Hong Kong's status as a free port makes it a central entrepot in the trade between China, India, and Britain. Local industries of shipbuilding and repair, rope manufacturing, and sugar and matches, all support this status. This brings modern industrialization to Hong Kong but has minimal impact on the local economy, which is mainly sustained by trade.
When Japan invades Hong Kong during World War II, the business elite is maintained in waterfront brothels. They are marched daily to offices, where they balance books and sign currency.
With the defeat of Japan, Hong Kong continues as an entrepot trade center, with food and textiles accounting for nearly two-thirds of re-exports. Civil war rages in China, and trade begins to falter.
A 1950 U.N. embargo on trade with China ends Hong Kong's entrepot status. With the Chinese market virtually closed until 1978, Hong Kong focuses on industrialization and develops new industries like textiles and plastics for export. With Japan in ruins after World War II and a huge flight of labor, capital, and expertise from Shanghai into Hong Kong, it becomes Asia's unrivaled industrial center.
The economy booms, and Hong Kong builds highways, tunnels, reservoirs, and high-rise buildings at a breathtaking pace. Industries diversify to include optical goods and electronics. The financial sector grows rapidly as Hong Kong banks lend to governments throughout the region, fueling Asian economic expansion. The Hong Kong stock market and gold markets are some of the world's most active.
When Chinese leaders Zhou Enlai and Mao Zedong die in 1976, Hong Kong's stock market drops slightly but rebounds quickly. Business continues as usual. Hong Kong increasingly relies on China's Guangdong province for cheap vegetables and other foodstuffs, legal and illegal labor, and its water supply. By 1978 China is the second largest source of Hong Kong imports.
Rising costs from two decades of growth, plus competition from other producers in Southeast Asia, threaten Hong Kong's price competitiveness. When China imposes policies to end the flow of cheap labor from the mainland, Hong Kong begins to move its labor-intensive industries into China, especially into the New Economic Zones in Guangdong province.
Jardine Matheson, Hong Kong's largest and oldest trading company, announces plans to move its legal residency to Bermuda, a move reflecting uncertainty over the fate of businesses when Hong Kong reverts to Chinese rule. Its head office and fixed assets will remain in Hong Kong.
Hong Kong invests billions in "out-processing" centers in Guangdong. Chinese partners supply the plant, labor, water, and electricity, while Hong Kong partners provide equipment, product design, materials, and marketing. This "cross-border industrial system" allows Hong Kong to avoid Chinese trade barriers and bureaucracy and is hugely successful. Investment jumps from US$0.5 to $5.8 in 10 years.
Hong Kong once again plays an entrepot role, with most of its trade with other countries involving re-export of products made in out-processing factories in China. High inflation rates and cheap currency drive island real estate properties up over 50 percent. By 1995 Hong Kong is the world's most expensive location for Class A office space, with rents as much as $135 per square foot.
The restoration of Hong Kong to China marks the beginning of full economic integration. As manufacturing moves to other Chinese cities, Hong Kong remains Asia's banking center and tries to transform itself into the infotech center of Asia.
Hong Kong enjoys its position as gateway to China and benefits from increased trade after China enters the WTO, despite the global economic slowdown. But growth is close to flat, and unemployment, public assistance, and the government deficit all swell, putting pressure on the currency. Mainland cities like Shanghai and offshore centers like Singapore present Hong Kong with tough competition.
The deadly SARS virus' spread from China raises fears of an economic crisis. Tourism plummets, and commerce is disrupted. The government halves its goal of 3 percent economic growth and unveils a financial aid package for business designed to counter the impact of the panic. The package, which slices into revenue sources, makes budget deficit reduction unlikely.
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