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Mainland China-Hong Kong

Economic Integration: Construction of an Index and Applications to Public Policy Research

A Project Funded by the Policy Innovation & Coordination Office

of the HKSAR Government

(2016.A3.009.17A )

Geng Cui, Xiangdong Wei, Simon Lo, Yuho Chung

Hong Kong Institute of Business Studies

Lingnan University, Hong Kong

October 4th., 2018

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Geng Cui, HKIBS Xiangdong Wei, Econ

Simon Lo, HKIBS Yuho Chung, HKIBS

Research Team

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Economic Integration (EI)

� Integration enables its participants to achieve a variety of common goals more effectively by joint or integrated action than unilateral measures (Balassa 1961)

� The process of developing a deep and stable relationship in the division of labor (Maksimova 1976)

� It includes the movement of goods/services, capital, and people.

� The results of price and productivity equalization (Holzman 1976)

� The eliminations of economic barriers between economies (Pelkmans 1984)

� The efficiency of the use of resources and allocation(Robson 1987)

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EI and Index

� European Union (EU) – removal the internal trade barriers

and consolidate their external trade policies

� North American Free Trade Area (NAFTA)

� Association of Southeast Asian Nations (ASEAN)

� Asia-Pacific Economic Integration (APEC)

� G-Index by the World Markets Research Centre

� Handbook on Economic Globalization Indicators (OECD,

2015).

� Closer Economic Partnership Arrangement (CEPA)

� One country, two systems

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Geographic Perspective

� The road-based land crossing is well developed

between Hong Kong and Shenzhen. There are four

vehicle boundary crossing located in Man Kam To,

Sha Tau Kok, Lok Ma Chau, and Shenzhen Bay for

both passengers and cargos

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Demographic Perspective

� Migration is an important characteristic to the demography of Hong Kong, thus the proportion of population of Hong Kong is composed of a proportion of population born in Mainland China, Taiwan, and Macao. It was about 40% in 1981. Their proportion, however, dropped slightly from 40% to 31% in 2016.

Hong Kong as a Migration city

Source: Hong Kong Census and Statistic Department

Place \ Census Year 1981 1986 1991 1996 2001 2006 2011 2016

Hong Kong 57.2% 59.4% 59.8% 60.3% 59.7% 60.3% 60.5% 60.7%

The mainland of China/

Macao/ Taiwan39.6% 37.0% 35.6% 33.7% 33.7% 33.5% 32.1% 31.0%

Elsewhere 3.2% 3.6% 4.6% 6.0% 6.6% 6.2% 7.4% 8.4%

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Economic Perspective

Trade between Hong Kong and Mainland China

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Share of China Share of US

Share of Hong Kong Domestic exports

In 1993, the Mainland China replaced the USA and became

the largest destination of Hong Kong domestic’s exports

Source: Hong Kong Census and Statistic Department2019/5/22

Economic Integration Index

� Economic integration refers to the establishment of a

common market between different economies through the

removal of restrictions on cross-border economic activities,

resulting in the free movement of goods, capital and

people.

� We adopt and categorize the measurements of economic

integration as three main components:

� the driving forces,

� transmission channels and

� consequences of integration

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Indicators: Driving Forces

� Number of Zero tariff codes between Hong Kong and

Mainland China

� Number of offices of mainland companies in Hong Kong

� Number of control points between Hong Kong and Mainland

China

� Number of cross-boundary trains

� Number of cross-border buses (including Coach and Shuttle

Bus)

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Indicators of transmission channels

� Number of Hong Kong residents to China

� Number of Visitors from China

� Share of spending for Chinese visitors

� Daily cross boundary trips

� Hong Kong’s Import from China

� Hong Kong’s Domestic export to China

� Hong Kong’s re-export to China

� Direct Investment from Hong Kong to China

� Direct Investment from China to Hong Kong

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Consequence of Integration

� A common market drives equalization of the two economies

in various aspects, including the equalization of

� consumer goods prices,

� wages,

� the costs of capital,

� income levels,

� production cycles,

� economic structures,

� yields of assets and

� correlations of output shocks.

