The Liberal Art University in Hong Kong
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Hong Kong-Chinese Mainland Economic Integration Index

中國內地及香港經濟整合指數的制訂及其促進香港公共政策研究之應用

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 )

This research develops a framework that defines and analyses the economic integration of mainland China and Hong Kong.

We propose a construction method for the mainland China–Hong Kong economic integration index that measures the development of the economic integration of mainland China and Hong Kong over time.

First, we propose the indicators that measure the various aspects of the economic integration of mainland China and Hong Kong. The index of economic integration aims to facilitate policy research and evaluate the long-term and causal relationships between the degree of economic integration and various important economic, social and political issues, including economic growth, unemployment rates, property prices, income disparity, social mobility, satisfaction with the government and ethnic identity.

過去三十年,中國內地及香港經濟整合持續展開。為了能夠把經濟整合演化過程中那些範圍廣泛的經濟活動所出現的既複雜、甚至時而背道而馳的發展趨勢,總結為一個簡單及易明的圖畫,方便政策制定者及公眾人士參考,我們建立香港與香港與香港與 內地 經濟一體化指 經濟一體化指 經濟一體化指 經濟一體化指 經濟一體化指 經濟一體化指 數,以衡量數,以衡量數,以衡量1990 年至2016 年兩個經濟體之間的一化水平。該指數由年兩個經濟體之間的一化水平。該指數由年兩個經濟體之間的一化水平。該指數由幾個經濟一體化的關鍵指標組成,包括其推動 力,過程和後果。 該指數從 0至100 的等級衡量過去二十六年經濟一體化的成果。在研究期間 ,我們發現香港與內地經濟高度一體化和相互依存,經濟高度一體化和相互依存,經濟一體化指數在很大程度上與 經濟一體化指數在很大程度上與 香港的一些社會經濟指標有著重大關聯。

  • Introduction
    • Main Index and Sub Indices: The economic integration index is developed based on three sets of indicators: (1) the driving forces (antecedents) of economic integration, (2) the transmission channels through which the integration forms and influences the economy, and (3) the consequences of integration. We simultaneously provide the overall economic integration between mainland China and Hong Kong as well as the sub-index (driving force, transmission channel, and consequence of integration) of each aspect of the integration.
     
  • Background: Economic integration between mainland China and Hong Kong has been constantly evolving over the past few decades. However, a deliberate evaluation of economic integration is difficult when it is not properly defined or measured. To facilitate the policy debate over the economic and social consequences of economic integration, resolve the acute outstanding issues and set out plans for the long-term economic development of Hong Kong, a comprehensive, objective, precise and timely index is needed to define and measure the development of economic integration between the mainland and the special autonomous region over time. The current research addressing index construction focuses on the regional integration of Europe, NAFTA, Africa or Asia. There is also a vast amount of literature examining each particular facet of the integration of mainland China and Hong Kong, such as the trading patterns, financial links, cross-border consumption and output synchronisation. Nevertheless, a comprehensive, objective and scientific index enabling the complicated structure of mainland-Hong Kong economic integration to be measured as a unified concept and updatable on a regular basis has so far not been available. Such an index is especially relevant and critical to policy discussions because it offers policymakers and the public a simple and intuitive picture summarising the complicated and sometimes contradictory developments among the wide-ranging economic activities occurring during the evolution of economic integration. In constructing this index, we collect historical data from the last three decades and take account of the special features of economic integration under the context of ‘one country-two systems’. By reviewing the literature on the economic integration between the mainland and Hong Kong, different aspects of economic integration, including its driving forces, processes and consequences, will be analysed and used.

 

  • Methodolgoy: The index consists of 21 objective components selected to measure the economic integration between the Chinese mainland and Hong Kong in three areas: (I) driving forces of integration, (II) transmission channels of integration, and (III) consequences of integration. The index is measured on a scale of 0 to 100 on an annual basis for twenty-six years.
  1. The driving forces of integration include the development of institutional arrangements and the advance of technologies that reduce the transaction costs of cross-border economic activities. Indicators of driving force includes:
    • 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)
  1. The second category uses the movement of goods, capital, and people to measure the transmission channels or processes of integration. Indicators include the volume of trade, capital flows, and commutations within the economies. Indicators of transmission channel include:
    • 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
  1. The third category measures the consequences of integration, which are grounded in the economic reasoning that the formation of a common market drives the equalization of various aspects of the two economies 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. Indicators of consequence of integration includes:

