Why Hong Kong's future depends on China's Belt and Road

There's more than money at stake.

by Adam Gale, Hong Kong
Last Updated: 15 Sep 2017

Early last year, the then chief executive of Hong Kong CY Leung made a policy address in which he mentioned the phrase ‘Belt and Road’ no fewer than 48 times. It was his ‘strong and stable’ moment, earning him widespread derision in Hong Kong’s free press, but for the city’s future, the Belt and Road is no laughing matter.

If you’re unfamiliar, the Belt and Road Initiative is Chinese president Xi Jinping’s signature foreign policy. The idea is to use China’s vast economic might to drag most of the Eastern hemisphere out of poverty and into the global economy. At its foundation will be trillions of dollars of infrastructure projects along the Silk Road Economic Belt (land corridors from China to eastern Europe and the Persian Gulf) and the 21st Century Maritime Silk Road (shipping routes to south-east Asia and east Africa), designed to allow these countries to develop and trade – with the world in general but specifically with China.

Leung made a great effort to ensure Hong Kong would take a slice of this multi-trillion dollar pie, and it appears to have paid off: a few months after Leung’s address, PRC politburo member Zhang Dejiang anointed Hong Kong as a ‘key link’ for the Belt and Road during a summit in the city.

‘In designing its 13th five-year plan and the vision and actions for the Belt and Road, the central government has made it a major policy to support Hong Kong’s participation in the Belt and Road development,’ Zhang said, working the room as only a Chinese politburo member can. ‘We believe that Hong Kong… will be able to make an important contribution to this endeavour.’

Since it was announced in 2013, the Belt and Road has opened up immense opportunities for Hong Kong financial services companies, lawyers, construction firms, transportation companies – you name it. These will only grow. But there’s more at stake here than mere commercial considerations.

Hong Kong is not what it was to China when it rejoined the motherland 20 years ago. Back then, it was the People’s Republic’s only modern city and by far its greatest port, a key asset for China’s stupendous economic growth. That's why it was able to establish itself as the world’s pre-eminent hub for offshore renminbi trading and the main conduit of capital flows in and out of China.

But increasingly, international businesses are trading directly with the mainland. Hong Kong's share of Chinese capital inflows and outflows has fallen from two-thirds to just over a half. Just as the former British colony once climbed the value chain from cheap manufacturing to quality manufacturing to high-end services, the same is beginning to happen to Beijing, Shenzhen and above all Shanghai. Mainland ports have already surpassed Hong Kong’s, which is now the world’s fifth biggest (its cargo airport is still number one). Who’s to say their financial institutions, advertising agencies and consultants won’t do the same?

Economic growth isn’t a zero sum game, but this isn’t just a matter of friendly competition. If Hong Kong loses its unique role in China’s grand plan, why would the Communist Party continue to allow it the privileges of freedom after the One Country, Two Systems agreement expires in 2047?  

This is why the Hong Kong government is trying so hard to promote itself as a financing, logistics and arbitration centre for the Belt and Road, for instance by pursuing policies to develop its bond and Islamic finance markets (many of the Belt and Road countries are Muslim). Hong Kong needs more than ever to prove its unique economic value to China as the gateway between East and West.

It’s still a strong pitch. Yes, many of the advantages Hong Kong possesses as a place to do business, for the Belt and Road or otherwise – prime location, access to top talent, pro-business culture and world-class infrastructure* – are replicable. If Shanghai doesn’t have all these already, it will do soon.

But many other advantages are not so easy to copy. Hong Kong’s friendly regulatory and tax environments (see box), for instance, are realistic for an offshore trading entrepot but not for a vast continental behemoth like China. Its freedom of capital stands out in the People’s Republic for a reason – the politburo doesn’t want free capital flows out of mainland China, because it wants control.


Hong Kong is unusual in that in that almost all property is leasehold. The government owns the land itself, and takes a cut every time an existing leasehold is renewed or extended. This land premium, combined with stamp duty, general rates and government rents, accounts for around half the city's income, allowing it to operate a rather liberal tax regime:

Profits (Corporation) Tax: 15-16.5%

Income tax: 2-15%

Tariffs: largely 0%, as Hong Kong is a free port

Inheritance duty: 0%

VAT/Sales tax: 0%

More importantly, Hong Kong has an international culture and business mindset that cannot simply be duplicated. Its historic commercial ties to foreign lands are strengthened by its substantial non-Chinese population (around 8%), the widespread use of business English, the common law system, operating under an independent judiciary, and the free access to the global internet.

