In Chapter 2 the argument is put forward that an increasing share of China's commodity trade, tourist trade and loan syndication is handled through Hong Kong, despite the fact that China now has many more direct links with the rest of the world. This paradox is explained by a theory of intermediation, which predicts a surge in demand for intermediation as the economy is decentralized.

In this chapter, the entrepôt function of Hong Kong is examined in detail because of its empirical and theoretical importance. The theory of intermediation developed in Chapter 2 is elaborated upon and applied specifically to entrepôt trade. Alternative explanations of entrepôt trade, such as historical and cultural factors, monopoly power, and economic distortions are also examined and applied to the analysis of the China–Hong Kong connection. China's indirect trade through Hong Kong relative to its total trade is analysed in detail by country and commodity.

The function of Hong Kong as a centre of trans-shipment will also be analysed. However, the data on trans-shipment are not as detailed as those available for entrepôt trade. Hong Kong trading firms performing a purely brokerage role in China's direct trade also appear to be important, but this part of the analysis will be brief as the data are fragmentary. The role of Hong Kong as a gateway for tourists to China is covered in Chapter 2 and is not repeated here.