Image: Hong Kong
Antony Dickson  /  AFP - Getty Images file
Pedestrians cross a road in Hong Kong's shopping district of Causeway Bay last year. Many newly affluent Chinese  cross over from the mainland to enjoy shopping in Hong Kong.
By John W. Schoen Senior Producer
msnbc.com
updated 10/20/2010 11:57:28 AM ET 2010-10-20T15:57:28

For centuries, Hong Kong has thrived as a trade gateway between China and the rest of the world. As China's booming export engine has raised the flow of capital in and out of the mainland, Hong Kong has risen with it.

But China's historic boom has led to increasing tensions with its trading partners, who have cried foul, arguing that an undervalued yuan and surging trade surpluses are proof that Beijing isn’t playing fair.

Now, Hong Kong's historic role as the go-between for East and West could become an important part in diffusing the increasingly contentious global economic battle known as the "currency wars."

Though the yuan cannot be freely traded on global currency markets, Beijing’s leaders have recently eased controls on currency flows between Hong Kong and the mainland.

Under pressure
With the economies of the developed world limping their way out of a deep recession, China is under strong pressure to relax its currency controls. Keeping a lid on the value of the yuan, trade partners complain, gives China an unfair advantage by making its products cheaper to export.

But Beijing also faces demands to relax controls on the expanding wealth of Chinese households and companies.

"The thing that's going to drive China to change its yuan policy is ultimately not going to be pressure from the West,” said Romnesh Lamba, head of market development for the Hong Kong Stock Exchange. “They will start changing it when they have no choice because their people will want to get some of that money out of China. That is going to be the greatest driver.”

China's leaders acknowledge that the government will need to relax currency controls over time. To ease the transition, they've begun easing controls between Hong Kong and the mainland, creating a kind of currency stepping-stone with the rest of the world.    

Hong Kong officials say they're ready, and well-positioned, to take on that role.

“We want to be the offshore center for (the yuan),” said John Tsang, Hong Kong’s Financial Secretary.

China’s booming economy and ambitious westward expansion has brought a flood of new capital. Foreign direct investment has surged, headed for $100 billion a year. That’s attracted a wave of new players to Hong Kong’s financial services industry.

“This year, we are seeing double the number of people coming into Hong Kong - and mostly in financially related jobs,” said Thompson.

A stepping stone
As the flow of foreign capital through Hong Kong to mainland China increases, the city's  financial services industry is also gearing up to help Chinese companies expand overseas. The hope is that mainland businesses see Hong Kong as a stepping stone to the rest of the financial world.

“They come to Hong Kong first because it is a place where they can they can learn all the rules and regulations,” said K.C. Kwok, a University of Hong Kong economist. “If they go straight to New York, they’re in the middle of nowhere. They don’t know the people, they don’t the language, they don’t know the customs, they don’t know the regulators … a lot of problems.”

Hong Kong’s finance industry is also hoping to help Western businesses solve problems when they try to get established or expand operations on the mainland. Competing in an economy dominated by state-owned enterprises calls for a skill-set many foreigners lack.

In its role as a money center, Hong Kong faces competition from Shanghai, the largest, fastest-growing financial hub on the mainland. Hong Kong officials and business leaders tend to play down the rivalry. They argue that Hong Kong offers businesses less government interference and a better-established set of laws to settle commercial disputes.  

“The laws (on the mainland) are inconsistent and inconsistently applied,” said Dickson Leung, a senior partner in Lehman Brown, an accounting firm.

Hong Kong also could play a role in political reforms on the mainland. According to the timetable spelled out when this former British colony reverted to Chinese rule in 1997, democratic reforms, including local government elections, are scheduled to begin in 2017.

Chinese officials describe the relationship between Hong Kong and the mainland as "one country, two systems." Most people expect that distinction to remain for some time, as Beijing's leaders pursue a form of capitalism in which the state, not the free market, allocates resources and capital.

As those two forms of capitalism continue to interact around the world, Hong Kong is hoping to remain at the middle of that intersection.

“This is the first time since 1850 that the global capitalist system is experiencing the rapid rise of a continent-sized, capitalist power that’s different from the dominant Anglo-American system of capitalism,” said Christopher McNally, a political economist at the East West Center in Honolulu. “Whatever China does now has an immediate impact on the global economy.”

Reporting for this series was done as part of the first China-United States Journalists Exchange, a field-study trip sponsored jointly by the East West Center, the Better Hong Kong Foundation and the All China Journalists Association.  The two-week trip included dozens of meetings with government, business and academic leaders in Hong Kong, Beijing, Chengdu and  areas damaged by the 2008 Sichuan earthquake.