     

    • 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
  • Findings: We find that the economies of Hong Kong and Chinese mainland have become highly integrated and interdependent on each other during the study period. We find that the proposed economic integration index is associated with several socio-economic indicators of Hong Kong in significant ways. We examine the dynamic relationships between the proposed Chinese mainland-Hong Kong Economic Integration Index and several key economic indicators (GDP, unemployment rate, Gini coefficient, and happiness indices) to demonstrate the predictive validity of the index. These key economic indicators are retrieved from different public databases. For example, GDP and unemployment rate data are from the Hong Kong Statistics and Census Department. The data on people’s ethnic identity and confidence in Hong Kong’s future are extracted from the Hong Kong University Public Opinion Programme. The happiness index is derived from the Centre for Public Policy Studies of Lingnan University. The data are organized as annual time series for the 1990 to 2016 period.
Table 1 reports the weights of the indicators for each sub-index and the weights of each sub-index in the overall integration index. The weights for each of the three sub-indices are almost one-third, meaning that they are equally important to the overall index.

Table 1. Components of Mainland-Hong Kong Index


Components of mainland-Hong Kong Index

 

I. 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 mainland

(10.7%)

 b) HK residents to mainland

(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 mainland

(11.8%)

 f) Domestic export to mainland

(10.7%)

 h) Re-export to mainland

(11.8%)

Flow of capital

 

 i) Inward position from mainland

(11.1%)

 j) Outward position to mainland

(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%)

Figure 1 presents the values of the three sub-indices during the 1990 to 2016 period. We see that in the early years the transmission channel, i.e., the trade and investment activities of the two sides, played an important role in the process of economic integration. In 2006, the driving forces, such as the CEPA agreement, facilitated the closer cooperation of the two economies.

Figure 1. Three Sub-indices of Economic Integration between Chinese Mainland and Hong Kong

The transmission channel sub-index drops a little bit between 2007 and 2009 due to the global financial crisis. However, the overall economic integration in Figure 2 still moved upward due to the introduction of several governmental policies such as the Individual Visit Scheme, which further enhanced the joint cooperation and economic integration.

Figure 2. The Overall Mainland-Hong Kong Index from 1990 to 2016

Figure 3 illustrates the trends in the economic integration index and several key indicators over the study period. For example, we can see that the trend in GDP matches the trend in economic integration.

Figure 3. Relationships between the Economic Integration Index and Key Economic and Social Indicators

GDP

Property price

Gini coefficient

Confidence of Hong Kong future

 

  • Implications

    This project is relevant to public policy in Hong Kong for two reasons. First, it is the first attempt to construct an economic integration index for the Chinese mainland and Hong Kong. An economic integration index is a useful method for measuring economic integration. It offers a quantifiable basis for policy discussion, which leads to better assessments of the economic and social consequences of economic integration. Regional institutions have recently started to develop, construct, and publish integration indices. For example, in early 2010 the European Union announced an annual EU Integration Index. In 2015, the Africa Development Bank published the Africa Regional Integration Index. The Pacific Economic Cooperation Council announced an index in 2013.
    There are several advantages to having a unified composite index as opposed to individual measurements of each aspect of economic integration. First, it provides a simple summary of the complex and elusive dimensions of economic activities. Second, it is easier for policymakers to interpret a single index than to identify the common trends across many separate indicators. Third, it facilitates communication with the public. Many fields study and measure different aspects of mainland-Hong Kong economic integration. Simply adapting existing international indices to the mainland-Hong Kong context would be misleading. It is therefore necessary to address the specific nature and features of economic integration in the mainland-Hong Kong context.
    In addition, although the literature on the nature and processes of economic integration between the mainland and Hong Kong is rich, only a few studies have discussed the consequences of integration. We fill this gap by providing empirical evidence of a long-term and causal relationship between the degree of economic integration and economic growth, the unemployment rate, property prices, income disparity, social mobility, satisfaction with the government, and ethnic identity. These are all important and acute economic, social, and political issues that are highly relevant to the public interest. This study’s conclusions should facilitate policy discussions that aim to solve outstanding issues and to develop plans for the long-term economic development of Hong Kong.

     

  • Annual Index
    • 2016 (Please see Figure 1-3 above)
    • 2017