Lesson 4: The Market Planned Economy (Hong Kong & China)

Pre-discussion
Any circumstance that brings buyers and sellers of products or services
together is referred to as a market. Individuals or businesses can be buyers or
sellers. Markets are used to make economic decisions in a market economy.
The means of production (resources and companies) are owned and operated
by private persons or groups of private individuals in market economies.
Businesses provide goods and services in response to customer
demand. Which goods and services are provided is determined by which
products corporations believe would make them the most money. The greater
the demand for a product from consumers or other businesses, the higher the
price businesses may charge, and hence the more product will be produced.
People's incomes determine consumer demand. The ownership of
resources determines a person's income (especially labor). The higher a
person's income is, the more society values his or her output (think Lady
Gaga or LeBron James).

Objectives
At the end of this lesson students can:

1. Differentiate the economic system of Hongkong and China.

2. Discuss the background of economic system of Hongkong and China.
3. Why Hongkong and China belong to developed Country.

HONG KONG
Hong Kong is special administrative region of China, located to the
east of the Pearl River estuary on the south coast of China. The region is
bordered by Guangdong province to the north and the South China Sea to the
east, south, and west. Hong Kong developed initially on the basis of its
excellent natural harbour (its Chinese name means “fragrant harbour”) and
the lucrative China trade, particularly opium dealing. It was the expansion of
its territory, however, that provided labour and other resources necessary for
sustained commercial growth that led to its becoming one of the world’s major
trade and financial centres. The community remains limited in space and
natural resources, and it faces persistent problems of overcrowding, trade
fluctuations, and social and political unrest. Nevertheless, Hong Kong has
emerged strong and prosperous, albeit with a changed role, as an entrepôt, a
manufacturing and financial centre, and a vital agent in the trade and
modernization of China.

Type of Government
The Hong Kong government is economically liberal, but
currently universal suffrage is only granted in District Council elections, and in
elections for half of the Legislative Council. The head of the government
(Chief Executive of Hong Kong) is elected through an electoral college with
the majority of its members elected by a limited number of voters mainly
within business and professional sectors.

Economic predictions

Since the 1997 handover, Hong Kong's economic future became far

more exposed to the challenges of economic globalisation and the direct
competition from cities in mainland China. In particular, Shanghai claimed to
have a geographical advantage. The Shanghai municipal government dream
of turning the city into China's main economic centre by as early as 2010.

Economic System
Hong Kong has a free market economy that is heavily reliant on
international commerce and finance, with the value of goods and services
trade, including reexports, accounting for almost four times GDP. There are
no qoutas or dumping laws.
Its economy is guided by positive non-interventionism and is heavily
reliant on global trade and finance. As a result, it is recognized as one of the
best areas to start a business. Indeed, according to a recent survey, Hong
Kong has grown from 998 registered start-ups in 2014 to over 2800 in 2018,
with eCommerce (22%), Fintech (12%), Software (12%), and Advertising
(11%) companies accounting for the majority. In 2015, Hong Kong was
ranked first in the Economic Freedom of the World Index, with a score of 8.97.

Positive Non-Interventionism
Economists such as Milton Friedman and the Cato Institute have
frequently cited Hong Kong's economic policy as an example of laissez-faire
capitalism, attributing the city's success to the policy. Others, however, have
argued that the term laissez-faire does not adequately describe the economic
strategy. They point out that the government is still involved in the economy in
a variety of ways, some of which exceed the level of involvement in other
capitalist countries. The government, for example, is involved in public works
projects, healthcare, education, and social welfare spending. Furthermore,
while personal and corporate income tax rates are low by worldwide
standards, Hong Kong's government derives a major percentage of its
revenue from property leases and land taxation, unlike most other
countries.All land in Hong Kong is owned by the government and is leased on
fixed terms to private developers and users in exchange for fees paid to the
state treasury. By banning the sale of land leases, the Hong Kong
government keeps land prices artificially high, allowing the government to
support public spending with a low tax rate on income and profit.

