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With the 1997 Sino-British Joint Declaration, Hong Kong became a Special Administrative Region of China and is composed of 230 small and large islands and is adjacent to the South China Sea. Its land area is only a bit larger than New York City, covering only 1,104 square kilometers and mostly consisting of steep hills and mountainous regions. Despite its small size, Hong Kong is home to 7.5 million residents of different nationalities, making it one of the world’s most densely populated places and also a major financial center and one of the world’s most developed cities.
The government practices non-interference in economic policies and heavily relies on international trade and finance, making Hong Kong a favorable place to start a business. According to a 2021 start-up survey conducted by InvestHK, despite the ongoing impact of the COVID-19 pandemic on the global economy, Hong Kong’s start-up ecosystem remains vibrant, with a 12% increase from 2020.
Hong Kong is a unique economy that was originally a sparsely populated fishing and farming village. In 1841, after the first Opium War, Hong Kong became a colony of the British Empire, was occupied by the Japanese Empire during World War II, and was regained by the British after Japan’s surrender. In 1949, when the Communist Party of China controlled the mainland, many refugees and skilled migrants crossed the border into Hong Kong to escape the Civil War, making Hong Kong one of the Four Asian Tigers. With the rapid increase in population after the war, the colonial government began to reform to improve infrastructure and public services.
However, due to limited natural resources, Hong Kong relies almost entirely on imports, including raw materials, food, consumer goods, capital goods, and fuel, and as labor and property costs rise, the competitiveness of the manufacturing sector is declining, and the economy is transitioning to a service-based economy. During the British colonial period, Hong Kong relied on its unique status as an international free port to mainly engage in re-exporting to China, and with the Chinese government’s more open diplomatic policies, trade between Hong Kong and China has also increased.
At the same time, due to the relative stability of the British government’s rule compared to other Asian regions, by the early 1990s, Hong Kong had become one of the world’s financial centers and maritime hubs, and was also the world’s tenth largest exporter and ninth largest importer. With a capitalistic service economy characterized by low taxes and free trade, the Hong Kong dollar is the world’s eighth most traded currency and legally issued by three major international commercial banks and pegged to the US dollar. The interest rate of the currency is determined by individual banks in Hong Kong to ensure that the exchange rate is market-driven.
Until 1997, Hong Kong was returned to China and became one of two Special Administrative Regions of China (the other being Macau) and began to implement a different administrative and economic system from mainland China, known as “One Country, Two Systems”. After this, even though Hong Kong became a Special Administrative Region of China, the Sino-British Joint Declaration maintained Hong Kong’s economic and administrative continuity through the transfer of sovereignty, and the region’s administrative system largely inherited that of the United Kingdom and still maintains independent economic and cultural relationships with other countries.
However, with China’s economic liberalization, Hong Kong’s industries are not only facing challenges from economic globalization, but also direct competition from mainland cities, particularly Shanghai, which has a geographical advantage. The opening of China’s financial market has led some of the world’s top leading companies to move to Shanghai.
Further more, since the implementation of the National Security Law in Hong Kong by the Chinese government in June 2020, it has resulted in the suspension of bilateral extradition treaties with the UK, Canada, Australia, New Zealand, Finland, and Ireland. The US also ended its economic and trade benefits for Hong Kong in July 2020, as the Hong Kong economy can no longer be separated from China as before. To make matters worse, investment in Hong Kong has plummeted in 2021, with more than 100 billion US dollars of capital outflow, according to government statistics, the second time since 1997.
GDP Data is updated in January, 2023. Figures below represent GDP contribution with the expenditure approach by segment. Data is sourced from World Bank, IMF, and local government and refactored by our team. Forecasted data is from EIU.
The Hong Kong economy is expected to grow again in the coming years, following a contraction of 3.5% in 2022. Despite the recovery, the economy is projected to remain smaller than it was in 2019. This slow growth is due to the decline in population in 2021-22, which will not quickly bounce back even with the lifting of pandemic restrictions. Additionally, the slump in private investment, combined with the ongoing decline in business confidence in both the mainland and Hong Kong economies, will contribute to the slow recovery. It will take 2-3 years for the local property construction sector to recover.
Over the next five years, investment in Hong Kong by international non-financial firms is expected to suffer as a result of the political unrest in 2019-21. This will also be partly due to the difficulty in attracting international talent even with the lifting of pandemic restrictions. Despite this, Hong Kong will still maintain its position as one of the world’s leading international financial centers, as regional rivals such as Shanghai, Shenzhen, and Singapore are unable to fill this role as a hub for financial flows between China and the global economy.
