Diskussionsbeiträge: Serie II, Sonderforschungsbereich 178 "Internationalisierung der Wirtschaft", Universität Konstanz 163
It is argued in this paper that China has invested heavily in the Hong Kong economy to build trust in its intentions to maintain the present course of economic policy. The investments have the character of hostages because their payoffs depend on a functioning Hong Kong economy. This increases the stake for the Chinese to keep their promise. The paper also provides considerable empirical support for the claim that the engagement of Chinese investors in Hong Kong had a significant effect on economic confidence and the Hong Kong stock market.