Transformation of China‟s economy and Hong Kong‟s economic policy

Abstract

In 2010, China surpassed Japan as the world's second-largest economy. Over the last three decades, the abundant, cheap labour, both skilled and unskilled, has fuelled the export-led growth of China. However, the days of cheap labour are numbered as workers want a share in the success of China‘s booming economy. However, China‘s economic growth is now facing a bottleneck. As a result, China‘s authorities are planning to transform the economy from an export-led growth to a consumption-led growth, and from manufacturing oriented to service oriented. The transformation of China‘s economy will invariably rebalance the world economy. Western economies will need to share their dominant positions in the goods, services and financial sectors with China. A more service oriented economy will establish personal relationships between people in China and the rest of the world, thus allowing the west a better understanding of China‘s market and indirectly enhancing the soft power of China. The liberalization of the financial market, including the internationalization of the RMB will open up a huge pool of capital market for explorations. Hong Kong, as the gateway to China, is expecting a shaking in its economy in the next few years. The challenge facing Hong Kong is how to cope with the changing global economic environment. Hong Kong has long established itself as a free market; its government traditionally plays a minimum role in economic activities, allowing market forces to work. Yet there is now an argument for a change in policy. It has been argued that, to capitalize on their close economic relationship with China, the government of Hong Kong should be more proactive in aligning Hong Kong‘s economy with China‘s transforming economy. This paper analyzes the challenges and uncertainties facing the transformation of China‘s economy, and argues that Hong Kong‘s small open economy should retain its traditional free market-oriented economic policy.