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Hong Kong: what are the secrets and valuable experience of the “ideal capitalism”?

Hong Kong


The world mass media rarely report about Hong Kong but they always do it always in the superlative degree and high style: The Pearl of the East, the Asian Manhattan, the City of the Future, the Legendary City, the Asian Hollywood etc. The less emotional investors and businessmen of the world underline that first of all Hong Kong is a reference book and an example of the real economic miracle. The area has almost no natural recourses. Only a small percent of its land is suitable for cultivation (agriculture) as almost 90% of the territory is occupied by mountains and hills. That is why food, water, raw materials and fuels are imported. Not to mention frequent earthquakes, typhoons, storms, high humidity and unbearable heat. Over a relatively short period of time Honk Kong made itself known to the rest of the world. It is really interesting how they succeeded in creating a prosperous city of the future in the area where there were no conditions for that.
Statistical success of Hong Kong:
The Association of Traders and Investors of South-Eastern Asia under Masterforex-V Academy notes that:
·         According to Heritage Foundation, Hong Kong has been the world’s number 1 in terms of the level of economic freedom for the last 17 year. Last year it got 89.7 out of 100 points of the index.
·         The Honk Kong’s GDP per capita is $40500, which is more than in some of the world’s most developed countries like France, Germany and Japan. Hong Kong, a former British colony, has already outpaced the UK in many social and economic aspects. Nowadays it comes 1st in terms of dollar billionaires (40 billionaires). It is not accidental that in numerous Chinese TV series the heroines marry only the rich living in Hong Kong.
·         Hong Kong is the world’s 3rd biggest financial center after London and New York. It is considered a would-be global financial center. Its banks are considered almost the safest in the world. This tiny territory comes 8th in terms of currency reserves.
·         For most investors around the world Hong Kong is the main gate to Asia and mainland China. Twice a year Hong Kong hosts various international shows attracting hundreds of thousands of businessmen and investors from around the world.
·         It comes 10th in terms of trading volume. Just image, the net cost of its import and export exceeds its GDP.
·         Its capital is one of the richest cities in the world, which strikes with its Asian comfort and European stylishness. It is not accidental that it comes 5th in the index of world cities (Foreign policy magazine).
·         In terms of the “density” of millionaire families Hong Kong comes 2nd after Singapore. (8.8% of all the households in Honk Kong own the assets to the sum of more than $1 million)
·         According to the rating of the national welfare (composed by Legatum, Oxford Analytica and Gallop World Poll Service) it comes 20th on the list.
·         It is a real shopping heaven. Even the pickiest customers are amazed at the variety of products by global brands and relatively low prices the local shops can offer.
·         It strikes the visitors by its futuristic look: urban jungle with skyscrapers of glass and concrete and hi-tech equipment, machinery and gadgets.
As you can see this range of epithets can be multiplied. It is not accidental that Hong Kong has become the symbol of the “ideal capitalism”. Dictionaries provide a complicated meaning of what can be ideal. On the one hand, it is something perfect. On the other hand, it is something unreal. So, which one of the 2 meanings Hong Kong is closer to?
What are the secrets of the success achieved by the Orient Express (Hong Kong)?