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Indicators of consequences of EI

� Convergence of GDP per capital

� Convergence of Consumer Price

� Difference in real interest rate

� Difference in inflation rate (consumer price, annual %)

� Number of cross-boundary students

� Number of cross-boundary workers

� Number of cross-boundary marriages

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Price equalization

0

20

40

60

80

100

120

140

1986 1991 1996 2001 2006 2011 2016

Hong Kong China0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

0.45

1986 1991 1996 2001 2006 2011 2016

Equality of Price (2010 = 100) Coefficient of variance

Source: World Bank

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Weights of the IndexI. Driving forces of Economic Integration [33.37%]a) Number of Zero tariff codes (20.20%)

b) Number of control points (20.37%)

c) Number of regional offices (20.76%)

d) Number of daily cross-border trains (17.93%)

e) Number of Cross-border buses (including Coach and Shuttle Bus) (20.74%)

II. Transmission Channel of Economic Integration [33.40%]Flow of people

a) Visitors from China (10.7%)

b) HK Residents to China (10.8%)

c) Proportion of spending from mainland visitors (11.4%)

d) Daily cross boundary vehicle trips (10.4%)

Flow of Goods

e) Import from China (11.8%)

f) Domestic Export to China (10.7%)

h) Re-export to China (11.8%)

Flow of capital

i) Inward position from China (11.1%)

j) Outward position to China (11.4%)

III. Consequence of Economic Integration [33.22%]a) convergence in GDP per capita (23.7%)

b) Price equalization (18.2%)

c) Difference in inflation rate (14.2%)

d) Difference in real interest rate (1.6%)

e) Cross boundary students (17.2%)

f) Cross boundary workers (23.0%)

g) Cross-boundary marriage (2.2%)2019/5/22

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Three Sub-indices for Economic Integration

between mainland China and Hong Kong

0

10

20

30

40

50

60

70

80

90

100

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

driving force transmission consequence

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Overall mainland-Hong Kong EI Index

during the Period of 1990 - 2016

0

10

20

30

40

50

60

70

80

90

100

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

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Major findings

� The integration index shows an upward trend from 1990 to 2016

� Integration grew slowly from 1990 to 1997, and increases at a faster pace after the handover from 1998 to 2007.

� The index remains stable in 2008 during the global financial crisis

� Grew again from 2008 to 2016 when the individual travel scheme and other measures (e.g., CEPA) are introduced.

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Co-integration Analyses by VECM

Variables Source Data periodEconomic indicator

GDP HKCSD 1990-2016Per capita GDP HKCSD 1990-2016Unemployment rate HKCSD 1990-2016

Property price (private domestic)Rating and valuation

department1990-2016

Property price (private office)Rating and valuation

department1990-2016

Social indicatorGini coefficient HKCSD 1990-2016

Cultural indicatorSatisfaction with the government HKU Pop 1997-2016Confidence in HK's future HKU Pop 1994-2016Ethnic identity - Hongkonger HKU Pop 1997-2016Ethnic identity - Chinese HKU Pop 1997-2016Happiness index Lingnan 2005-2016

Table 20. Economic and Social Variables

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Year GDP Per capita GDP

Unemployment rate

Property price (private domestic)

