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Hong Kong has bridged the East and the West for centuries. Its location positions it ideally to facilitate exports from China and imports from the rest of the world. After the Opium War of the 1840s, the commercial importance of Hong Kong led the British to secure the territory as a spoil. As a royal colony, Hong Kong adopted British laws, governance and customs while maintaining its Asian identity. This combination allowed Hong Kong to emerge as one of the world’s leading economic centers.

Hong Kong was remanded from the United Kingdom to China in 1997, with the promise of considerable autonomy under the “one country, two systems” rubric. But in recent years, real or perceived incursions from the mainland have left Hong Kong’s residents uneasy. In March, an extradition bill allowing suspected Hong Kong criminals to be tried in mainland China led thousands to the streets. Over the summer, the protests have gained intensity.

The demonstrations come at a delicate time. Hong Kong’s economy has struggled amid trade tensions between the United States and China, and the unrest has depressed commerce further. Hong Kong itself has become part of the contretemps, with Washington warning Beijing against aggression. The Chinese response will be critical not only for Hong Kong, but for a broad range of stakeholders.

Economically, Hong Kong has prospered under Chinese authority. Real gross domestic product (GDP) has more than doubled since the change of control. The port of Hong Kong is the seventh largest in world, and the Hong Kong stock exchange is the sixth largest in the world. Hong Kong’s residents enjoy a high standard of living.

Many attribute Hong Kong’s economic progress to the relative sovereignty Beijing has afforded it. Hong Kong has its own currency and its own central bank to manage it. Hong Kong’s markets operate under Western-style laws and regulations that provide comfort to investors. Free of the media control imposed on the mainland, Hong Kong residents have unfettered access to information. The Heritage Foundation has ranked Hong Kong as the world’s freest economy for 25 years in a row.

These qualities have made Hong Kong a favored destination for international expertise and international capital. The number of multinational firms making their regional headquarters in Hong Kong has increased substantially over the past two decades. Almost 5% of Hong Kong’s population is composed of expatriates, and the Hong Kong airport is among the busiest in the world for both cargo and passengers.

China has taken full advantage of Hong Kong’s financial system, with a number of its companies listing their shares on the Hong Kong exchange. (The Chinese central bank has also issued debt in Hong Kong.)  Global investors view the Hang Seng exchange as an ideal entry point to buy Chinese assets. While equity markets in Shanghai and Shenzen aspire to one day rival Hong Kong, such an outcome would require substantial structural reforms.

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