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By Jake van der Kamp  FT

However complex the workings of the Hong Kong economy, the mainspring that drives the mechanism is simple enough. It prospers by doing what China could, but – wisely or foolishly – will not do.

The pattern was established from the outset. In 1839, China banned opium traders from its coasts after a rise in drug addiction. Britain then seized Hong Kong for the purpose of drug trafficking along those coasts. Hong Kong would do what China had determined not to.

This beginning also introduced another aspect of the set-up. The authorities are not always diligent in rooting out dubious practices when commerce is concerned.

The mainspring has not always been able to drive the mechanism at its full potential. Hong Kong has few opportunities to exploit when China’s economy is allowed to operate on market principles.

At such times, it has generally been Shanghai that dominated, while Hong Kong reverted to being a racetrack funded by dockyard work and Pearl River transhipment.

But in 1949 the mainspring was released to work at full strength. While the rest of the world moved to an era of expanded trade and technology transfers, China looked inward with Communist party rule and missed an opportunity that it would only begin to seize again 30 years later.

Hong Kong’s transition to an industrial trading economy during this period was made possible only because it was a model that China shunned.

It was at first done with the simplest manufactured goods sold to the least demanding of markets, Africa, and then a rapid move up the quality ladder, most notably in the garment industry, to that most demanding of markets, the US.

The relationship was so unusual that less than 0.5 per cent of Hong Kong’s domestic exports went to China in the 1970s. Yet annual growth for the decade ran at more than 9 per cent. Doing what China would not do suited Hong Kong superbly.

Then, in the 1980s, everything changed again.

China awoke, its borders opened, and the people who had made Hong Kong an industrial success moved their manufacturing across that border so fast that whole districts changed from hives of activity to wasteland.

China was obviously better suited to export manufacturing. It always had been. China’s leaders just had not realised it.

What was Hong Kong to do next? Once more, it turned to doing what China would not.

The Beijing authorities heartily approved of becoming an industrial powerhouse but frowned on the financial arrangements this entailed. To this day, the capital account on the balance of payments remains closed, interest rates remain mandated by policy objectives and the currency is carefully managed.

But industry does not flourish if its financial roots are missing. Into the void stepped Hong Kong, with banking, accounting, insurance, investment and trade services. Since 1980, service exports have risen 25-fold to HK$720bn (US$93bn) a year, almost 45 per cent of gross domestic product.

City governments in China, particularly Shanghai’s, naturally view this with envy and also want to become service centres.

The only requirements they seem to recognise, however, are glass, steel and concrete for the office buildings. Hong Kong’s crucial strengths of the rule of law, preservation of civil liberties and open financial markets mystify them.

Hong Kong’s service industries only boom because China’s leaders have not grasped the nettle and made the necessary reforms. A truly open capital account is many years away. It threatens notions about the role of government that have evolved over millennia.

If it did happen, Hong Kong’s economy would probably adapt and come to rely more on fashion and the arts.

In the arts, particularly, Hong Kong is likely to have an advantage, as freedom of expression is likely to be one the last liberties fully granted in China. The mainspring of the mechanism would remain unchanged.

The only other activity likely to become prominent is that of government officials fretting and wringing their hands about where Hong Kong will go next. The keepers of the mainspring have little faith in it workings.

Jake van der Kamp is a Hong Kong-based columnist, author and investor