Chinese Investment in Hong Kong: Issues and Problems

Undoubtedly, integration offers a new opportunity to both Hong Kong and China. This process encourages a two-way flow of capital that can exploit comparative advantages of the two differently endowed regions. In this article, however, we have examined this process from a different perspective, particularly in terms of some of the problems that may arise. As the economies of China and Hong Kong start to integrate, the exploitation of privileges held by China-backed companies may adversely affect the operation of the market economy in Hong Kong. One possible solution is to delink the relationships between governments and enterprises in China, so that the privileges currently enjoyed by the China-backed companies can be removed. Such a policy would in principle eliminate one of the major obstructions to the process of marketization in the Chinese economy. But local government bodies in China are working against this policy and, as shown above, are engaging in activities that allow them to expand and consolidate their companies. Such actions tend to sabotage the attempts of the central government to remove control of local governments over enterprises and thereby inhibit the transformation of the economy toward a system in which competition can effectively operate.