

China’s parliament has started issuing unprecedented interpretations of Hong Kong laws. And on Saturday, Xi will inaugurate the city’s new chief executive, who had little public support but was selected by a small group of largely pro-Beijing elites.

“If you want to stay in business, if you want to enjoy social freedoms, that’s probably OK,” said Ding Xueliang, a social science professor at the Hong Kong University of Science and Technology. “But you can’t cross into core politics.”

The tension in Hong Kong is palpable. Many refuse to celebrate Saturday’s anniversary. Thousands may protest. Pro-democracy advocates feel Beijing reneged on its promise of universal suffrage and is now trampling on its “one country, two systems” vow, which has profound political and economic implications for the city.

“I think Hong Kong is still the reigning financial center in Asia,” said David Loevinger, a former China specialist at the U.S. Treasury Department and now a top Asia strategist for the Los Angeles investment firm TCW.

“The fear in Hong Kong is that what makes Hong Kong special is eroded over time, then Hong Kong becomes just another Chinese city,” he said.

Times staff writer Lee reported from Washington and special correspondent Meyers from Hong Kong.


China demands that U.S. arms deal with Taiwan be canceled

As the world focuses on its nuclear ambitions, North Korea deploys another weapon: Drones

Naval commander stresses no change in U.S. policy on South China Sea