Hong Kong: One country, two economies

INTRODUCTION

In 1989 China passed through another cycle of abrupt economy correction and a severe crack
down on political dissidents in Tienanmen Square. Some people were confused over these
issues and concluded that for a Hong Kong economically dependent on an ailing economy managed
by officials wearing Chinese jackboots, the future was dim (Mann 1990). This has led some people
mistaken that Hong Kong might crumble in the near future. On July 1st, 1997 Hong Kong was
returned to Chinese sovereignty and this territory is now called Hong Kong Special Administrative
Region (HKSAR) of China with a high degree of autonomy. The Joint Declaration of one country,
two systems, was registered at the United Nations in 1984. Hong Kong remained a free port, a
free trader and level playing field for business. HKSAR is empowered to conduct its own external
economic relations and enjoy a separate membership of the World Trade Organization, APEC and
other international economic organizations. The Joint Declaration also states that Hong Kong is
to be ruled by Hong Kong people (HKSAR 1997). HKSAR has a great challenge ahead; which is to
maintain and prove that HKSAR will still be a competitive place for business and restoring
confidence of existing and potential foreign investors.
There were still lots of companies coming to Hong Kong in spite of the uncertainty after returning
to China. The growth of American companies coming into HKSAR will remain high at 6-7%
annually. Mcdonalds and Pizza Hut are two cases in point. There is also an increasing trend in
investment from Japan into Hong Kong, mainly in the banking, insurance and securities industries.
Currently there are more than 1200 Japanese companies operating in HKSAR.
The purpose of this research paper is to examine the current business environment of Hong Kong,
understand the countrys development model, describe some major and critical issues of doing
business in Hong Kong and identify the strategic changes required by MNCs in order to be successful
in HKSAR.

Summary
The Hong Kong economy regained some momentum in the second quarter of
2016, growing modestly by 1.7% in real terms over a year earlier, up from
0.8% in the preceding quarter. This was largely underpinned by a pick-up in
goods exports. On a seasonally adjusted quarter-to-quarter basis, real GDP
rebounded distinctly by 1.6% in the second quarter, reversing the 0.5% decline
in the preceding quarter.

Global economic growth was still slow in the second quarter, yet reflected some
relative improvement from the disappointing start of the year. Regional trade
flows also showed initial signs of stabilisation. The UK vote in late June in
favour of leaving the EU caused a temporary large sell-off in the global

financial markets and worsened the already subdued global outlook, but had
little impact on the wider European and global economy in so far as the second
quarter is concerned. Against this background, Hong Kongs total exports of
goods resumed modest growth in the second quarter, after declining for four
consecutive quarters. Meanwhile, exports of services also saw a slightly
narrower decline, reflecting reduced drag from the slowdown in inbound
tourism and regional trade and cargo flows.
On the domestic front, private consumption expenditure still grew slightly in the
second quarter. Meanwhile, the decline in investment expenditure narrowed
notably, thanks to the pick-up in overall building and construction works,
though private sector machinery and equipment acquisition was still subdued.

The labour market remained remarkably resilient. The seasonally adjusted

unemployment rate held unchanged at 3.4% in the second quarter. Wages and
earnings sustained further growth. Total employment grew modestly, but signs
of slackening labour demand in the trade- and consumption-related sectors
continued to be a cause for concern.

The local stock market remained rather volatile in the second quarter, but the
range of fluctuation narrowed compared to the preceding quarter. While the
UK vote in favour of leaving the EU surprised global financial markets in late
June, equity markets stabilised quickly after a brief jittery period. Residential
property market activity also rebounded during the second quarter from its
low, with prices showing a small increase.

Underlying inflation eased back in the second quarter, thanks to largely

moderate local cost pressure and the absence of imported inflation. Looking
ahead, barring any unforeseen fluctuations in international energy and food
prices, consumer price inflation is expected to remain benign in the near term.

Techonology
Generally, Hong Kong is positioned well and has very good achievements in many of the
general characteristics of a KBE. Hong Kong has excellent ICT infrastructure and there has
been a steady growing trend in adoption of information technology in the community. Hong
Kong people are increasingly equipped in terms of knowledge and skills. Also, Hong Kong's
favourable business environment provides business establishments with confidence, and
innovation activities have been growing steadily in recent years.

