(THIS ARTICLE IS COURTESY OF FORBES INVESTING MARKET MOVES)
How Does Centrally Planned China Raise Capital?
Through careful planning and strategic economic policy reforms, mainland China has evolved from a country struck by poverty to the world’s second largest economy. But don’t think this was solely the Chinese bureaucrats’ doing. The U.K.’s special “present” to China proved to be essential to the story of China’s miraculous development.
In 1997, Tony Blair, who was U.K.’s prime minister at the time, went to Hong Kong to give the city back to Beijing. 156 years of colonial rule had completely transformed the city.
What was once a backwards fishing village, was now one of the worlds’ most important financial hubs.
Hong Kong currently has the highest concentration of international banks in the world. The 71 largest international banks and almost 300 international fund management companies are housed in Hong Kong. The island also has most beneficial legal regulations for both residents and companies.
China basically saw Hong Kong attending a 150 yearlong financial course. The financial powerhouse now belongs back to the Middle Kingdom that uses it to funnel foreign capital into its centrally planned economy. Something the mainland wasn’t able to do by itself.
Never before has a centrally planned economy ever received such a precious gift as Hong Kong.
How Hong Kong feeds China
Companies in planned economies – like China’s – typically have a hard time raising capital. That makes Hong Kong a key factor in China’s economic development.
With its leading financial institutions in place, Hong Kong is able to raise capital unhindered by political or economic instability. A problem free market economies like in the U.S. generally have to deal with.
Four years before Hong Kong was given back to China, it was responsible for 27% of China’s GDP. Let’s put this in perspective. At the time, only 6.5 million people lived in Hong Kong while mainland China had a population of 1 billion people. It’s easy to see that Hong Kong’s impact on China’s economic growth was tremendous.
The mainland did catch up over time as the graph below clearly illustrates. By 2017, Hong Kong accounted for merely 3% of the GDP.
Hong Kong’s return in 1997 coincided with the dramatic rise of China’s GDP.
China’s economic growth was partially due to twenty years of export-oriented policies from Beijing. But without Hong Kong’s well-established financial markets, necessary funds couldn’t have been raised.