Economic Interactions: China Vis‐A‐Vis Hong Kong

Hong Kong's role has been integral to China's unprecedented economic growth, but privatization ranks first in importance. Another key factor is Beijing's putting economic reform before political reform. Giving democracy to a society in chaos likely makes matters worse. Hong Kong and China both have profited from their partnership. As China has opened up to allow transformation into a market economy, Hong Kong has provided informational impetus for change, a capitalist model to copy, and middleman functions for China to participate in outside‐world goods and financial markets. The collapse of Communism in China and elsewhere has increased the supply of cheap labour perhaps by 2 billion. Manufacturing countries with expensive labour and high cost welfare programmes—such as those in the United States, Canada, and Europe—will have difficulty. Capitalists in these countries will do well by investing abroad but not in their own countries. Though wrong in detail, the factor price equalization theorem—that international movement of goods and international movement of factors of production are equivalent—basically is correct. If China continues moving toward privatisation and joining the international community, it will become fiercely competitive, and prospects will be bright for both China and Hong Kong. However, China's recent drift from capitalism clouds those prospects. Fundamentally, three kinds of rights systems exist: (i) a capitalist system, with well defined private property rights, protected by law, where control of resources is based on ownership; (ii) a hierarchical system, such as Communism, where control of resources is based on one's rank in the hierarchy; (iii) a system of corruption, where control of resources is based on bribes and patronage. China rapidly had been making a transition from the second system to the first but recently seems to have derailed into the third. In any case, Communism's collapse is one of the great events in human history. The hero of that event is Deng Xiaoping—not Gorbachev, nor Thatcher, nor Reagan. Hong Kong, by contributing significantly to China's capitalist movement, has led the Communist world to change.