It is common knowledge that Hong Kong, South Korea, Singapore and Taiwan are called “the 4 Minor Asian Dragons”, i.e. the group of 4 countries that turned into post-industrial, highly developed states over a relatively short period of time ( almost 4 times faster than Japan and 8 times faster than the US).
Apart form the numerous peculiarities the mentioned countries have (they will be mentioned below), Masterforex-V analysts distinguish a range of common factors, which serve as the basis of their break-neck economic growth:
1.      The external factor.   The thing is that while South Korea and Taiwan previously were of considerable strategic interest to the US as they were the countries opposing the “communist expansion” to the East and South-East of Asia, Hong Kong was a British colony for more than 150 years. That is why all these countries were constantly provided with generous economic and military support.
2.      The internal factors of this development model:
·        Favorable geographic position. All these countries turned out to be at the crossroads of the major economic and trade routes close to such centers of global development as the US, Japan and China. Hong Kong consists of a peninsula and a group of more than 260 islands. So, it has a favorable outlet to the sea. It is sufficient to say that one of the deepest natural sea ports is located in Hong Kong. Its destiny was predetermined in the middle of the 19th century, when it turned from a British cargo transit point in the region into “porto-franco” (a tax-free zone and free storage). It was Hong Kong that became the major channel of contacts between the People's Republic of China (PRC) and the West after it was created and faced external isolation. When Deng Xiaoping started his reforms in China, it was Hong Kong that became the main source of investments in the Chinese economy. At least China’s first special economic zone (Shenzhen) was created at the border with Hong Kong. Nowadays Hong Kong Harbor hosts nearly 300 ships a day. Hong Kong comes 4th in the world in terms of cargo transportation volume.
·        Fairly cheap labor power is another factor shared by the Asian dragons. After the proclamation of the PRC in 1949 a wave of immigrants running from the Communists flooded Hong Kong and Taiwan. As a result Hong Kong got cheap but qualified labor power. After the border with mainland China was opened Hong Kong saw another wave of cheap labor power flooding it. Moreover, the citizens of Hong Kong work more than 50hrs a week, which is one of the longest working weeks around the world. A 12h-hour working day with only one day-off is not an obligation but is rather widespread. I would be sufficient to say that the Hong Kong authorities will introduce the notion of the minimal wages (income) only in May 2011. It will be as low as $3.6/h (for comparison sake, in Japan - $9.85/h, in New Zealand - $9.67/h). Most people have a relatively low income of $650 a month )on average).
·        Political stability. Almost in all the mentioned countries there were authoritarian political regimes making radical economic changes and guaranteeing foreign investors a high degree of security for their investments. It is interesting that the British authorities started implementing democratic changes in Hong Kong only at the end of the 20th century in advance of handing it over to China. Until 1997 Hong Kong remained a British colony. The Governor was appointed by the Queen, there was no democracy. When Hong Kong reunited with China it was done in the mode “one country – two systems”, i.e. for Honk Kong it meant capitalistic economy and self-government. Until 2047 Honk Kong will preserve its own flag, emblem, government, law, currency (Hong Kong Dollar, HKD) and complete economic independence. The defense and external policy affairs are an exception. However, despite the fact that Hong Kong enjoys relatively wide autonomy, China almost completely controls its executive and legislative power and tries to prevent further democratization. For example, only half of the members of the Hong Kong parliament are elected through public voting. The others are elected by big-scale businessmen, lawyers and financiers. The head of the executive authority is still elected by 800 representatives of the Hong Kong business elite (the candidate for the post of Prime Minister was offered by Beijing and approved by Honk Kong). The Chinese authorities are afraid that general elections may undermine the political and economic situation in Hong Kong while seriously affecting the economic development in the area.
·        The mental peculiarities of the local population also played one of the key roles in the success achieved by the mentioned countries. It is clear that Hong Kong needs constant intensive labor in order to flourish as it is deprived of its own natural recourses. Diligence and desire for success are cultivated since early childhood. You won’t probably see any lazybones there. Other traits typical of the local population are:
ü Discipline. They respect the law and like when everything is in order.
ü Thrift and pragmatism. Indeed, Hong Kong is one of the most expensive cities in the world in terms of living costs. So they have to save on everything.
ü Loyalty. They do not judge others by appearance. Of course, there are many rich people living in Hong Kong. Yet, you may happen to talk to a person without even knowing that he or she is a millionaire. For example, Lee Ka-Shing, 82, the head of Cheung Kong (Holdings) Ltd. and Hutchison Whampoa Ltd, is the richest person in Hong Kong ($24B). Yet, his lifestyle is very ascetic. It wears relatively cheap clothes and footwear and watches. It gets up early every day. However, for some less well-off people public opinion can matter a lot. Sometimes they strive to show off and demonstrate their prosperity to others. They may, for example, arrange a more spectacular wedding then their neighbors did or buy some expensive clothes despite the fact that they will have to save on food.