Innovation activities play an important role in a knowledge-based economy. R&D is a key

component of technological innovation, whereas the latter also includes other related activities
(such as pre-production before mass production of new products and training of employees for

new processes) which support the implementation of product and process innovations. While
non-technological innovation is not directly related to the application and advancement of
science and technology, it also contributes to the competitiveness and performance of business
establishments along with technological innovation.
R&D activities refer to creative work undertaken on a systematic basis in order to increase
the stock of knowledge, and the use of this knowledge to devise new
products/processes/applications or improve existing products/processes/applications.
Technological innovation refers to activity conducted for the purpose of (i) introducing any
technologically new or significantly improved product or service; or (ii) introducing any
technologically new or significantly improved process in manufacturing a product or in providing
a service. In most cases, product and process innovations involve R&D activities which are
either conducted in-house by business establishments or contracted out to other organisations.
Non-technological innovation includes the implementation of important changes in
organisational structures and marketing strategies.

Political

Hong Kong's business community is

'freaked out' over China's crackdown
A crisis of confidence has hit foreign and local-owned companies in Hong
Kong following the abduction of five booksellers by Chinese agents
The words were unusual coming from the mouth of a seasoned business figure
in the hyper-competitive world of Hong Kong finance.
The middle-class, the professionals, even the accountants: people are just
freaked out about what is going on.

Author linked to missing Hong

Kong publishers calls on Beijing
to free them
Read more

But the man, who runs one of Hong Kongs business associations, was not
talking about the slowdown of Chinas economy. Instead, he was referring
to the recent disappearances of five Hong Kong booksellers, a case that has
sent shivers through the territory and raised fears that its one nation, two
systems model is under threat.
The situation is so sensitive that he declined to be named.
The booksellers, including British and Swedish passport holders, went missing
one by one over the past few months and are suspected of being abducted by
Chinese agents from inside Hong Kong and, in one case, from Thailand.
[W]hile many Hong Kong Chinese business directors have their foreign
passports, what has happened shows that even these may not be capable of
offering any protection after all, he said.
The comments underscore a deepening crisis of confidence among foreign and
local companies in Hong Kong. Some of these companies are reviewing their
relationship with the former British colony in light of the ongoing booksellers
scandal.
The Hong Kong-based booksellers who include British editor Lee
Bo andSwedish publisher Gui Minhai are currently in the custody of Chinese
security services having mysteriously disappeared last year, in southern China,
Hong Kong and Thailand.
Many believe Gui and Lee, who specialised in salacious books about the
Communist party elite, were abducted by Chinese agents and spirited back to
the mainland at the behest of Beijing.
Lees apparent abduction in particular he is suspected to have been seized
from the streets of the supposedly autonomous Hong Kong has sent
shockwaves through the former colonys dissident and activist community.
But major corporations and smaller business interests are also showing
growing signs of unease about the changing climate in Hong Kong.
At the end of January, an anonymous HSBC insider suggested the
situation might influence possible plans to relocate the banks headquarters to
Hong Kong.

The situation in Hong Kong appears to be getting worse, the source told
Reuters. You have to wonder if the city will remain a suitable base for an
independent-minded, top global financial institution.
Concerns about Chinas increasing influence over the financial hub and its
independent status were cited as a possible factor in the banks final decision
on the relocation of its headquarters.
Four Hong Kong-based chambers of commerce contacted by the Guardian
declined interviews on the topic, underlining the increased precautions being
taken by the foreign business community in Hong Kong.
But Mark Simon, a senior executive at Hong Kongs pro-democracy Next
Media Group, said some investors were now turning their backs on Hong
Kong because of the political situation.
We have seen this happen in China, with people starting to get out as the
situation tightens. The same is happening in Hong Kong now: even [billionaire
tycoon] Li Ka-shing is selling his China and Hong Kong assets Simon said.
Is political instability a big issue? Yes, but there are still not a lot of
alternatives to Hong Kong if you want to do business with China.
Nevertheless some seem to be weighing their options as a result of recent
events. Steve Vickers, the chief executive of Steve Vickers and Associates, a
specialist in political and corporate risk consultancy in Hong Kong, said his
firm had had approaches over the past couple of weeks from its clients on
the need to review their risk profile in light of the booksellers disappearance
case.
Of even greater concern than the booksellers case is the apparent erosion of
the rule of law in Hong Kong.
Vickers said: The Hong Kong government appears to now have considerably
diminished autonomy and the [central government] liaison office seems to be
strengthening its position.
I think the current action is calculated to cause people to keep their heads
down when it comes to producing seditious material as the Chinese public
security probably sees it. But it has also certainly sent a chill through the
business and social arenas in Hong Kong.
The growing concerns within Hong Kongs business community come against
a slowing economic backdrop, with the stock markets having weakened

