Over the past two decades, Hong Kong's economy has gone from being completely separate from that of Mainland China's, to inseparably intertwined today. Being the Mainland's largest foreign investor, Hong Kong has long exerted influence on China's economy. At the same time, the territory has firmly established itself as a financial and commercial hub serving financial flows in and out of the Mainland. Today, interaction between the two economies is taking on a new form. As China's economy booms, its impact on Hong Kong's economy is growing.

Twenty years ago, China's economy was basically closed off to the world, and had little impact on Hong Kong. Being the world's most open economy, Hong Kong is inevitably affected by the global economy, especially the U.S. and Japan. By contrast, such forces on China's financial system have a limited impact. Even after the Asian Financial Crisis, China's financial system basically remained intact and the Mainland economy continued to grow. The result is China's expanding economic power has started to have a stronger influence on Asia and the world.

The trading, financial and shipping industries have built the Hong Kong of today, the well being of which all rely heavily on overseas markets. According to 2003 statistics, these three sectors account for 22 percent, 12.5 percent and 7 percent respectively of Hong Kong's gross domestic product.

Being one of the major entreports of China, the rise and fall of China's external trade has a significant impact on Hong Kong's economy, as the graph illustrates. In 2003, the gross product of Hong Kong's two-way trade increased by 13.9 percent over 2002's level, contributing 3 percent to the local GDP. This explains why Hong Kong achieved a 3.3 percent real-terms GDP growth last year despite the outbreak of SARS and the global economic slowdown.

The financial sector is one of Hong Kong's pillar economies. Since Tsingtao Beer became the first Mainland company to list on Hong Kong's Stock Exchange in 1993, a total of 98 red chip and 76 H share companies have followed suit. Last year, Mainland enterprises raised HK$52.97 billion in Hong Kong through the issuance of new shares and financing.

Before the Asian Financial Crisis, Hong Kong's GDP growth was mainly driven by internal activity. However, the plunge in property prices and weak global economy has dampened domestic demand. As a result, the property, retail and restaurant sectors contribution to Hong Kong's GDP fell by 42 percent, 20 percent and 35 percent respectively in 2003 compared with 1997.

However, since the second half of last year, the Mainland has also started to impact Hong Kong's property and retail markets, with the widening of the "Individual Visit Scheme" under the Closer Economic Partnership Arrangement helping to revitalize the local retail market. The number of Mainland visitors coming to Hong Kong increased from 0.31 million in May 2003 to 1.1 million in January this year, accounting for two-thirds of all tourist arrivals. Moreover, each Mainland tourist spends on average HK$5,000-6,000.

Some wealthy Mainlanders have bought houses and insurance in the territory, which has boosted the internal market. As such, Hong Kong's once domestically influenced sectors of the economy are now being penetrated increasingly by external factors.

Today, Mainland China's economy commands an unprecedented influence on that of Hong Kong. By rough estimates, at least 30 percent of the local economy is heavily reliant on China. Macro measures adopted by Beijing to slow down its thriving external trade will definitely affect Hong Kong. Fortunately, these measures are expected to have little impact on the number of Mainland visitors traveling to Hong Kong, and their spending power. With economists forecasting that China will have a soft economic landing when its growth slows, Hong Kong can continue to benefit from China's economic growth.