1.      Flexible policies pursued by the Hong Kong authorities. Like the other “Asian dragons”, Hong Kong underwent numerous economic reforms to become an export-oriented country. These are the stages of its economic development:
·        It started with producing textile and clothes. Today the textile industry gives 30% of the export volumes. Because of the lack of its own recourses Hong Kong exchanged the products for the recourses exported by other countries.
·        Intensive attraction of foreign capital, equipment and technology from developed countries.
·        It underwent intensive industrialization. The pace of the GBP growth in the1980-1990s was 7% on average. However, most industrial enterprises moved to mainland China. So, nowadays the industrial production makes up only 9% of the entire economy of Hong Kong.
·        Because of the restrained domestic demand the external trade was stimulated. Hong Kong became export-oriented. Today almost 90% of the products are exported.
·        It proceeded to the production of hi-tech products and turned into one of the world’s leading centers of innovation and technology.
·         The service sector became the core of the economy: tourism, telecommunications, fixed property, insurance, civil services, restaurant and hotel business etc. The service sector makes up 90% of the economy with almost 85% of the Hong Kong population working in it. Tourism is a separate issue. Last year almost 36 million tourists visited the tiny Hong Kong (which is 5 times more than the population of Hong Kong). Tourists are attracted by many things like beautiful nature, magnificent skyscrapers, modern recreation areas, numerous clubs, bars, restaurants etc. Yet we have already mentioned that Hong Kong is the recognized capital of shopping with streets of boutiques (Prada, Gucci, Hermes, Luis Vuitton). And which is more important, the prices are 20% lower than in Europe, or even 60-70% lower during the season of discounts. And finally, in the 1990s Hong Kong became a financial and banking center. It should be noted that trade and logistics are the key economic sectors (29% of the GDP).
So, we can see that thanks to the dynamic and flexible economic policies Hong Kong managed to turn into a well-developed economic center.
Why is Hong Kong so interesting for investors and businessmen?


Indeed, they say that the name can determine the future. It can be said that Hong Kong is lucky to have the name that is translated as “fragrant harbor” ( they used to trade fragrances here). So why does Hong Kong attract numerous foreign investors and businessmen? Many experts assume that it happens because Hong Kong is a brilliant example of the “laissez-faire capitalism”. The only question is what made Hong Kong a brilliant example.
·         Free market, free flows of capital, products and labor force. The foundation of its liberal economic policy was laid during the 150-year period of the British colonial rule. Today almost all the economic activity is concentrated in private hands. That is why it is so flexible when it comes to adapting to the changeable economic conditions. However there was the time when the authorities interfered with the economy and regulated the sales of land, affected the national currency rate etc. The government started practicing the policy of positive non-interference only in 1980.
·         Favorable business and taxation environment. The tax burden in Hong Kong is minimal: there is no VAT, custom duties and various social fees. It has a territorial principle of taxation. That is why it is often called “offshore”. It is a free port with low taxes. For example, if some post-Soviet country wants to withdraw the dividends from its Chinese business through China it will have to pay 10%. If it does the same through Hong Kong it will pay 2 times less (i.e. 5% in the example). It is not accidental that in the annual Tax Misery Index published by Forbes Hong Kong is always among the few countries with optimal business taxation.
·         Strict compliance with law, which serves as a guarantee for numerous foreign investors. The Hong Kong business is efficient and confidential. Hong Kong can boast a transparent maintenance system, extremely low level of corruption and unbiased judges. In the 1970s 94% of all the civil servants were corrupt. In 1974 the authorities stated an uncompromised war against corruption: they abolished the presumption of innocence for officials (the principle “prove you bought it for your money, not for a bribe”), created an independent anti-corruption commission which was subordinate directly to the Governor General. They also stated a free 24/7 anonymous hotline. All these steps helped to reduce the corruption in Hong Kong to a minimum. According to the current Transparency International rating, Hong Kong comes 13th in terms effectiveness of combating corruption. Yet they were smart enough to not go into extremes to solve the problem.
·         Up-to-date infrastructure. Hong Kong can boast probably the most developed financial, office and transportation infrastructure in Asia. More over it is well-maintained:
-          All the parts of Hong Kong, including big islands, are connected with each other with a network of tunnels, flyovers and bridges.
-          It has a super-modern airport with a freight terminal, which comes 1st in Asia and 2nd in the world in terms of freight traffic. Airplanes take off every minute no matter whether it is day or night.
-          It is the world’s biggest duty-free container port. The trade fleet counts over 600 vessels. Over 570 vessels are registered in other countries
-          About 250 banks are located in Hong Kong. 70 out of the world’s 100 biggest banks have their offices in Hong Kong. Its banking system proved stable even during the global crisis
-          It has its own version of the famous Silicon Valley - Science & Technology Park – which provides the local hi-tech and innovative companies with all the conditions needed to be productive, including fully-equipped labs and offices at reduced prices.
·         Favorable investment climate. Hong Kong is considered the world’s best place for conducting a business. It offers almost unlimited opportunities:
-          British legislation protecting the copyrighted intellectual property from pirates
-          insignificant limitations in financial activity
-          governmental guarantees
-          a stable national currency – Hong Kong Dollar – one of the safest currencies in the world.
-          Local banks exercise no currency control
-          insignificant inflation rate
-          The Hong Kong Stock Exchange is the most active market in Asia. Before the crisis it was 2nd in terms of IPO. At the moment it is the only financial center in Asia that can perform online transactions in HKD, USD, EUR and CNY. The market capitalization of the Hong Kong Exchange is $1.8 trillion.
-          There is international arbitrage for settling disputes.
-          Most citizens speak fluent English. There are many foreigners living and working in Hong Kong.
In general, Hong Kong is a European rather than Asian city. Its citizens have British names and Chinese surnames. For example, current Chief Executive and President of the Executive Council of the Government of Hong Kong is Donald Tsang.
-          Hong Kong is close to the rapidly developing markets, especially to the Chinese market, which make it a “corridor” between Europe and Asia. It is convenient for importing/exporting various products from/to China. That is why many skeptics say that Hong Kong is successful only because it is situated close to China. Indeed, close relations with China are very beneficial for Hong Kong. It is sufficient to say that the major part of Hong Kong’s export is the re-export of the products made in China. Almost 60% of the Chinese export goes through Hong Kong.
Now it is clear why numerous international Asian corporations have their offices in Hong Kong (over 60% of 6440 international companies located in Hong Kong are regional offices and headquarters). That is why Hong Kong comes 11th in The Global Competitiveness Index 2010-2011.
The other side of the “fragrant harbor”.


