For 25 years, Hong Kong topped an economic freedom index. This year, it fell off completely

March 4, 2021, 10:46 AM UTC

Our mission to make business better is fueled by readers like you. To enjoy unlimited access to our journalism, subscribe today.

On Thursday, the Heritage Foundation dropped Hong Kong from its annual “economic freedom” index—a list the Asian financial hub topped for 25 years—claiming the special administrative region has become politically indistinguishable from mainland China.

“No doubt both Hong Kong and Macau, as special administrative regions, enjoy economic policies that in many respects offer their citizens more economic freedom than is available to the average citizen of China,” the Washington, D.C.-based think tank said. “But developments in recent years have demonstrated unambiguously that those policies are ultimately controlled from Beijing.”

When Hong Kong returned to Chinese sovereignty in 1997, authorities in Hong Kong and Beijing agreed to abide by a “one country, two systems” model of operation that allowed Hong Kong to retain a “high degree of autonomy” from mainland China.

The systemic separation allowed international businesses to flourish in Hong Kong, where investors enjoyed robust rule of law and easy access to capital flows. But after widespread anti-government protests gripped the city in 2019, Beijing has grown much more assertive in governing the city.

In June 2020, the central government in Beijing promulgated a National Security Law in Hong Kong—bypassing the local legislature and, experts argued, violating the “one country, two systems” principle.

Analysts likewise worried Beijing’s heavy-handed interference undermined Hong Kong’s rule of law, which is a bedrock of the city’s appeal to international business. The Heritage Foundation’s decision to remove Hong Kong from its list affirms those fears to some degree.

Subscribe to Eastworld for weekly insight on what’s dominating business in Asia, delivered free to your inbox.

The Heritage Foundation says it compiles its index by ranking economies on 12 “quantifiable and qualifiable” factors, grouped into four categories: open markets, regulatory efficiency, government size, and rule of law.

The foundation says that “going forward, developments in Hong Kong…that are relevant to economic freedom will be considered in the context of China’s evaluation” on the list, meaning the two economies have been consolidated. China ranks 107th on the list of 178, between Uganda and Uzbekistan. The U.S. ranks No. 20, and Singapore is No. 1.

Singapore surpassed Hong Kong on the index in 2019, knocking Hong Kong from the top spot for the first time since 1995. The Heritage Foundation said Hong Kong’s position slipped that year because the protests had “dampened investment inflows.”

On Thursday, Hong Kong Finance Secretary Paul Chan told the South China Morning Post that he does “not agree that our economic policy has been taken over by the central government” and accused the Heritage Foundation of acting on “ideological inclination and political bias.”

“It seems to me the decision of excluding Hong Kong from the report is not justified,” Chan said. “The rule of law is very much respected here. The independent judiciary is working here.”

But the consequences of the National Security Law continue to play out in Hong Kong, as local authorities made their 100th arrest under the new rule book on Wednesday. The total includes 55 pro-democracy figures arrested for organizing an unofficial primary election last year to vet candidates for the local elections. On Sunday, 47 of the 55 were charged with “subverting state power”—a crime that carries a maximum sentence of life in prison.