Hong Kong’s status as one of the world’s leading financial centers appears to be under threat.
Beijing unanimously approved a new national security law for the territory, which some experts warn has the potential to erode structures that give the region great privileges on the international stage.
The law prohibits sedition, secession and treason against China, crimes that can mean life in prison.
“China constantly uses national security as a reason to say, ‘I don’t have to abide by any rule. I can arrest you without explanation,'” said Robert Koepp, founder and director of Geoeconomix.
China’s prime minister says the law is designed to protect the long-term prosperity of the city, which has been affected by the protests since 2019, but critics fear that China’s move to tighten its control would jeopardize the freedoms that China guaranteed to Hong Kong for 50 years when the United Kingdom handed it over in 1997.
“We did not expect this large-scale frontal attack,” said Hong Kong lawmaker Claudia Mo. “Beijing obviously thinks this will be a coup de grace for the Hong Kong democratic movement … This is the end of Hong Kong according to What we know.”
Because right now?
With the West largely distracted by the global coronavirus pandemic, and superpowers like the United States already shrinking under increasingly isolationist policies, experts say the timing of national security law makes perfect sense to China.
Also at stake? A need to shore up support at home. China’s handling of the outbreak in Wuhan sparked anger not only from the international community but also from some citizens of mainland China.
Also, China’s economy is in bad shape. It took a big hit from Covid-19, but even before that, growth slowed. 2020 marked the first time in decades that the Communist Party chose not to set a growth target for the economy.
Some analysts say Beijing needed a quick fix to repair its image at home. Getting Hong Kong in line is a very popular mission among the general population, one that could help distract you from other problems.
Perhaps the most important factor at stake is that China simply does not need Hong Kong as much as it used to.
In the 1990s, Hong Kong represented 27% of the Chinese economy. Now, it represents less than 3%.
Chinese megacities like Shenzhen, Beijing, Shanghai, Chongqing and Guangzhou have experienced explosive growth since the 1990s. Instead of having a central city that attracts foreign investment and workers, China now has several, and without the bureaucracy that comes with it. Hong Kong special status.
That means that the Chinese government has less and less incentive to keep Hong Kong happy and financially independent.
Why Hong Kong still matters
China has been relying less and less on Hong Kong for years. Shanghai has become a major business hub, attracting multinationals from around the world. And Shenzhen, a metropolis north of Hong Kong, has become a massive, productive manufacturing powerhouse that helped make China the world’s largest exporter.
But Hong Kong’s status as one of Asia’s most prominent financial centers will be hard to beat. The city’s smooth interface with the West, not to mention its massive port, makes it a very easy place to do business with global investors.
For much of its history, Hong Kong has functioned as a key east-west conduit for global finance and trade, thanks in large part to its independent judiciary and its regulators who guarantee an irrational rule of law.
Although multinational companies are now left without mainland China and Hong Kong, international companies and investors trust Hong Kong’s legal system. Operating outside of mainland China is a more complicated proposition with its authoritarian legal system and strict capital controls.
So even though Hong Kong doesn’t contribute as much to China’s annual GDP as it once did, it’s still China’s lifeline to collect from the West.
Most of the foreign direct investment that flows into and out of China passes through Hong Kong.
Chinese companies also prefer Hong Kong when it comes to raising and borrowing money. Take a look at this chart comparing the amount of cash raised by companies on the continent that go public on major stock exchanges. The Hong Kong exchange dominates.
The city is so popular when it comes to helping continental businesses borrow cash through bonds. or loans.
Hong Kong is also home to private banking, fintech, and derivatives trading. But perhaps the biggest difference between Beijing and Hong Kong is access to the global currency market.
China has used Hong Kong’s financial institutions to help shore up its national currency. In June, Chief Executive Carrie Lam presented a new proposal to transform the city into a more prominent offshore hub for the Chinese yuan, part of a broader initiative to further integrate the city with mainland China’s financial markets.
Some experts say the city’s biggest advantage is its position as a major offshore financing center for US dollars.
The Hong Kong dollar has been pegged to the dollar since 1983, which has been key to ensuring financial stability. Investors generally feel safe leaving their cash in Hong Kong and trading in the local Hong Kong currency, because it is easily convertible to US dollars.
This is a large part of what propelled Hong Kong to become the main financial center that it is today. And it is, according to analysts, one of his most important contributions to China.
“What has changed for Hong Kong over the years is that it is a much smaller part of China’s GDP today than it was 20 years ago,” said Ravi Agrawal, managing editor of Foreign Policy. “But even so, it remains a vital component, as it provides dollar financing for many of the large Chinese companies that use Hong Kong for that very reason. Therefore, any pressure from the United States could hurt.”
Some observers from China say US threats to change Hong Kong’s special privileges could include limiting the city’s access to US dollars, a move that could trigger a domino effect, starting with capital flight and culminating in a collapse. of the currency and large losses for investors.
But this result is part of the “nuclear scenario,” one that analysts believe is highly unlikely.
A financial center in danger
Hong Kong’s economic stability was in question even before the announcement of the new national security law.
Hong Kong had already fallen from third to sixth place from September 2019 to March 2020 in a biannual ranking of the world’s global financial centers, surpassed by Tokyo, Shanghai and Singapore, and with Beijing behind number seven.
The 2019 pro-democracy protests effectively closed trade. No one went out, shops and restaurants closed early, and tourism took a big hit. That, along with an eroding atmosphere of freedom, sent the territory’s economy into recession in 2019.
The new legislation, which prohibits subversion of state power, terrorist activities and foreign interference, has only served to further fuel unrest across the territory.
More than 1,300 US companies operate in Hong Kong, and more than 80% of US companies in the territory surveyed by the United States Chamber of Commerce said they are concerned about China’s move to enact the new national security law, citing fears about the potential impact on “basic civil liberties”.
At stake are also the important privileges granted to Hong Kong under the 1992 Policy Act between the United States and Hong Kong. Trade between the United States and Hong Kong was approximately $ 66 billion in 2019.
The Australian National Bank said in a note on May 28 that the United States has opened “the door to possible import tariffs from Hong Kong, visa restrictions or asset freezes for senior officials.”
The Trump administration has already begun taking action. Secretary of State Mike Pompeo announced new visa restrictions on Friday for Chinese officials responsible for restricting freedoms in Hong Kong.
However, the United States has the greatest potential to inflict pain if it chooses to restrict imports of sensitive technology to Hong Kong-based companies.
“Hong Kong will become a Chinese city,” said Koepp. “For those companies that have interests where data is very important, let’s say finance, say anything related to drugs or business information, business intelligence. Well, many of those operations could end up going to a place like Singapore, which is considered uncontaminated. ” because of the threat of Chinese national security laws. “