Economic freedom
After Singapore, Hong Kong was classified as the world's second freest
economy in The Heritage Foundation's Index of Economic Freedom in 2020.
In 183 economies, the index examines constraints on business, trade,
investment, finance, property rights, and labor, as well as the impact of
corruption, government size, and monetary controls. Hong Kong is the only
economy with a score of 90 or above on the 100-point scale, achieved in 2014
and 2018. The Heritage Foundation eliminated Hong Kong as a separate
entity from China from its ranking of the world's freest economies in 2021,
citing increased Chinese government influence in Hong Kong's governmental
structure and democratic process. With this, Hong Kong and Macao lost a
position in the index that they had held for several decades. The president of
the Heritage Foundation stated that Hong Kong will have more economic
freedoms, but that those economic policies will still be controlled by Beijing.

Tax System

Profits or income arising in or deriving from Hong Kong are subject to tax
 Profits Tax
 Salaries Tax
 Property Tax

The Hong Kong Special Administrative Region does not levy taxes
based on an individual's total income. That is, profits from business or trading
are taxed as profits, income from work, office, or pension is taxed as salary,
and rental income from immovable property is taxed as property. There is no
capital gains tax, no withholding tax, no estate tax, no dividend tax, no sales
tax, and no value added tax and no tax on interest in the city . For these
reasons, Hong Kong is a popular shopping destination.

Furthermore, under Article 106 of the Hong Kong Basic Law, Hong
Kong has independent public finance, and no tax income is handed over to
the Chinese Central Government. The Inland Revenue Department collects
taxes.

Exchange Market and Trade

Stock Exchange
The Hong Kong Stock Exchange is a wholly owned subsidiary of the
Hong Kong Exchange and Clearing Limited (HKEx) and the principal regulator
of Hong Kong and Mainland Chinese issuers. It has the third-largest stock
market in the world. It has surpassed Chicago-based CME to become the
world's largest bourse in terms of market capitalisation. It has 2,538 listed
businesses with a combined market capitalisation of HK$47 trillion as of the
end of 2020. It is said to be Asia's fastest growing stock market.
Trading
 International trade is the most important economic activity in Hong
Kong. Its government stance on trade reflects Hong Kong's status as a free
trade zone. This strategy imposes only the bare minimum of limitations and
allows market forces to govern exports and imports. Hong Kong is a major
Asian exporter and importer of goods and services.

CHINA
China is a country in East Asia that is located in both the Northern and
Eastern hemispheres of the Earth. China is one of the world's oldest
civilizations, but it is only recently that it has become a "modern" nation. China
has transformed quicker than any other country in the world over the last 20
years. Chinese history is split into dynasties, each of which represents the
reign of a line of emperors. With a population of over 1.4 billion people, it is
the world's most populated country. It is the world's third or fourth largest
country, with a size of around 9.6 million square kilometers (3.7 million mi2).

Government System
China, formally The People's Republic of China, is viewed as a one-
party communist dictatorship ruled by the Communist Party of China (CPC).
The CPC has ruled China since 1949, when it defeated its nationalist
opponents in a civil war. Political authority in China is, in theory, entirely in the
hands of the people.China, in fact, is a multiparty, democratic state, according
to the Chinese government. In actuality, however, there is no such thing as a
multiparty democracy.

China has the appearance of a functioning democracy. It has a legislative and

an executive that are supposedly answerable to the people of China. In
actuality, however, the CPC wields real authority in China's government, not
the people. As a result, the CPC leaders are also the country's leaders.

