How dependent is Hong Kong on China?

A common perception is that the Hong Kong economy is heavily dependent on Mainland China. Most trade through the Hong Kong port, the worlds' busiest by container volume, is re-exports to/from China; many Hong Kong residents have significant capital investments in China; and China is the main source of tourists to Hong Kong (13.6 million out of a total of 25.3 million in 2006). Just how dependent really is Hong Kong?

One way to examine the degree of links between two economies is to look for similarities in the business cycles. If one economy is heavily dependent on another, then we would expect to find that their business cycles move closely together. Petra Gerlach-Kristen wrote a paper for the Hong Kong Institute of Economics and Business Strategy that showed Hong Kong's business cycle becoming more synchronised with China over time (see http://www.hiebs.hku.hk/working_paper_updates/pdf/wp1115.pdf).

The figure below, from her paper, shows a measure of the output gap for Hong Kong (labelled y(HK) ) and mainland China (y). In recent years, the two are highly synchronised. The one exception is the Asian Financial Crisis in 1997/98. This is not suprising, since we would expect the relationship between Hong Kong and China to be uni-directional: mainland China influences Hong Kong, but Hong Kong is too small to have much effect on mainland China. In the case of 97/98, in addition to suffering from the Asian Crisis, Hong Kong was battered as the real estate bubble burst. Since this shock was confined to Hong Kong, we would not expect it to have any effect in mainland China. This is consistent with the common perception.