Hong Kong has played a vital role in China's economic development by providing capital and linking China to world markets. But the territory's most important function is to offer legal protection and financing to some of China's most talented entrepreneurs. This institutional function stems partly from the British colonial legacy of the rule of law. A more important reason, however, is the slowness of institutional reforms to protect and finance domestic private businesses. Consider the case of Lenovo, China's largest computer maker. After its move late last year to purchase International Business Machines' personal computer business, many hailed Lenovo as leading a new breed of world-class Chinese domestic company. The deal enhanced the view that China was fertile ground for entrepreneurial growth. McKinsey Quarterly even claimed that China had the "best of all possible models".

These business analysts missed one detail: Lenovo is a foreign company. Lenovo organised its operations in China as subsidiaries of its Hong Kong branch. As such, they are subject to laws pertaining to foreign direct investment rather than those for domestic business. In 2003, seven of Lenovo's Hong Kong subsidiaries were among China's 500 largest foreign operations.