Hong Kong vs. Mainland China: What’s the Difference?

Hong Kong vs. Mainland China: An Overview

Hong Kong is one of Asia’s busiest hotspots. Not only is it an international financial hub, business center, shopping paradise, and tourist destination, but it is also a special administrative region (SAR) of China. As such, Hong Kong is an inalienable part of China and, at times, has resisted Beijing’s interference in its political life.

Pro-democracy activists in Hong Kong would like the region to remain distinct from other Chinese cities. That makes the relationship between Hong Kong and mainland China complex. Having said that, mainland China and Hong Kong complement each other economically even if their political differences remain entrenched.

Hong Kong

Britain negotiated a 99-year lease with China on its Hong Kong colony in 1898. That lease ended in 1997 when Britain returned Hong Kong to China. It then became the Hong Kong SAR of the People’s Republic of China.

Under the doctrine of one country, two systems, China allows the former colony to continue to govern itself and maintain many independent systems for 50 years beginning from 1997. Owing to its colonial history, English is one of Hong Kong’s official languages.

Hong Kong has no separate diplomatic identity from mainland China, but it may attend events of select international organizations, such as the Asian Development Bank, the International Monetary Fund (IMF), the World Health Organization, and the United Nations World Tourism Organization, as an associate member rather than a member state. It can also participate in trade-related events and agreements under the name Hong Kong, China.

Mainland China

This East Asian country is the world’s second most populous after India, with more than 1.4 billion people. China is governed by the Chinese Communist Party, which has jurisdiction over 23 provinces, five autonomous regions, four direct-controlled municipalities, and the SARs of both Hong Kong and Macau.

Mainland China has the second-largest economy in the world at $17.96 trillion. It follows the United States, whose economy was valued at $25.44 trillion as of 2022. China built its economy on manufacturing and exports, leading to decades of growth.

Consumer demand in foreign markets has helped sustain China’s export-driven growth. However, after a tough 2018, in which the nation was embroiled in a trade war with the United States, the Chinese economy has grown at its slowest pace in 28 years.

Taxes and Money

Hong Kong is allowed to continue to use its free-enterprise system, rather than merge into the communist structure of mainland China. Hong Kong has independent finances and China neither interferes in its tax laws nor levies any taxes on Hong Kong. As such, the region has separate policies related to money, finance, trade, customs, and foreign exchange.

Hong Kong and mainland China even use different currencies. Hong Kong continues to use the Hong Kong dollar (HKD), which is pegged under a linked exchange rate system to the U.S. dollar. Mainland China, on the other hand, uses the Chinese yuan (CNY) as legal tender. Merchants in Hong Kong do not freely accept the yuan.

Economies

Hong Kong’s economy is characterized by low tax rates, free trade, and limited government interference. As mentioned above, China had the second largest economy in the world at $17.96 trillion as of 2022. Hong Kong had the 44th largest, with a gross domestic product (GDP) of $359.84 billion.

Hong Kong’s economy was rated the freest in the world from 1995 to 2019 by The Heritage Foundation’s annual index of the world’s freest economies. However, it was removed from that list in 2021 because it may be more directly controlled by China.

Hong Kong has long been a hub of trade and finance. In 2022 93.4% of its GDP came from the service sector. The service sector includes services related to travel, trade, finance, and transportation.

Hong Kong once had some manufacturing, but this has long been shifted to mainland China for lower costs. The manufacturing sector’s contribution to Hong Kong’s overall GDP was 1% in 2022 and has sat around that number for some time. Agriculture contributes just 0.1% because Hong Kong is tiny and has no space for it. The region not rich in natural resources and depends on imports for food and raw materials. Construction contributes around 4.3%.

The economy of mainland China mainly depends on manufacturing. But, the country’s service sector has started to pick up even though the share of services in the GDP is much less than that of developed countries like the United States and Japan. It’s less than that of developing countries such as Brazil and India. Agriculture constitutes around 8% of China’s GDP, while it is a negligible part of Hong Kong’s.

Hong Kong’s GDP per capita in current U.S. dollars is vastly higher than that of mainland China—$48,983.60 versus $12,720.20. However, China’s annual GDP per capita growth rate was 3%, while Hong Kong’s was -2.6% in 2022.

For 2022, Hong Kong’s annual GDP growth was -3.5% while mainland China’s was 3%.

Stock Markets

The Hong Kong Stock Exchange has been the preferred choice for most Chinese companies looking to raise capital. That’s because mainland Chinese stock markets like the Shanghai and Shenzhen Stock Exchanges are more restrictive with higher financial requirements. Hong Kong’s stock market also attracts more overseas investors.

As Tianlei Huang, a research analyst at the Peterson Institute for International Economics, wrote:

“Hong Kong has multiple advantages that are missing in China. First, a registration-based IPO system, which enables listing to be relatively faster and easier than in the mainland. Second, the absence of capital controls and greater international exposure, which allows Hong Kong to serve as an anchor point for global expansion. Third, a sound financial infrastructure, which mitigates operational costs. Fourth, an effective regulatory framework, which focuses on transparency and prudent minimum standards”

Access to Capital and Investments

Shanghai-Hong Kong Stock Connect launched in November 2014. It established a cross-border channel for access to stock markets and investments. This arrangement allowed regional investors to trade specified companies listed on each other’s stock exchange through their local securities firms.

Before the program, individual investors in Hong Kong (or worldwide) had no direct access to Chinese stocks. In December 2016, a similar program titled Shenzhen-Hong Kong Stock Connect was launched as well.

Market Capitalization

The Hong Kong Stock Exchange listed 1,447 mainland Chinese companies in 2023, this was 55% of the total number of listed companies on the exchange. By market capitalization, these companies accounted for 76% of the stock market in Hong Kong.

Hong Kong’s stock market was the fifth largest in the world by market cap at $4.29 trillion as of January 2024. India replaced it as the fourth-largest in the world on Jan. 23, 2024, with a total market cap of $4.33 trillion.

Economic Interdependence

Even with recent political disturbances over Hong Kong’s democracy and independent governance, the economic ties between Hong Kong and mainland China remain strong. Hong Kong and China boost each other’s economies. The two had annual bilateral trade valued at over $593.5 billion in 2022.

Hong Kong can be seen as a gateway to China for those who are interested in doing business on the mainland or in accessing Chinese stocks or investments. As of 2022, 124 of the 155 licensed banks in Hong Kong were incorporated outside Hong Kong with the vast majority and perhaps all of them being from mainland China.

Mainland China is Hong Kong’s largest trading partner and its second-largest source of inward direct investment. The mainland’s non-financial direct investment in Hong Kong was $543.8 billion in 2021. That accounted for 27.7% of the total, according to Hong Kong’s Trade and Industry Department.

Moreover, the Trade and Industry Department also noted that Hong Kong directs 37.1% of its domestic exports to mainland China. China is also the biggest supplier of imports to Hong Kong (42.2%) in 2022.

Hong Kong is a major supplier of entrepôt services to China. In 2022, the value of goods re-exported through Hong Kong from and to the Mainland was $487.4 billion and accounted for 85.4% of Hong Kong’s total re-export trade value.

However, some argue that Hong Kong’s economic importance and relevance to China’s growth story is rapidly fading.

Key Differences

The chart below highlights some of the key differences between Hong Kong and mainland China that we’ve discussed above.