Hong Kong SAR

What is Hong Kong SAR, China?

Hong Kong SAR is one of the metropolitan areas in the People’s Republic of China (PRC). As a premier business and financial center, Hong Kong is able to retain its monetary independence, as well as the currency-board type arrangement for its interchange rate. It is because Hong Kong maintains its own governance and control over its economic and domestic affairs and those of other surrounding areas.

Because of its relative autonomy, Hong Kong is referred to as a Special Administrative Region (SAR). Another SAR that operates with a degree of independence is Macao SAR. According to the Census and Statistics Department (Hong Kong), Hong Kong SAR is one of the most densely populated cities in China, with a population of 7.45 million people as of 2018.

Understanding Hong Kong SAR, China

Historical Origin

Hong Kong became a Special Administrative Region (SAR) of China, following the smooth transfer of sovereignty from the British to the People’s Republic of China in 1984, under the umbrella of the Joint Declaration. The region is defined by the Basic Law for Hong Kong Special Administrative Region (SAR) under the “One Country, Two System” arrangement, which was signed in 1984 but was effected in 1997.

Initially, Beijing was the prospective special administrative region until the idea was reversed. It saw Beijing draft the Basic Law for Hong Kong by translating the general principles of the Joint Declaration into greater detail.

The arrangement outlawed the People’s Republic of China’s socialist system forthwith in Hong Kong and stipulated that the region would retain control over its economic and political independence for 50 years until 2047.

Composition of Hong Kong

Since the sovereignty of Hong Kong was returned to China on July 1, 1997, Hong Kong SAR has maintained its governmental and economic affairs separate from Chinese edicts. The system entails democracy, capitalism, and a separate currency called the Hong Kong dollar.

Hong Kong retains executive, judiciary, and legislative autonomy in all matters except foreign affairs and military defense. Socially, Hong Kong is a hybrid, which is different from that of the Chinese mainland. English (with British orthography) and Chinese are the two most dominant official languages in the SAR. A significant number of Hong Kong-born citizens are ethnic Chinese.

Economic Status of Hong Kong SAR

The Heritage Foundation’s Index of Economic Freedom has consistently ranked Hong Kong as the freest economy in the world. The legal rules’ minimum control over Hong Kong’s market economy attracted the attention of renowned economists on the vanguard of free-market capitalism, such as Milton Friedman, who, in 1990, acknowledged that it was perhaps the best exemplar of a free market economy.

Hong Kong’s service economy is characterized by an effective international financial market, near a free trade port, and low taxation. The SAR’s service economy means an economic system that depends on providing essential services, rather than manufacturing or producing goods. Hong Kong has positioned itself as the platform on which the Chinese economy trades with other countries.

The region also serves as the world’s headquarters for more than 1,300 companies, owing to its role as the principal financial center in China. A free market and a democratic government are the central tenets of success in business and governance in Hong Kong.

Hong Kong is currently ranked as the 33^rd-largest economy in the world, with a population of about 7.45 million. As of 2018, Hong Kong’s GDP was valued at $362.7 billion, earning the 17^th spot in the world with a GDP per capita of $48,675.

Political Tension Between Hong Kong and China

The most pressing challenge to the Hong Kong SAR is interference in its political and economic systems by the Chinese government. The cause of the underlying tension between the two administrative regions is attributed to the political ideals in Hong Kong by the British. The departure from cultural identities has seen Hongkong’s citizens alienate themselves from their Chinese counterparts.

In the same vein, Hong Kong’s economy has experienced an unsteady growth over the past two decades, unlike China, which has emerged as one of the world’s economic superpowers. It has eventually made cronyism and conflicts of interest rampant in the region, fueling more public fury. Hong Kong’s government has also been accused of being unresponsive for continually ignoring the distress call to broaden its tax base, embrace democratic participation of political parties, or lower property taxes.

All of the above mentioned issues have created a public perception that the Liaison Office, China’s representative in Hong Kong, is influencing Hong Kong’s government to increase its clout in the region. The notion is also associated with the outcome of election results and interference in domestic affairs.

Special Considerations

The extradition bill introduced in Hong Kong in April 2019 and withdrawn in September the same year led to civil unrest in demand for democracy. The bill would have allowed, under certain circumstances, Mainland China to extradite Hongkong citizens who commit a crime. Hong Kong residents feared that the bill exposes residents to unfair trials and violent treatment in China.

Additionally, it is argued that the bill could have given China an upper hand in influencing Hong Kong, thereby suppressing activists and journalists. The fact that Hong Kong keeps its own judiciary and runs a separate legal system from mainland China that expires in 2047 makes it unclear what its status will be then.

Additional Resources

CFI is the official provider of the global Commercial Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:

• Market Economy
• Hong Kong Monetary Authority (HKMA)
• MSCI Emerging Markets Index
• Socialism vs Capitalism
• See all foreign exchange resources