Finance and related professional services are expected to remain dominant in Hong Kong’s economy in the future. Trade flows will continue to be high in relation to the size of the economy, reflecting Hong Kong’s status as a shipping hub, but with limited links to the local industry. Public policy is unlikely to make much progress in diversifying the economy towards high-tech industries such as advanced computing and biotechnology, due to the small size of local specialized labor pools and high real estate costs.
The government’s efforts to increase housing supply will eventually lead to faster growth in overall fixed investment, with construction typically accounting for half of investment expenditure. However, this trend is expected to emerge only in the latter part of the forecast period, due to the lengthy acquisition and planning processes.
GDP Data is updated in January, 2023. Figures below represent GDP contribution with the expenditure approach by segment. Data is sourced from World Bank, IMF, and local government and refactored by our team. Forecasted data is from EIU.
As of early 2022, Hong Kong had nearly 7.4 million residents and ranked 103rd in the world in terms of population. For such a population, Hong Kong’s land area appears to be very limited, with only 1,104 square kilometers, only a bit larger than New York. Hong Kong is located in the southeast of China and is composed of main island and many smaller islands in the South China Sea. It has a well-developed transportation network and densely built environment, making it one of the world’s most densely populated places, with a population density of around 6,600 people per square kilometer, ranking 5th in the world after only Macau, Monaco, and Singapore.
Hong Kong is also the second lowest country in the world in terms of fertility rate (only higher than South Korea), with a total fertility rate (TFR) of only 0.9 in 2020, according to World Bank data, far below the replacement rate of 2.1. In recent years, Hong Kong’s population has slowed down, declined, or even emigrated, with a 1.2% decrease in population in 2021 according to the Hong Kong government statistics.
Besides many Hong Kong people’s dissatisfaction with China’s intervention in internal affairs, a large part of the population decline is due to Hong Kong’s high housing prices. According to data from real estate consultancy CBRE Global Living, Hong Kong was rated as the world’s most expensive real estate market in 2020, with an average house price of around $1.25 million. Together with the instability of the political situation and China’s zero-tolerance policy towards the pandemic, Hong Kong is no longer as attractive as it used to be, resulting in many foreign nationals permanently returning to the United States, Britain, Australia, and other countries.
For an economy highly dependent on the service sector, the loss of senior talent will seriously affect businesses and the economy. Sally Wong, CEO of the Hong Kong Investment Funds Association, has publicly asked officials to relax the strict restrictions on exit and pandemic-related restrictions in Hong Kong, so as not to risk permanent talent loss.
Not only are a large number of foreign nationals leaving Hong Kong, but also many Hong Kong residents. According to Bloomberg, 88,800 Hong Kong people applied for UK National (Overseas) visas in the first three quarters of 2021. Thousands of others, whether local or foreign, are moving to safer areas in the region.
Chinese 92%, Filipino 2.5%, Indonesian 2.1%, other 3.4% (2016 est. by CIA)
Cantonese (official) 88.9%, English (official) 4.3%, Mandarin (official) 1.9%, other Chinese dialects 3.1%, other 1.9% (2016 est.)
Buddhist or Taoist 27.9%, Protestant 6.7%, Roman Catholic 5.3%, Muslim 4.2%, Hindu 1.4%, Sikh 0.2%, other or none 54.3% (2016 est. by CIA)
Hong Kong was under British control in the 19th century and returned to Chinese sovereignty in 1997 as a Special Administrative Region (SAR) of China, as per the Sino-British Joint Declaration signed in 1984. The territory was promised “a high degree of autonomy” for at least 50 years, and is governed by the Basic Law of the Hong Kong SAR, which acts as a mini-constitution. However, after the passing of the National Security Law on 30 June 2020 by the Standing Committee of the National People’s Congress, a controversial law that takes away the “full” autonomy of Hong Kong, the government is not perceived by many as self-ruled any more.
John Lee took office as the chief executive of Hong Kong in July 2022, succeeding Carrie Lam. The chief executive is selected by the 1,200-member Election Committee and advised by the Executive Council (the cabinet). The Legislative Council (Legco) is composed of a combination of direct vote, registered industry-body polls, and appointment by the Election Committee, with the first component accounting for about a fifth of the seats. The standing committee of China’s National People’s Congress, which is controlled by the Chinese Communist Party (CCP), has ultimate authority over the interpretation of the Basic Law.
As the Chinese government increases its authority through the national security law and closer guidance of the local government, Hong Kong’s autonomy will be totally diminished in the coming years. However, the judiciary’s ability to independently rule on commercial cases is unlikely to be affected by the national security law. Despite progress in securing new land for residential development, public dissatisfaction over the high cost of housing will remain a pressing issue in coming years.
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