Nothing can be perfect in all aspects. Hong Kong is prosperous but its economy has its own weak spots as well:
·         Its economy is fast growing and developing but it depends on international trade
·         Industrial production is not developed enough. Despite the relatively high development level of electronic and textile industries, the main product Hong Kong produces is …money.
·         It depends on other countries in terms of agricultural products. The agriculture is weak as it can satisfy the needs of only 20% of the population.
·         The correlation between the Hong Kong Dollar and the US Dollar is tough. That is why the global crisis was more painful for Hong Kong than for China.
·         Uneven distribution of the national welfare. High income per capita but relatively low wages (according to statistics, the poor make up 20% of the entire population of Hong Kong).
·         High density of population – 6352 people per sq km. because of the deficit of land the apartments are tiny and very expensive. The Hong Kong fixed property is 55% more expensive than the fixed property in London. And the prices keep growing. Since early 2009 the prices have gained 55%. Experts say that the Hong Kong housing market is the most overestimated housing market in the English-speaking world. There is deficit of fresh water and fresh air.
·         Demography. The average amount deliveries make up only 0.95 per woman, which is one of the lowest values in the world (the optimal level is 2.1). Over the last few decades Chinese immigrants contribute to the growth of population in Hong Kong (45000 a year).
·         Every year the influence of China becomes more considerable. Despite the agreement that China is not going to influence the economic system of Hong Kong until 2047 numerous experts anticipate radical changes on the territory in the near future.
We'll wait and see. In the meantime Hong Kong remains one of the flourishing parts of the world, especially now when the economic center of gravity is gradually shifting from the West to the East.  As long as Hong Kong is located in the epicenter of the Asian economic activity, it will not lose the opportunity to benefit from the situation. As for the “ideal capitalism” Hong Kong proved that such an economic model deserves to exist.
Survey: Will Hong Kong become the “capital” of the financial world?
  • Yes, it will. There are all the necessary conditions.
  • No, it won’t. The vacancy is filled by New York and London.



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