These charts reveal why Hong Kong is essential to China

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These charts show why Hong Kong is important to China

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Beijing’s current push to carry out a nationwide security law in Hong Kong — a Chinese unique administrative area — as soon as again increased concerns that the city’s autonomy is being jeopardized.     

Hong Kong, a previous British nest went back to Chinese guideline in 1997, is governed under the “one country, two systems” concept. The structure enables the city some flexibility that its mainland equivalents do not delight in, such as independent power, minimal election rights, its own currency and a mainly independent legal system.

Such autonomy from mainland China underpins Hong Kong’s position as a leading worldwide monetary and company center. It’s likewise a reason that the U.S., by law, treats it in a different way from other Chinese cities — however that so-called unique status is now under risk.

Still, Hong Kong has actually been an essential entrance in between China and the rest of the world. That is most likely to stay so for a long time, despite the fact that the area’s contribution to China’s financial development has actually decreased through the years.

“I think that Hong Kong will be difficult to replicate elsewhere in (China) to be honest, and I think that it makes sense to double down on … (the) grand vision of ‘one country, two systems’,” Kurt Tong, previous U.S. consul basic to Hong Kong and Macau, informed CNBC’s “Squawk Box Asia” previously this month.

Here are some charts that reveal numerous reasons Hong Kong is essential to China.

Open capital markets

One of the most apparent qualities that separates Hong Kong from the rest of China is its position as a totally free and open economy. That enables the area to bring in cash from various parts of the world more effectively than other mainland Chinese cities which go through capital controls.  

As an outcome, a growing variety of Chinese business are making the most of Hong Kong’s access to worldwide financiers to raise funds. That has actually assisted Hong Kong end up being the world’s leading market for going publics for 7 out of the past 11 years — consisting of in 2019 when the city was swallowed up by extensive pro-democracy demonstrations that often turned violent.

Chinese business that have actually noted in the area consist of tech giants Alibaba and JD.com.

Increasingly, the city is likewise ending up being an entrance for Chinese financiers to buy worldwide business, stated Charles Li, president of the Hong Kong stock market. That’s specifically so if more foreign business can offer their shares to mainland financiers through a listing in Hong Kong, he included.

“When that happens, we will see very, very sustained flows of foreign companies wanting to be listed here because they are able to directly sell into China, which is still a captive capital base,” Li informed CNBC’s Emily Tan on Wednesday.

The exchanges of Hong Kong, Shanghai and Shenzhen are connected through a program called the stock link. It enables financiers to trade — through their house exchange — picked securities on the other taking part platforms.

Chinese yuan goes worldwide

Hong Kong’s status as an international monetary and company center has actually likewise assisted China to promote higher worldwide usage of its currency, the renminbi or Chinese yuan.

The area — which has its own currency, the Hong Kong dollar — is among the couple of locations where the yuan is traded outside the mainland.

The newest information from the Bank for International Settlements, a banks that serves reserve banks worldwide, revealed that Hong Kong is the world’s greatest market for forex deals including the Chinese yuan. That offers the city an edge over other significant monetary centers, such as Singapore and London, in drawing financiers wishing to trade the renminbi.

The typical everyday turnover of such deals in the city increased by 39.6% from $77.1 billion in April 2016 to $107.6 billion in April 2019, according to information assembled by the BIS, which is released every 3 years.

China’s abroad financial investments

Hong Kong’s function as an intermediary in between China and the world does not stop there.

As Chinese business broaden their financial investments overseas, much of that cash circulation is routed through Hong Kong to “take advantage of the territory’s favourable regulatory environment and available professional services,” according to Washington-based think tank Peterson Institute for International Economics.

“A great amount of Chinese investment does not remain in Hong Kong. It is either repatriated to China as profits and funds or sent elsewhere in the rest of the world,” checked out a PIIE report.

By 2018, Hong Kong represented around 55.5% of China’s overall abroad direct financial investments, according to the National Bureau of Statistics of China. Even though that percentage is lower than a years earlier, the quantity of financial investments has actually grown significantly through the years, the information revealed.

Facilitating trade

China’s opening and its entry into the World Trade Organization has actually minimized Hong Kong’s significance in assisting in product trade in between the mainland and the world.

But that function acquired some significance at the height of the U.S.-China trade war, when the 2 nations slapped raised tariffs on each other’s items. That’s due to the fact that of a “first-sales rule” which governs how the U.S. uses tariffs on its imports, stated Iris Pang, primary financial expert for Greater China at Dutch bank ING.

Under the guideline, exports to the U.S. that are routed through more than one area will deal with tariffs based upon the deal cost in the extremely first leg, she discussed in a note last month.

“For example, when a Chinese exporter sells goods to a Hong Kong re-exporter at a lower price, then the Hong Kong re-exporter (eg, a subsidiary of the Mainland China company located in Hong Kong) sells at a higher price to a US importer, the tariff will be based on the first transaction,” stated Pang.

“As such, the tariff paid could be lowered when there is a throughput via Hong Kong,” she included.

In 2018 — when a trade war broke out in between Washington and Beijing — around 8% of mainland China’s exports to the U.S. and about 6% of mainland China’s imports from the U.S. were routed through Hong Kong, according to the area’s Trade and Industry Department.

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