What Is Hong Kong SAR, China?
Hong Kong is the premier financial and business center in China and a regional financial leader. Hong Kong is one of China's special administrative regions (SARs). A SAR is a relatively autonomous region within the People's Republic of China that maintains separate legal, administrative, and judicial systems from the rest of the country.
Key Takeaways
- Hong Kong is an Asian financial hub once colonized by the British and is now a semi-autonomous part of China.
- Special Administrative Regions (SARs) exist as relatively autonomous portions of a country that maintain some degree of political and economic independence.
- Because of their history of independence and colonization, SARs such as Hong Kong may find themselves in conflict with the political authority of China.
Understanding Hong Kong SAR, China
Hong Kong is a special administrative region (SAR) that exists as part of the People’s Republic of China under the “One Country, Two Systems” doctrine, negotiated in the Sino-British Joint Declaration, negotiated and signed in 1984, but taking effect in 1997.
The "One Country, Two Systems" doctrine stipulated that the People's Republic of China's socialist system would not be practiced in Hong Kong, and Hong Kong would maintain its political and economic quasi-independencefor 50 years after the transfer of sovereignty, until 2047.
What does that mean? Since July 1, 1997, when the United Kingdom transferred the sovereignty ofHong Kong to China, Hong Kong has maintained a separate political and economic system from China—democratic(ish), and capitalist—anda separate currency (the Hong Kong Dollar, HKD$).
Hong Kong retainsindependent executive, legislative, and judiciary powers, in all matters other than military defense and foreign affairs. English and Chinese are the two official languages.
Hong Kong's Economy
Hong Kong wasranked as the world's freest economy in the Heritage Foundation'sIndex of Economic Freedomfrom the index's inception in 1995, until 2020 when Singapore knocked it off the top spot to number two. However, the following year, in 2021, the index stopped including Hong Kong and Macau due to an increase in China's influence.
In 1990, Milton Friedman wrote that it was perhaps the best example of a free market economy. The service economy in Hong Kong is characterized primarily by low taxation, near-free port trade, and a well-established international financial market. Service economy, here, means an economy that is not industrial, or manufacturing based, but is instead based on financial services, health, and human services, hospitality, information technology, etc.
Using its political and economic autonomy, Hong Kong has positioned itself as the place where international and Chinese businesses find common ground. It is also considered the principal financial center in China.As a result, more than 9,000 companies in Hong Kong have parent companies located outside of Hong Kong in 2023.
This democratic government and the free markethave beensuccessful, to some extent. It's the world's 43rd largest economy in 2022 with a population smaller than the city of Tokyo, at 7.35 million in 2022. Hong Kong had a GDP of$359.8 billion in 2022, giving it the world's 28thhighestGDP per capita, at$48,983 in 2022.
Hong Kong and China's Tensions
Historically, China has had considerable incentive to refrain from interfering in Hong Kong's political and economic systems. Atthe transfer of sovereignty in 1997, Hong Kong, with a population of 6.5 million at the time, had an economy one-fifth the size of the Chinese economy, which had a population ofover 1.2 billion.
This is no longer the case. Over the past 20 years, Hong Kong's economy has stagnated,changingvery little in makeup,withGDPgrowth slowing, and inequality rising significantly. During the same period, China became an economic superpower.As of 2022, Hong Kongnow accounts for just2% of Chinese GDP.
Some think that the greatest risk to Hong Kong's autonomyis political and business elites in the region ceding itto the Liaison Office, to remove political tensions from the region, and return Hong Kong to an economic city.
This may prove a poor decision though, as a marriage of business and government has proven counterproductive in Hong Kong, leading to an increase in conflicts of interest and cronyism, not to mention a non-responsive government that refuses to broaden its tax base or lower property taxes, and has excluded political parties from democratic participation. All of this has led to a public perception of theHong Kong SAR government as not aslegitimate as it once was.
Given these recent trends, the Liaison Office, the People's Republic of China representative in Hong Kong, has been taking steps to meaningfully increase its influence and clout in the region, interfering in both domestic affairs and elections.
For example, the Liaison Office boughtHong Kong's largest publishing house (removing titles critical of the Communist Party) and lobbiedfor Hong Kong's 2017 chief executive, Carrie Lam. In 2022, Lam stepped down.
What Is the Financial System of Hong Kong?
Hong Kong is a large financial center with many banks and financial institutions. The region has favorable tax laws and a strong financial market with its own stock market. The currency, the Hong Kong dollar, is pegged to the U.S. dollar.
What Is Hong Kong Ranked in the Financial Market?
According to the Global Financial Centres Index 34, published in Sept. 2023, Hong Kong ranks fourth in a list of the top global financial centers, behind New York, London, and Singapore.
Is Hong Kong Financially Stable?
Yes, Hong Kong is financially stable. Despite protests and China's ever-expanding grip to bring Hong Kong further under its laws, Hong Kong remains a financially stable region.
The Bottom Line
Hong Kong is one of the leading financial centers in the world and for a large part of its history was under British rule, until it was "returned" to China in 1997. Hong Kong operated outside of China's sphere of politics for a long time after returning to the country; however, as China has grown, both in economic and political power, it has brought Hong Kong further into its control. The region continues to be a prominent financial hub in both Asia and the world.