considerably since last year both in China and in Hong Kong, and a growth
forecast at its lowest levels in the past decade.
Deeply polarised politics, a weaker economy prompting a probable fall in
property prices, and a failure to innovate will erode Hong Kongs traditional
reputation as a global business centre in 2016, according to a SVA report on
Hong Kong and the current situation.
Freedom from fear is a thing of the past for Hong Kong and this applies to
everyone: businessmen or student, said Law Yukkai, of the Hong Kong
Human Rights Monitor.
The last bastion of Hong Kongs guarantees is the law. What we have left is
our legal system, but people fear that this may be under attack too, the head
of the business association said.
I unwittingly chose a very politically charged time to study abroad in Hong Kong. The
locals here are in the midst of a debate about their own identity.
What does it mean to be from Hong Kong? What powers should the mainland Chinese
government have on the island? Should Hong Kong push for more independence or
even full separation from the mainland?
Hong Kongs political system is one of the most unique situations in the world. Under
One Country, Two Systems, Hong Kong is a part of communist China, but maintains
its own capitalist system. Hong Kong citizens enjoy certain freedoms that mainland
Chinese citizens dont. Hong Kong has its own judiciary, police force and currency, and
its people have freedom of speech and assembly. When the territory was handed over
from the British to the Chinese in June of 1997, the two powers agreed Hong Kong
would be governed under this system for 50 years.
Recently, some young people in Hong Kong have started to question the terms of this
agreement. In 2014, the Umbrella Revolution made international news when students
took to the streets to call for universal suffrage for Hong Kongs chief executive. They
used umbrellas to shield themselves from pepper spray, earning the movement its
name.
Recently, tensions flared again when booksellers who have published information
critiquing the Chinese Communist Party and President Xi Jinping went missing under

suspicious circumstances. Some activists believed they were kidnapped by the Chinese
government, which they said was a violation of the One Country, Two Systems
agreement. Some of the missing people showed up in mainland police custody months
later. They said they had turned themselves in to authorities, but family members raised
doubts about their confessions. A few have since returned home and cancelled their
missing person cases with the Hong Kong police.
There was a massive protest relating to the booksellers on the day we arrived in Hong
Kong. That protest was peaceful, but on Feb. 8, Chinese New Year, it was a different
story. Rioters clashed with police who shut down illegal food stalls in a popular market
district. These food stalls are set up every year for Chinese New Year.
This event wasnt connected to the booksellers, but there are a number of theories
behind why it happened. Some scholars say that frustration with the mainlands
attempts to suppress Hong Kong culture played a role. Others say protesters were
simply fed up with the economic situation in Hong Kong. Authorities are still
investigating whether the incident was pre-planned and by whom.
Since Ive been studying in the city, Ive been trying to follow all of this closely, but, as
Im sure you can tell, its incredibly complex. Although Ive been following local news
sources, Ive learned so much more from just talking to locals. This idealistic,
democratic fervor is fueled almost entirely by Hong Kongs youth. In general, older
people are less involved.
There are people alive today who were old enough to remember the time of the
handover between Britain and China, and who will also be alive in 31 years when the
One Country, Two Systems policy expires. These people probably went through school
under British rule. They worked and raised children of their own in a capitalist but
Chinese Hong Kong. When they are nearing retirement age and their children are
entering the work force, it will be a time of political upheaval as Hong Kongs fate is
decided once again. When theyve lived under so many different rulers and political
systems, its no wonder people here arent sure what it means to be a Hong Kong native.
When I talk to people back home about these issues, some of them ask me where I
stand. My answer is that I have no idea. As an outsider, I dont think I have a right to
have an opinion. I dont get to decide what it means to be a native of Hong Kong. All I

can do is appreciate the opportunity this semester offers me in being present for such an
important conversation.
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Please consider the water supply and electricity supply first before moving on to political
independence. Some politicians have kept mentioning the potential "threats" of the
Mainland Chinese army/police. However, ironically, the Mainland Chinese army does
not really need to do anything at all to shake HK. You know what would be happening if
the Mainland Chinese suppliers of water and electricity to HK suddenly shut down their
lines for one week, right? I'm afraid the daily life of normal HK people would be seriously
impacted, and the social orders could be heavily affected as well. Even worse situations
could occur but I would rather not describe. If you are not ever possibly able to supply
water and electricity independently within HK yourselves, it's not smart at all to
repeatedly mention an unrealistic, deeply flawed and groundless "goal of HK
Independence".
It's a good one. Just read.
Water: definitely yes from Mainland China.
Electricity: How to get coal and natural gas? "...operate advanced power stations fueled by coal or
natural gas..."