Yr1999 = 100

Property price (private office)Yr1999 = 100

Gini coefficient

Satisfaction with the

government

Confidence in HK's future

Ethnic identity -

Hongkonger

Happiness index

1990 599,256 105,050 1.3 44.8 99.1 0.4714

1991 691,323 120,188 1.8 61.1 100.3 0.476

1992 807,130 139,148 2.0 85.2 137.1 0.4844

1993 931,010 157,772 2.0 93.0 164.6 0.4928

1994 1,049,610 173,909 1.9 114.9 230.3 0.5012 56.36%

1995 1,119,006 181,772 3.2 107.3 194.6 0.5096 58.15%

1996 1,235,301 191,951 2.8 116.9 188.4 0.518 62.62%

1997 1,373,083 211,592 2.2 163.1 213.1 0.5194 3.30 73.45% 35.87%

1998 1,308,074 199,898 4.7 117.1 134.5 0.5208 2.83 62.65% 34.10%

1999 1,285,946 194,649 6.2 100.0 100.0 0.5222 2.86 60.23% 37.29%

2008 1,707,487 245,406 3.5 120.5 199.0 0.5346 3.13 74.46% 19.95% 69.3

2009 1,659,245 237,960 5.3 121.3 179.8 0.5354 2.91 69.48% 31.17% 70.6

2010 1,776,332 252,887 4.3 150.9 230.4 0.5362 2.85 64.93% 30.42% 70.1

2011 1,934,430 273,549 3.4 182.1 297.9 0.537 2.62 59.13% 39.77% 71.3

2012 2,037,059 284,899 3.3 206.2 334.7 0.5374 2.66 54.57% 36.32% 70.3

2013 2,138,305 297,860 3.4 242.4 409.8 0.5378 2.65 52.97% 36.53% 70.5

2014 2,260,005 312,609 3.3 256.9 423.0 0.5382 2.64 48.45% 41.24% 70.5

2015 2,398,437 328,945 3.3 296.8 448.9 0.5386 2.59 46.52% 38.26% 70

2016 2,491,001 339,531 3.4 286.1 426.9 0.539 2.50 45.57% 38.26% 67.6

Table 21. Sample of Key Indicators from 1990 to 2016

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GDP Property price

Gini coefficient Confidence of Hong Kong future

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

GD

P H

K$

mill

ion

0

10

20

30

40

50

60

70

80

90

100

Eco

nom

ic in

tegr

atio

n in

dex

1990 1995 2000 2005 2010 2015

Years

Integration indexGDP

0

100

200

300

Pro

pert

y pr

ice

of p

rivat

e d

omes

tic Y

R19

99 =

100

0

10

20

30

40

50

60

70

80

90

100

Eco

nom

ic in

tegr

atio

n in

dex

1990 1995 2000 2005 2010 2015

Years

Integration indexProperty price

0.4

0.45

0.50

0.55

0.60

Gin

i coe

ffici

ent

0

10

20

30

40

50

60

70

80

90

100

Eco

nom

ic in

tegr

atio

n in

dex

1990 1995 2000 2005 2010 2015

Years

Integration indexGini coefficient

0

20%

40%

60%

80%

100%

Con

fiden

ce o

f Hon

g K

ong

Fut

ure

0

10

20

30

40

50

60

70

80

90

100

Eco

nom

ic in

tegr

atio

n in

dex

1990 1995 2000 2005 2010 2015

Years

Integration indexConfidence of Hong Kong Future

Figure 15. Relationships between the Economic Integration Index and

Key Economic and Social Indicators

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Key variableCoefficient of co-

integration t-statistics

GDP 5.46E-05*** 5.81

Per capita GDP 4.71E-04*** 9.04

Unemployment rate 3.42*** 2.89

Property price (private domestic) 0.39*** 3.09

Property price (private office) 0.43*** 6.85

Gini coefficient 65737.86*** 8.58

Satisfaction with the government 16.76*** 4.81

Confidence in HK's future 35.18*** 3.18

Ethnic identity - Chinese 54.33*** 4.98

Happiness index 0.61 1.07

Table 22. Results of Long-run Equilibrium RelationshipsNote: level of significance: *** p < 0.01, ** p < 0.05, * p < 0.10

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Conclusion

� Economic integration is key to economic growth (e.g., GDP, income) and ethnic identity, and coincides with higher property prices and income disparity.

� These economic and social issues are highly relevant to public interest and policy.

� This study facilitates policy discussion and analysis to tackle outstanding issues and to ensure long-term economic development of Hong Kong.

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Thank you!

Q&A

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