Economic System

Prior to the establishment of the People's Republic of China in 1949,

the largest yearly outputs of key industrial and agricultural products in this
weakened colossus of a country with a population of approximately 500
million people and an area of 9.6 million square kilometers were as follows:
Yarn 445,000 tons, cotton cloth 2.79 billion meters, raw coal 61.88 million
tons, energy generated 6 billion kwh, grain 150 million tons, cotton 849,000
tons This was the starting point for the new China's economic development.
After 50 years of planned and large-scale economic development,
China is now one of the world's main economic powers with the greatest
development potential, and its people enjoy a fairly well-off existence. From
1953 through 2000, China effectively completed nine five-year plans,
achieving significant results and creating a solid platform for future economic
development. China's economy has risen at an extraordinary rate since the
implementation of reform and opening-up in 1979.
Economic restructuring is one of the main aspects of China’s reform. In
the first 30 years after the founding of the PRC, the Chinese government
carried out a system of planned economy, and targets and quotas for various
spheres of economic development were all set by the special planning
committees of the state.Factories produced things in accordance with state
plans, and farmers planted crops in accordance with state plans as well.
Commercial departments replenished and sold their stockpiles in accordance
with state plans, and the items' characteristics, quantities, and prices were all
set by planning departments. At the end of the 1970s, China's leaders made a
historic decision to change the country's decades-old economic system in
order to close the economic development gap with other countries.
The reform began in the rural areas in 1978, with the implementation of
the household contract responsibility system. Farmers were given the right to
use the land, arrange farm operations, and dispose of products on their own
under this system. The state monopoly on the purchase and marketing of
agricultural products was abolished; the prices of the majority of farm products
were liberalized; many policies restricting agricultural development were
repealed; and farmers were allowed to diversify their businesses and
establish township enterprises. All of this had piqued the farmers' interest in
producing.
In 1984, the economic reorganization shifted from rural to urban areas.
After 10 years of reform and opening up, the Chinese government issued a
policy to develop a market economy in 1992. The following are the primary
features of economic structural transformation, according to government
documents: The development of diverse economic elements will be supported
but the public sector of the economy will remain dominating. To fulfill the
needs of the market economy, state-owned firms' activities should be modified
to conform to the modern enterprise system. A unified and open market
system should be built in the country to connect rural and urban markets, as
well as domestic and foreign markets, and to enhance resource allocation
optimization. The government's function of regulating the economy should be
modified in order to develop a complete macro-control system mostly through
indirect means. A distribution system should be designed in which work-based
distribution reigns supreme while efficiency and fairness are prioritized. This
method will promote some individuals and places to get wealthy first, and then
they may assist other people and places in becoming wealthy as well.
A social security system suited to China's needs must be developed for
both rural and urban populations in order to achieve overall economic
development and social stability.In 1997, the Chinese government
emphasized that the non-public sectors of the economy are an important
component part of China's socialist economy, in which profitability is
encouraged for elements of production such as capital and technology,
allowing economic restructuring to progress more rapidly. In several domains
was carried out easily and with tremendous success in 2001.
At the moment, China is well on its way to establishing a socialist
market economy system, and the market's basic function in resource
allocation has been improved. Simultaneously, the macro-control system has
begun to take shape.Furthermore, the extensive style of economic expansion
is giving way to an intensive mode. According to the plan, the socialist market
economy would be enhanced further by 2010, and by 2020, China will have
established a comparably mature socialist market economy structure.

National Market Structure

China is a socialist market economy, defined by state-owned
companies and public ownership inside a market economy. A market
economy, by definition, is one in which key economic choices are influenced
by supply and demand, the two main forces that impact prices.

Summary

The economy of Hong Kong is a highly developed free-market

economy characterised by low taxation, almost free port trade and well-
established international financial market. Its currency, called the Hong Kong
dollar, is legally issued by three major international commercial banks, and is
pegged to the US dollar. Hong Kong’s economy is characterized by limited
import restrictions, free trade, a low and simple taxation system, and a robust
legal system similar to Australia’s. Hong Kong’s trade is heavily reliant on
imports, with over 90% of food and beverages sourced from other countries.

China’s economy is the second-largest in the world, behind only the

United States. But after three decades of spectacular growth, China is now
moving into a slower growth phase – an inevitable result of its transition from
a developing economy to a more mature, developed economy. In the 1980s,
1990s and early 2000s, China’s annual GDP growth frequently exceeded 10
per cent, with an estimated 2019 growth of 6.3 per cent, although this is likely
to be closer to 6 per cent with the impact of the US-China trade war.

Since the introduction of Deng Xiaoping’s economic reforms, China

has what economists call a socialist market economy – one in which a
dominant state-owned enterprises sector exists in parallel with market
capitalism and private ownership. It was the active encouragement of private
enterprise from 1978 that enabled China to kick-start the long expansionary
boom that continues today. Private businesses now produce more than half of
China’s GDP and most of its exports. They also create most new jobs.
Assesment

Identification

1. It is a special administrative region of China.

2. Is a wholly owned subsidiary of the Hong Kong Exchange and Clearing
Limited (HKEx) and the principal regulator of Hong Kong and Mainland
Chinese issuers.
3. A country that is socialist market economy, defined by state-owned
companies and public ownership inside a market economy.
4. It is one of the main aspects of China’s reform.
5. A communist country.

Enumeration

1. What are the three profits or income arising in or deriving from Hong Kong
are subject to tax?

References

What Type Of Government Does China Have? - WorldAtlas

Economy of Hong Kong - Wikipedia

https://courses.lumenlearning.com/wmopen-introbusiness/chapter/economic-
systems/