Social Structure
Hong Kongs national language is Cantonese. However, Hong Kong Cantonese is not exactly same
as the actual Guangzhou Cantonese or Punyu Cantonese, which was regarded as the purest form
of Cantonese. Over the years, Hong Kong people have developed and enriched the language with
emotions and Western borrowed words (Lithbridge 1980). Hong Kong is bilingual society, with
English being the most frequently used language in their daily work. Interestingly, one who speaks
Hong Kong Cantonese need not necessarily be Chinese. Many foreigners from Philippines, Britain,
America, Australia, Japan, India and Pakistan working in Hong Kong speak fluent Cantonese,
thus making Hong Kong a well-integrated society, with over 95% of the population having
communication skills in Cantonese. Hong Kong has two major systems of social stratification, one
European and the other Chinese. They do not interlock, although high-ranking members from each
are found working together amicably. Each system is too autonomous with its symbols, rituals,
rules and gradation of status (Hong and Cethbridge, 1995). It is possible to distinguish four main
categories of Europeans in Hong Kong. They are:

1. Government servants.
2. Those employed or self-employed in private sectors.
3. Members of professions; teachers, clergymen and missionaries, nurses and social workers in
voluntary organizations and
4. Technicians and supervisors.
There were no Europeans working as bricklayers, dockers, machinists, fitters or plumbers, and
other skilled or semi-skilled labor.
Dual-income family is a norm among Hong Kong Chinese. Fact is that female gender discrimination
in job recruitment, income and political rights exist although Hong Kong has reached the status of
an advanced industrialized society. The social class differences are classified according to gradation
of wealth. Hong Kong people can be distinguished into:
1. Professionals and top managers
2. Business entrepreneurs
3. Bureaucrats and clerks
4. Semi-skilled and unskilled labor
Educational achievements and hard work are considered the most critical personal factors for
success. Todays dynamism of Hong Kong has been achieved through the predominant goal of the
society doing business and all that entails for advancement and material well-being. This may
be due to the historical imprint resulting from lack of identification with the colonial regime and
identity vaunting opportunity, mobility and success.

Hong Kong has most of the social problems found in other developed countries plus a few unique
ones. Drug addicts, secret society members, conventional and white collar crimes are common.
There are conspicuous numbers of shady businessmen, corrupt policemen and civil servants.
Lubrication is common in the lower social class in order to get things done effectively. Independent
Commission Against Corruption (ICAC) was established to eliminate some syndicated corruption
within the police force that gave protection to those that gained livelihood illegally from prostitution,
gambling and drugs.
Hong Kong, from whatever perspective one views it, is an extra-ordinary society, a mixture of the
antique and the modern; economically advanced though socially backward in many areas. It is a
place where different communities come together, principally in the market-place.

Legal

As regards the legal perspective, the Hong Kong protects the right of individuals and legal persons
to the acquisition, use, disposal and inheritance of property and the right to compensate for lawful
deprivation of their property. Hong Kong has its independence over finance and uses its financial
revenues exclusively for its own purposes. The Government of Hong Kong provides an appropriate
economic and legal environment for the maintenance of Hong Kong as an international financial
center. Hong Kongs currency is backed 100% by reserve fund and Hong Kong $ is freely convertible,
with no foreign exchange control policies (Law of HKSAR).
The HKSAR Governments control over business disclosure is minimal. All wholly owned
subsidiaries of US companies need not file any financial statements to the government. There are
minimal capitalization requirements for a private company thus encouraging foreign direct
investments into Hong Kong. However, the role of the government is larger than it appears with
close scrutiny and regulations through various schemes of control, e.g. the grant of franchise to sole
supplier, government participation in large-scale projects like container facility at Kwai Chung
and the first cross-harbor tunnel.
Though the HKSAR Government does not influence labor and capital prices, it does have
considerable control over the price of land and over land policy itself. The intervention in the
financial sector is more legalistic and concerned with regulatory control on financial institutions
so as to ensure the industrys stability and to safeguard the interest of individuals. Nevertheless,
there are also instances of governments direct intervention in the monetary sector. In 1995, the
government advised banks not to provide mortgages of over 70% of the purchase price, with the
intention to check escalating property prices (Dun & Brad Street, 1996).

Firms can be exposed to political and legal risk due to possible government actions or outside the
governments control. Political related risk in Hong Kong can be summarized as shown in Figure 2.

