Hong Kong vs. Mainland China: What’s the Difference?

Beijing and the Financial Hub Maintain Two Systems Under One Flag

Reviewed by Thomas Brock
Fact checked by Michael Rosenston

When a citizen of mainland China travels to Hong Kong, they’ll need to have their passport, likely want to exchange their yuan for Hong Kong dollars, and be prepared to follow laws that are often significantly different from the mainland.

Hong Kong’s sophisticated financial system, housed in a skyline of gleaming skyscrapers, processes trillions in assets under a regulatory framework distinct from mainland China. As a special administrative region (SAR), Hong Kong maintains its own currency, runs its own stock exchange (one of the world’s largest), and operates with different tax laws—all under systems developed during 156 years of British rule that ended in 1997.

While Hong Kong’s gross domestic product (GDP) represents only about 2% of China’s total economy, its financial markets and international banking sector are outsized in the country’s global trade and investment flows. The territory annually has about $600 billion in bilateral trade with mainland China, highlighting its continued importance as a financial intermediary between China and global markets.

Key Takeaways

• Hong Kong is a special administrative region (SAR) controlled by the People’s Republic of China and enjoys limited autonomy.
• When British rule ended, Hong Kong was given a certain degree of autonomy from mainland China under the “one country, two systems” principle.
• Hong Kong’s market economy is characterized by low tax rates, free trade, and limited government interference.
• The mainland Chinese stock markets are more conservative and restrictive than that of Hong Kong.
• The Shanghai and Hong Kong stock exchanges are two of the largest in the world.

Hong Kong vs. Mainland China: An Overview

Hong Kong is one of Asia’s busiest cities. The SAR is an international financial hub, business center, and shopping and tourist destination. Nevertheless, it’s entirely under the sovereignty of China and, at times, has fiercely resisted Beijing’s interference in its political life.

Pro-democracy activists in Hong Kong would like the region to remain distinct from other Chinese cities. That makes the relationship between Hong Kong and mainland China complex. Having said that, mainland China and Hong Kong complement each other economically, even if there’s continued controversy around their political relationship.

Note

SARs exist throughout the world, though the name is specific to the special administrative status of Hong Kong and Macao in China.

The History of Hong Kong-China Relations

Hong Kong’s relationship with mainland China has involved complex political and economic interactions across centuries. The territory’s modern history began during the First Opium War, when Britain seized Hong Kong Island in 1841. The following year, China formally ceded it to Great Britain in the Treaty of Nanking. British control expanded with the addition of the Kowloon Peninsula in 1860 after the Second Opium War.

The British Colonial Era (1841-1997)

During British rule, Hong Kong developed into a major trading port and eventually a global financial center. The colony operated under British common law, developed Western-style financial institutions, and established international business practices that would later distinguish it from mainland China’s socialist system.

Britain negotiated a 99-year lease of its Hong Kong colony with China in 1898. That lease ended in 1997 when Britain returned Hong Kong to China. It then became the Hong Kong SAR of the People’s Republic of China.

Note

The U.S. has its own special administrative regions. Among them, the U.S. government lists Jarvis Island, a South Pacific coral island administered by the U.S. Fish and Wildlife Service of the U.S. Department of the Interior.

The Transition (1984-1997)

In 1984, Britain and China signed the Sino-British Joint Declaration, setting the stage for Hong Kong’s return to Chinese sovereignty. The agreement introduced the concept of “one country, two systems,” promising that China’s socialist system would not be imposed on Hong Kong. Under this framework, Hong Kong would maintain its capitalist system and independent judiciary for at least 50 years after the 1997 handover.

Early SAR Years (1997-2014)

After becoming a special administrative region in 1997, Hong Kong maintained significant autonomy in most areas except foreign relations and defense. The territory preserved its separate legal system, currency, and financial regulations, helping it retain its status as a global financial hub.

The era wasn’t without its controversies between the region and the mainland. Security legislation in 2003—it would be shelved until 2024 when it was passed as Article 23—was pulled after massive protests on Hong Kong’s streets by hundreds of thousands.

Advisor Insight

Mainland Chinese companies comprise more than three-quarters of Hong Kong’s stock market capitalization.

Contested Sovereignty (2014-Present)

There are many reasons for the shift in relations between Hong Kong and the mainland in the last 15 years or so, but one is simply the balance of power has changed significantly. In 1997, when Britain handed Hong Kong back to China, the territory wielded extraordinary economic leverage. Despite having less than 1% of China’s population (6.5 million versus 1.2 billion), Hong Kong’s financial sector and international trade links generated an economy one-fifth the size of mainland China’s. This economic might gave Hong Kong significant influence in maintaining its autonomous systems.

