“Hong-Kong's Autonomy and its Relationship to China”

Hong Kong Location

Hong Kong is located in eastern Asia, on the southeast coast of the People's Republic of China, facing the South China Sea.

Area

Total: 1,104 km2 (426 sq mi)

Land: 1,054 km2 (407 sq mi)

Water: 50 km2 (19 sq mi)

Integration and Autonomy

The links between the banking and monetary systems of China and Hong Kong are already close and are likely to become closer over time. The distinguishing characteristic of the constitutional and administrative arrangements laid down by the Joint Declaration and the Basic Law is that Hong Kong shall enjoy a high degree of autonomy after 1997, and this apply in the banking and monetary areas as in other aspects of Hong Kong affairs. In keeping with the general principle of "one country, two systems", some of the provisions of the Basic Law which are relevant to banking and monetary affairs can be paraphrased as follows: Hong Kong shall retain the status of an international financial centre. The Government of the future SAR shall, on its own, formulates monetary and financial policies, safeguard the free operation of financial business and financial markets, and regulate and supervise them.

Legal relation between China and Hong Kong

There shall be no exchange control and the Government of the future SAR shall safeguard the free flow of capital within, into and out of Hong Kong. The markets for foreign exchange, gold, securities, futures and other similar instruments shall continue.

The HK dollar, as the local legal tender, shall continue to circulate and remain freely convertible. It must be backed by a 100% reserve fund. The Exchange Fund shall be managed and controlled by the Government of the future SAR, primarily for regulating the exchange value of the HK dollar.

On the basis of this legal framework, Mr Chen Yuan, the Deputy Governor of the People's Bank, characterized the financial relations between China and Hong Kong as "being between two relatively independent financial systems under two different social and economic systems within one sovereign country,'" This is an excellent way of describing the relationship since it captures the two notions of autonomy and integration. Some practical results of this are that Hong Kong banks operating in China continue to be regarded as foreign banks after 1997 and vice versa for Chinese banks in Hong Kong. The HK dollar also be regarded as a foreign currency on the Mainland as the RMB in Hong Kong. In a similar vein, debt issued by Chinese entities in the Hong Kong market an external obligation of China.

Nonetheless, the fact that Hong Kong and China part of one sovereign country and the closeness of the economic and financial links between them clearly means that it necessary for there to be close cooperation between the central banks of the two territories - in other words between the People's Bank of China and the Hong Kong Monetary Authority. This is a simple fact of life: a financial crisis in China would obviously have major implications for Hong Kong and vice versa. A spillover effect could also result from significant changes in the monetary policies ...