Environment

Survey shows that Hong Kongs business environment and

competitiveness are top concerns for business community
A survey by PwC has shown that nearly seven out of ten (67%) senior executives rank Hong Kongs business
environment and its competitiveness as their top concerns. Close to half (47%) of respondents believe that the
opportunities and challenges brought by the Free Trade Zones (FTZs) in mainland China are crucial for these
two areas.
For the third consecutive year, PwC has surveyed its clients in the run-up to the Hong Kong Budget in order to
identify what issues across Hong Kong society as a whole are demanding their attention. This years survey
collected 236 responses between 26 January and 9 February, with the majority of respondents being senior
executives.
This years findings show 67% of respondents listing Hong Kong business environment/competitiveness as
their top concern, followed by property market / land policy (23%). These results are broadly in line with
PwCs 2014 survey, when the figures were 63% and 26% respectively.
When asked to focus in on their three major concerns for Hong Kongs business environment and
competitiveness, close to half (47%) believe that the most important issue is to position HK to embrace the
opportunities and take on the challenges of the FTZs in Mainland China. This is down from a 61% rating in
2014. In second place comes further support for pillar/ priority industries, which rose from 18% last year to
27% this year. In third place, tax incentives for specific industries and tax rate adjustments/ tax reform both
scored 9%. This indicates how close tax measures are to the heart of the business community.
The survey shows that as more FTZs are being set up in mainland China, the Hong Kong business community
is gaining a better understanding of FTZ policy. In response it is directing its attention to how Hong Kong can
further support pillar/priority industries and adjust tax policies to keep Hong Kong businesses competitive, says
PwC Hong Kong tax partner K K So. As far as promotion of industries is concerned, PwC welcomes the
measure announced in the recent policy address by the Chief Executive regarding the aviation financing and
leasing industry in Hong Kong. We believe that this important development will bring about exciting new
opportunities in three of Hong Kongs pillar industries: namely financial services, logistics and services. We look
forward to the government drawing up the relevant tax measures to promote aviation financing and leasing so

as to strengthen Hong Kongs position as an international centre for this important industry.
The survey also reveals consistent concerns regarding the property market and land policy between 2014 and
2015. Ranking first, with 49% in 2014 and 44% in 2015 is increase land supply/ speed up land sales and urban
renewal. Next comes regulate property prices through administrative measures (28% and 30% respectively),
followed by increase public housing and improve its allocation (17% and 20% respectively).
When looking at demographic challenges, further invest in education / training again comes top at 33%,
although this is slightly down on last years figure of 38%. Retirement protection / MPF moves up from third
place last year (18%) to second place on 25%. In third place comes strengthen medical / healthcare services
(18%), which was 23% last year.
Improving air quality remains the highest environmental protection issue, though it slips to 51%, down from
60% last year. Waste management / recycling, which stood at 27% in 2014, edges up slightly to 26% in 2015.
The third major concern is incentives for businesses to go green, which moves up from 10% last year to 17%
in 2015.
Environmental protection is important for Hong Kong to retain its competitiveness and attract foreign
investment, says PwC Hong Kong tax partner Agnes Wong. The survey indicates that over half still believe
that improving our air quality is a top environmental concern and a key issue for the business community. We
believe that air quality is an important factor for talent thinking about working in Hong Kong. Hong Kongs
overall competitiveness is enhanced when these people want to carry on working here. More respondents this
year want to know how the government will incentivise businesses to go green. This shows that businesses are
positive about going green, provided a corresponding policy is in place.
Alongside these survey findings, PwC today revised its forecast for the overall budget surplus which the SAR
government will record for the year 2014/15. Calculated on SAR government financial figures as of 31
December 2014, PwC now predicts total revenues of HK$479.3 billion for the year 2014/15. Revenues from
profits tax and salary tax will be HK$133 billion and HK$67.2 billion respectively. Total stamp duties could
amount to HK$79.5 billion. This years expenditure will stand at HK$398.8 billion. Taking into account that the
government had earlier announced that it would buy back HK$9.7 billion in government bonds, this brings this
years surplus to HK$70.8 billion in total. We forecast that by the end of March 2015, Hong Kongs financial
reserves will stand at HK$799 billion, equivalent to 24 months of total government expenditure.

Hong Kong has continued to beat its key rival Singapore to be ranked the
most economically free market in the world, according to the Fraser Institute in
Canada.
But an economist has warned that recent political tensions in the city,
including themissing booksellers saga capturing international media attention
this year, have added uncertainty as to whether the city could still top the list
in future.

Conlusion in PESTLE PDF