However, the decades since have seen a dramatic reversal. While mainland China has seen explosive growth to become the world’s second-largest economy, Hong Kong’s growth has been modest, if not flat. By 2024, Hong Kong’s economic output represented less than 2% of China’s GDP—a striking decline from its previous position.

Understanding Hong Kong’s distinct economic system is crucial for anyone looking to do business in greater China.

There are just a few differently administered areas of the world that, for historical and geopolitical reasons, aren’t sites of contestation over political rights and sovereignty. In the last decade or more, Chinese “interference” in Hong Kong governance has provoked strong reactions from democratic activists in the region:

• 2014: The “Umbrella Movement” involved widespread protests over proposed changes to Hong Kong’s electoral system.
• 2019: Large-scale protests erupted over a proposed extradition bill that would have allowed criminal suspects to be sent to mainland China.
• 2020: Beijing implemented a new national security law.
• 2021: Electoral system changes required candidates to be pre-approved by a government committee.
• 2024: Hong Kong’s legislature passed Article 23, a new security law expanding government powers.

Important

For decades, Hong Kong has served as a crucial testing ground for China’s financial liberalization initiatives.

Hong Kong

Under the doctrine of one country, two systems, China agreed to allow the former colony to continue to govern itself and maintain many independent systems for 50 years beginning in 1997. Owing to its colonial history, English is one of Hong Kong’s official languages.

Hong Kong has no separate diplomatic identity from mainland China, but it may attend events of select international organizations, such as the Asian Development Bank, the International Monetary Fund, the World Health Organization, and the United Nations World Tourism Organization, as an associate member rather than a member state. It can also participate in trade-related events and agreements under the name Hong Kong, China.

Important

Manufacturing, once a significant part of Hong Kong’s economy, now contributes only about 1% of GDP, having largely shifted to mainland China over the past few decades.

The Hong Kong Monetary Authority serves as the de facto central bank, maintaining the Hong Kong dollar’s peg to the U.S. dollar through a currency board system. This arrangement, in place since 1983, has helped maintain monetary stability and confidence in Hong Kong’s financial system. The territory also maintains its own tax system, with significantly lower rates than mainland China and no value-added tax.

Hong Kong’s economy is overwhelmingly service-based, with the service sector accounting for over 90% of GDP. The territory’s financial services industry is particularly crucial, hosting one of the world’s largest stock exchanges and serving as a major center for international banking, asset management, and trade finance.

Important

The territory’s economic success has always depended on balancing international access with regional integration.

Mainland China

China is the world’s second-most populous country after India, with more than 1.4 billion people. China is governed by the Chinese Communist Party, which has jurisdiction over 23 provinces, five autonomous regions, four directly controlled municipalities, and the SARs of Hong Kong and Macao.

Mainland China has the second-largest economy in the world at almost $18 trillion, behind only the U.S., whose economy was valued at almost $30 trillion. Unlike Hong Kong’s service-focused economy, mainland China economic mix is more diverse, combining manufacturing prowess with growing service industries and significant agricultural production.

The mainland operates under a socialist market economy model, where state-owned enterprises coexist with private businesses under government oversight. The People’s Bank of China serves as the central bank, managing the yuan and implementing monetary policy across mainland territories (except Hong Kong and Macao).

While the service sector has grown significantly, manufacturing remains crucial to China’s economic strength. Agriculture still contributes about 8% to GDP, reflecting China’s need to feed its massive population. This economic diversity has helped make China the world’s second-largest economy, though its GDP per capita in U.S. dollars ($12,720.20) remains significantly lower than Hong Kong’s ($48,983.60).

Consumer demand in foreign markets has helped sustain China’s export-driven growth. However, it’s faced a rocky few years, first with many countries worldwide seeking to diversify their manufacturing sources with a “China plus one policy,” a trade war with the U.S., and a real estate bubble that burst in the wake of the pandemic.

Hong Kong vs. China: Money, Taxes, and Economics

Hong Kong has independent finances and China neither interferes in its tax laws nor levies any taxes on Hong Kong. As such, the region has separate policies related to money, finance, trade, customs, and foreign exchange.

Money

Hong Kong and mainland China even use different currencies. Hong Kong continues to use the Hong Kong dollar (HKD), which is pegged at a rate of about HKD 7.80 to one U.S. dollar. Merchants in Hong Kong do not generally accept the yuan.

Taxes

The SAR operates one of the world’s simplest tax structures, with a maximum personal income tax rate of 15% and corporate tax rate of 16.5%—significantly lower than mainland China’s rates. Hong Kong also has no value-added, capital gains, or dividend taxes, in stark contrast to mainland China’s more complex tax system.

Important

Hong Kong has a service economy, which generates over 90% of its GDP.

Economy

China’s economic structure differs significantly from Hong Kong’s:

• Manufacturing remains a crucial sector, though services are growing.
• Agriculture contributes about 8% to GDP.
• State-owned enterprises play major roles in key industries.
• The government maintains greater control over currency flows and foreign investment.

