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Weijian Shan

Hong Kong has long prided itself as “the Pearl of the Orient” and the most famous economic success story in southern China. Yet in reality, Hong Kong has lagged far behind its mainland neighbour Shenzhen in growth for the past three decades.
It should not have been this way – and there is a way for Hong Kong to catch up.
The Hong Kong government aims to develop the city into a “headquarters economy” by attracting businesses from around the world to come. A way to achieve this would be for monetary authorities in Beijing and Hong Kong to further allow Hong Kong banks to offer banking services in China’s domestic currency, the renminbi, so businesses headquartered in Hong Kong can borrow and deposit the renminbi for their operations on the mainland.
In 1993, Hong Kong’s gross domestic product (GDP) was more than 20 times that of Shenzhen. But by 2022, Shenzhen’s GDP had grown nearly 86 times and now exceeds Hong Kong’s. Hong Kong, by comparison, saw a mere 2.3-fold increase, according to World Bank statistics.
How did Shenzhen develop so rapidly? Shenzhen was designated a special economic zone in 1980. Deng Xiaoping, the Chinese paramount leader at the time, likened building it to a tough battle: “The central government has no money, but we can give you some policies. You can do it yourself and fight your way out.”
Shenzhen adopted policies that were the most business-friendly in China, including a corporate income tax rate of about 15 per cent. Its reform policies allowed the first and only foreign acquisition of control of a national bank in 2004, a fascinating story told in my book Money Machine. The city became a hotbed of entrepreneurship, a hub of innovation and home to Fortune Global 500 companies including Huawei, Tencent, Ping An Insurance Group and BYD.




When it comes to laissez-faire policies, however, Shenzhen pales in comparison with Hong Kong – arguably the freest market economy in the world with a corporate income tax rate of 16.5 per cent and no taxes on dividends or capital gains. So why have Chinese mainland companies not swarmed into Hong Kong as they have into Shenzhen?
The major reason is that Hong Kong is outside the currency system of the mainland. Rather, it is in a currency union with the United States through its linked exchange rate system, which pegs the Hong Kong dollar to the US dollar. The US dollar peg has served Hong Kong well, underpinning its currency and economic stability. However, as a result, the Hong Kong Monetary Authority (HKMA) can only follow the monetary policy of the United States.
When the US Federal Reserve increases interest rates to suppress inflation, the HKMA does likewise, even if inflation is not a problem in Hong Kong. When the US dollar appreciates against other currencies, so does the Hong Kong dollar. Consequently, based on World Bank statistics, the trajectory of Hong Kong’s economic performance – up 2.3 times – closely hugs that of the United States – rising 2.1 times – in 30 years.


China’s capital control rules restrict cross-border financial transactions in foreign currencies, even in Hong Kong. The onshore renminbi – one of two types of renminbi, China’s currency – is not available for such transactions outside mainland China. If a Chinese company opens an office in Hong Kong, it can only operate as an offshore outpost from the mainland, not as a headquarters, because it cannot borrow yuan in Hong Kong to finance its operations back home.
As for the offshore renminbi, the other type of renminbi, its cross-border use on the mainland is subject to the same foreign exchange control rules as foreign currencies. Its availability is also limited as Hong Kong’s offshore renminbi pool is only about 1 trillion yuan (US$140.9 billion), a tiny fraction of the city’s total deposits of more than US$2 trillion.
If major Hong Kong banks such as Bank of China (Hong Kong), HSBC and Standard Chartered Bank are allowed to offer onshore renminbi services like their branches on the mainland, it would dramatically change the game, because businesses in Hong Kong could then borrow and deposit onshore renminbi just as they do in Shenzhen or Shanghai to finance their operations in the vast mainland market.
To accommodate China’s foreign exchange control rules, onshore renminbi booked by Hong Kong banks should only be drawn from their mainland branches or subsidiaries by their customers for their use on the mainland but not in Hong Kong. Under such an arrangement, China’s capital control rules would still apply to onshore renminbi business transactions in Hong Kong. China’s central bank would not have to worry about capital leakage from the country.

The city will effectively become part of the mainland’s currency zone, but only for businesses registered in Hong Kong with significant operations on the mainland. Hong Kong would become more competitive than Shenzhen in the race to build a “headquarters economy” as it would offer everything its neighbour does and more. After all, Hong Kong is an international financial centre.
The good news is that Hong Kong is already taking steps in this direction. In May, the HKMA and China’s central bank began a pilot programme for Hong Kong citizens to purchase and use e-CNY for cross-border payments – an embryonic form of a dual currency system.
If the system is expanded to include corporate onshore renminbi banking, allowing foreign and Chinese businesses to fully manage their mainland operations and finances from the city, Hong Kong will be truly irresistible as a headquarters city.


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Allowing Hong Kong banks to offer Chinese onshore renminbi services would enable the city to leverage its economic freedom on a whole new level


Allowing Hong Kong banks to offer Chinese onshore renminbi services would enable the city to leverage its economic freedom on a whole new level.


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Expresses the views, ideas and conclusions of the author. (Eg. Enough of Crazy Rich Asians, think of crazy poor Hongkongers.)


How the yuan can help Hong Kong outcompete Shenzhen

.css-1c6uqr6{color:inherit;font-weight:inherit;font-size:inherit;font-family:inherit;line-height:inherit;overflow-wrap:break-word;}Allowing Hong Kong banks to offer Chinese onshore renminbi services would enable the city to leverage its economic freedom on a whole new level

Allowing Hong Kong banks to offer Chinese onshore renminbi services would enable the city to leverage its economic freedom on a whole new level