Hong Kong’s GDP is now just 3% of mainland China’s, down from 18% in 1997 when the city returned to Chinese control. But Hong Kong still serves as the main gateway between China and the world where financial flows are concerned. (See Chart 1.) This outsized role is made possible by the “one country, two systems” framework, which has allowed the city to retain its attractive legal, regulatory and tax systems. Worryingly, the ongoing protests have highlighted the growing strains on this arrangement, strains that risk being exacerbated in the event of heavy-handed mainland intervention. Some commentators have argued that Hong Kong’s continued importance as an offshore financial centre will deter the government from taking aggressive action. But with politics increasingly taking precedence over economics, we suspect that the Communist Party would be willing to undermine the foundations of Hong Kong’s success if it felt doing so was necessary to keep the city in line.
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