While Hong Kong was once crucial as China’s primary gateway for international investment, mainland cities like Shanghai and Shenzhen have developed their own important financial sectors. However, Hong Kong’s financial infrastructure and international connections continue to make it valuable for China’s global economic engagement with the rest of the world.

The economy of mainland China depends on manufacturing. However, the country’s service sector has started to pick up even though the share of services in the GDP is much less than that of developed countries like the U.S. and Japan and developing countries such as Brazil and India.

Hong Kong continues to serve vital economic functions for China:

• Its significant banking sector facilitates international investment flows.
• The territory’s legal system provides certainty for international contracts.
• Its free port status helps facilitate China’s global trade.

That said, this relationship has evolved as mainland financial centers like Shanghai and Shenzhen have developed. Once China’s primary window to global markets, Hong Kong now competes with these mainland cities while maintaining advantages in areas requiring international legal frameworks or sophisticated financial services.

Stock Markets

The Hong Kong Stock Exchange has long been the preferred choice for most Chinese companies looking to raise capital. That’s because mainland Chinese stock markets like the Shanghai and Shenzhen Stock Exchanges are more restrictive with higher financial requirements. Hong Kong’s stock market also attracts more overseas investors.

Hong Kong’s stock market is the fifth largest in the world by market cap at about $4.3 trillion. India replaced it as the fourth-largest in 2024.

Economic Interdependence

Even with recent political disputes over Hong Kong’s independent governance, the economic ties between Hong Kong and mainland China remain strong. Hong Kong and China boost each other’s economies. The two have annual bilateral trade valued at over $600 billion.

Hong Kong can be seen as a gateway to China for those interested in doing business on the mainland or investing in Chinese stocks or other assets. As of 2024, 124 of the 155 licensed banks in Hong Kong were incorporated outside Hong Kong, with the vast majority from the mainland.

Mainland China is Hong Kong’s largest trading partner and its second-largest source of inward direct investment. In addition, Hong Kong directs about 38% of its domestic exports to the mainland. China is also the biggest supplier of imports to Hong Kong (about 42%).

Hong Kong is a significant supplier of entrepôt services to China. The value of goods reexported through Hong Kong from and to the mainland reaching half-a-trillion dollars, accounting for more than 85% of Hong Kong’s total reexport trade value.

Key Differences

The chart below highlights some of the key differences between Hong Kong and mainland China:

What Is a Special Administrative Region (SAR)?

An SAR is a semiautonomous territory that operates under the “one country, two systems” principle created by China. SARs maintain separate political and economic systems from mainland China while remaining under Chinese sovereignty. China has two SARs: Hong Kong and Macao. Under their SAR status, these regions can do the following:

• Maintain their own legal systems
• Keep separate financial and monetary systems
• Maintain separate official languages (English and Chinese for Hong Kong; Portuguese and Chinese for Macao)
• Preserve independent immigration and customs policies

What SARs Exist outside China?

The term “special administrative region” (SAR) in its specific legal form exists only in China. However, many countries have regions with similar special autonomous status, though under different names. Here are some examples:

• United Kingdom: The Isle of Man, Jersey, and Guernsey are “crown dependencies” with their own financial and legal systems but are under British sovereignty.
• Denmark: Greenland and the Faeroe Islands function as autonomous territories with substantial self-governance.
• Finland: The Åland Islands have autonomous status with special linguistic and cultural protections.
• Portugal: Madeira and the Azores are autonomous regions with their own political-administrative statutes.
• France: New Caledonia has a special status (“sui generis collectivity”) with significant autonomy.

Isn’t China a Communist Country?

While China is governed by the Chinese Communist Party, its economic system today bears little resemblance to traditional communist economic models. Instead, China operates what economists typically call a “socialist market economy” or “state capitalism,” combining elements of capitalism with strong state control and ownership in key sectors.

For example, private businesses generate about 60% of GDP, and the stock market plays a major role in capital allocation.

How Much Does Hong Kong Contribute to China’s Economy?

As a percentage of China’s GDP, Hong Kong represented a bit less than 2% in recent years.

The Bottom Line

The relationship between Hong Kong and mainland China reflects one of the world’s most unique economic experiments. While operating under Chinese sovereignty, Hong Kong maintains distinct financial, monetary, and legal systems that set it apart from mainland China’s socialist market economy.

This arrangement has evolved immensely since the 1997 handover—Hong Kong’s economic importance to China has diminished from one-fifth of China’s GDP to just 2%. However, its role has merely shifted, not disappeared. The territory continues to serve as a crucial financial gateway, combining international banking expertise, legal certainty, and sophisticated financial services with deep China market knowledge. Understanding these distinct systems and their interaction remains essential for anyone engaging in Asian markets or international trade.