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1978. Hong Kong pays for the water in advance in order to help finance the large-scale pumping investment necessary inside China. Around 30 per cent of water consumed in Hong Kong comes from China, and without this water it would not be possible for Hong Kong to maintain its present population in the absence of hauling water by sea, a cumbersome and expensive solution,
The special economic zones, especially Shenzhen, have been found useful by some Hong Kong industrialists who have found the process of moving up into less labor-intensive technology made easier if the existing machinery in Hong Kong is supplied to China, perhaps by means of a compensation deal, and this provides the opportunity to sell old, out-dated but still serviceable equipment at a profit, to build up credit with China, feel patriotic and helpful to the Motherland, and at the same time to modernize the Hong Kong firm so that it becomes more efficient and better equipped to compete with rivals-including of course China. It is believed that this has happened-it is a common rumor among the Hong Kong Chinese industrial community-but the scale is unknown; probably it is small, for otherwise the evidence would be over- whelmingly obvious, and it is not.
Three outstanding changes have occurred in the China-Hong Kong economic relationship since 1978: trade levels have increased, with Hong Kong gaining at a faster rate than China but less in absolute terms; China's balance of trade with Hong Kong has improved but the future could hold problems; and the traditional role of Hong Kong as an entrepot for China, rather than an indus- trial state in its own right, is re-emerging. All of these changes have been caused by alterations in or intensifications of Chinese economic policy since 1978, in particular the increased reliance on foreign trade as an instrument of growth, the increase in authority to some local areas (especially the southern provinces of Guangdong and Fujian) and firms, and the establishment of special economic
zones.'
The first major change in the relationship between the two, the rapid increase in foreign trade, is noticeably greater than that be- tween China and the world in general which accounts for Hong Kong moving from less than one per cent to three per cent of the China market between 1978 and 1980. In these years Chinese ex- ports to Hong Kong rose 2.1 times, but domestically produced Hong Kong goods exported to China rose 19.8 times while goods originating elsewhere, imported to Hong Kong and then re-exported