Hong Kong is China’s biggest economic success – and the mainland needs it more than ever

Hong Kong is wealthier than Germany, France and the UK. It can show China how to avoid its biggest economic challenge: the middle-income trap

If the riots in Hong Kong are troubling to the world, as they jolly well should be, they are even more troubling to China.

Hong Kong is tiny, with 7.5 million people, but has been stunningly successful. It is China’s second richest city in terms of income per head, with only the gambling hub of Macau (also a former colony) a bit ahead. Its nominal GDP of $50,000 (£40,000) per capita means that it is wealthier than Germany, France and the UK.

But that is just the start. The success of Hong Kong was the beacon inspiring Deng Xiaoping to reform China’s economic system. Those reforms, from 1978 onwards, have set the country on its march to become the world’s largest economy within the next decade. In 1980 the special economic zone of Shenzhen, just across from Hong Kong, was the first such experiment. It has transformed a collection of fishing villages into a metropolis that is now larger than Hong Kong itself. The model was then extended to other special zones, which in turn formed the basis for other reforms throughout mainland China.

It was the genius of Deng to change the system slowly and incrementally – I am in awe of what he achieved. But now China has become such an economic success story, does it still need the example of Hong Kong to point a way forward?

A political observation and an economic question. The observation is that the “one country, two systems” political accord under which Hong Kong was returned to China is an obvious model for the reintegration of Taiwan. So riots in Hong Kong have wider political resonance. And the question is: does China still need Hong Kong as a beacon for development?

There are two views. One, popular within some sections of the Chinese elite, is to say not really. Anyone who has visited Shanghai will be aware of the might of the country’s great commercial capital. Hong Kong has more glitter, but lacks the raw power. A nation of 1.4 billion people versus a city of 7.5 million? No contest.

This view would maintain that Hong Kong continues to be useful to China, because it remains a gateway both into and out of the mainland. But whatever it might be able to teach the rest of China, the lessons are either unnecessary or inappropriate.

The other view – which I admit I find more compelling – is that Hong Kong is as important as ever, for it points the way China might avoid “the middle-income trap”, in which a country reaches a middle-income level of economic development but fails to progress further. That is the core economic challenge China faces.

Many countries get stuck. In much of Latin America and in Russia, wealth per head rises to a certain level then fails to climb much further. Sometimes it goes backwards. Argentina being the sad example of that. The World Bank noted that only 13 of the 101 countries deemed to be middle-income countries in 1960 had achieved high-income levels in 2011.

Even Japan, certainly a high-income country and the third largest economy in the world, has slipped in the global league table. Some people in China are concerned that as the country ages it too will face the same challenges as Japan, the difference being that growth will top out at a much lower level of wealth per head. It will, as many commentators suggest, grow old before it becomes rich.

What Hong Kong does is to show that it can indeed make that leap. It has done so, and continues, despite headwinds, to push forward.

One of the most impressive things about Hong Kong is its healthcare, which is ranked number one in the world for its efficiency. It also has the longest life expectancy in the world. Or take higher education. On the QS rankings it has three universities in the top 50, the same as all mainland China. Given the disparity in population, that is stunning.

There are other measures one could take, just as there are other city states (including Singapore) that are sustaining very high levels of economic development. But I think that these achievements in health and education make the point that Hong Kong should remain an economic beacon for the rest of China – and, I would add, the rest of the world.