Photos: China 2.0 - Economic transformation

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  1. China 2.0

    A guard stands sentry overlooking Tiananmen Square in Beijing. Three decades after the failed policies of Mao Zedong's Cultural Revolution brought economic collapse, China has caught up with Japan to become the world's second-largest economy. But as it enters a new phase of growth, the Chinese government faces a new set of challenges. (John Schoen / msnbc.com) Back to slideshow navigation
  2. The way West

    The Great Wall, one of the greatest engineering projects ever built, stretches west. China has embarked on a massive new infrastructure program designed to spread the breakneck economic growth of its coastal cities to inland and western regions. (John Schoen / msnbc.com) Back to slideshow navigation
  3. Panda power

    A growing panda consumes between 15 to 30 kilograms of bamboo every day in the Wolong National Nature Reserve in western Sichuan, a popular tourist attraction. The government is encouraging newly wealthy Chinese to travel more as part of a plan to boost domestic spending. (John Schoen / msnbc.com) Back to slideshow navigation
  4. Wealth gap

    Shoppers search for low prices at a Wal-Mart store in the New World Shopping Center in Beijing. China's red-hot economy has raised the living standards of urban households. But hundreds of millions of rural workers earn roughly $2 a day. (John Schoen / msnbc.com) Back to slideshow navigation
  5. Building the New China

    A laborer in Chengdu works on a new sewer system, part of a multibillion-dollar investment in new roads, railways, power and water lines. China's rapid industrialization has created a long list of environmental hazards that will be costly to clean up. (John Schoen / msnbc.com) Back to slideshow navigation
  6. Property wealth

    A farmer in rural Sichuan province tends to the fall harvest. Rural households recently were granted long-term leases on their property. But land reform has been plagued by corruption. (John Schoen / msnbc.com) Back to slideshow navigation
  7. The next generation

    Like many aspiring young Chinese, Gong Da Dian, 25, who goes by the English name "Dickens," moved to the city of Chengdu looking for a better life. But it hasn't been easy. He wants to go back to school and start a computer company "if I can get enough money.” (John Schoen / msnbc.com) Back to slideshow navigation
  8. Learning to innovate

    At Deyang Primary School No. 1, students assemble in light, airy rooms surrounding a quiet courtyard. Classes can include as many as 70 students. To create new technology and high-wage jobs, China is spending heavily on education. (John Schoen / msnbc.com) Back to slideshow navigation
  9. Designing their future

    A worker at an art company in western Sichuan province creates traditional Chinese paintings. The government is working to create jobs in rural areas, where employment opportunities are scarce. (John Schoen / msnbc.com) Back to slideshow navigation
  10. On the move

    Three years ago, He Yue moved to Chengdu in Sichuan province to find "a better opportunity." She now works as a travel agent and business is brisk. "Chinese people used to travel once a year," she said. "Now they travel two or three times a year." (John Schoen / msnbc.com) Back to slideshow navigation
  11. Recovery and rebuilding

    A photo is left as a memorial to victims of the Sichaun earthquake of 2008, which killed nearly 70,000 people and left millions homeless. The government committed more than $400 million to the relief and rebuilding effort. (John Schoen / msnbc.com) Back to slideshow navigation
  12. Road to Somewhere

    Though China's coastal cities are choked with traffic, some new highways like this one in Sichuan province are virtually empty. China's leaders are hoping an expanded network of roads, high-speed railways, airports and data links will spur growth in western and inland regions, where economic gains have lagged coastal cities. (John Schoen / msnbc.com) Back to slideshow navigation
  13. Slow, steady recovery

    You Zhoubao was at home when the Sichuan earthquake struck in 2008, collapsing his home and severing his left leg above the knee. Two years after the disaster, victims are still being treated at a local clinic sponsored by the Hong Kong Red Cross. (John Schoen / msnbc.com) Back to slideshow navigation
  14. Growth takes a toll

    Stockbroker Zai Shasha helps her customers navigate the burgeoning Chinese stock market. Rapid urban development has helped boost investment returns for her customers. But growth also has created "some sorrows," she said. "The traffic is bad, and the air is terrible." (John Schoen / msnbc.com) Back to slideshow navigation
  15. Relaxing by the river

    Visitors to Chengdu's riverwalk enjoy a little relief from a hot September day. People in this provincial capital proudly say they enjoy a "more relaxed" lifestyle than friends and family in China's bustling coastal cities. (John Schoen / msnbc.com) Back to slideshow navigation
  16. Hazy outlook

    Air pollution is a serious problem for Chinese cities, including western provincial capitals like Chengdu. Only 1 percent of the country’s 560 million urban resident breathe air considered safe by the European Union, according to the World Bank. (John Schoen / msnbc.com) Back to slideshow navigation
  17. Hong Kong: the capitol of capital

    Shoppers flock to Hong Kong from mainland China to spend some of their new wealth. The city also draws investors hoping to profit from heavy investment in the next phase of China's economic development. (John Schoen / msnbc.com) Back to slideshow navigation
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