‘I have some friends working in a tech company just across the border in Shenzhen,’ says Stephen Liang, assistant executive director of the Hong Kong Trade Development Council. ‘Every weekend they travel across the border because they need to know what kind of products and new ideas are available in other markets. We can get information freely, we know what’s happening in every corner of the world, but in China because of their own system in communications especially, there are certain limits.’

Unsurprisingly for a government employee, that’s about as political as he gets, but Liang hits on an important point: Hong Kong’s political uniqueness is actually a major source of its economic value to Beijing, as well as to businesses both international and domestic. It’s inconceivable that any city in mainland China could challenge Hong Kong as the world’s freest economy, or catch up with its enviable position among the world's easiest places to do business.  

The 50km Hong Kong-Zhuhai-Macao Bridge, due to be completed by the end of 2017. China is splashing out on infrastructure to connect Hong Kong, Macao and the nine mainland cities of the Pearl River Delta, with an estimated combined urban population of over 66 million. It is hoped much improved road and rail links will reduce passenger and container transport times by as much as half. 

This is ultimately why it is so well placed to exploit the Belt and Road – the city has a foot in both China and the West, both culturally and in business experience and relationships. There are no fewer than 8,000 foreign businesses with operations in Hong Kong, over 1,400 of which use the city as their regional headquarters for either the mainland or Asia Pacific. Hong Kong business people, meanwhile, also have 30 years of experience operating in the rapid, infrastructure-driven growth environment of the mainland.

Hongkongers do not take their special position for granted. They are more than aware that mainland cities are not only becoming more sophisticated, but also pitching for international firms to do business with them directly, rather than through Hong Kong intermediaries. Indeed, they go to extraordinary lengths to promote themselves and their trade interests.

Walls and billboards across the commercial district speak of fashion exhibitions and watch fairs. Even amid the sweltering trinket markets of Wan Chai, you’ll find blokes handing out fliers for headline exhibitions and events. And on 21 September, the show is coming to London for the major Think Asia, Think Hong Kong event, bringing together business leaders across various sectors to discuss UK-Hong Kong trade and investment opportunities.

There are significant aspects of Hong Kong’s future that will ultimately be determined by powerful men (and they are all men) behind closed doors. Hong Kong knows this, but it also knows that its unique position as an international trading city in China becomes more precious, not less, as the mainland opens up to the world through the Belt and Road. The city’s fighting hard to hold onto its special status with all the advantages that brings; given what Hong Kong's got going for it, it’s hard to bet against it.

*Hong Kong’s underground network, the MTR, is spacious, air-conditioned and efficient enough to make this Londoner green with envy – hardworking Hongkongers can easily schedule six or seven in-person meetings a day, Liang informs me,with another over dinner.


It’s a terrible name. Or, at least, its lyrical quality in Mandarin gets lost in translation. But the Belt and Road Initiative promises to be transformative. Announced in 2013, the open-ended but probably multi-decade project involves huge sums of capital from the Chinese state in the forms of grants and loans, to fund major infrastructure work such as sea and air ports, roads, railways, electricity generation and distribution and other utilities.

Branching out from the public investment will be numerous public-private initiatives. This is largely where Hong Kong comes in. Projects such as industrial parks, shopping malls, mines, waste treatment plants, hospitals, crematoria and safe-housing projects will be paid for via equity and bonds from private investors, and built by local and foreign firms, often in joint ventures. Hong Kong recently set up the Infrastructure Financing Facilitation Office (IFFO) to help foster these deals, and hopes to be the arbitration centre for when disputes arise.

All in all, the Belt and Road could gobble up a trillion dollars a year in public and private money, bringing huge returns and contributing to enormous economic growth for a great swathe of the world’s population.

Some, however, look at China’s policy as a cynical attempt to grow its soft power and draw smaller countries into its sphere of influence. At the very least it will put to good use the vast Chinese construction industry, which has struggled of late as the country starts its transition to a service economy.


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