Hong Kong Security Law: How Will The Controversial Legislation Affect Business?

After China this week passed a new national security law for Hong Kong, private-sector leaders and analysts are divided over how it will impact business in the territory. The national security law broadens Beijing’s powers to investigate and prosecute suspected criminals in Hong Kong and criminalizes the acts of secession, subversion, terrorism, and collusion with foreign powers.

Hong Kong is one of the world’s most influential financial centers and is home to the Hong Kong Stock Exchange, Asia’s third-largest stock exchange in terms of market capitalization. The Index of Economic Freedom, an index created by the right-leaning Heritage Foundation, had ranked Hong Kong as the world’s freest economy in the world from 1995 to 2019.

Two of Hong Kong’s biggest banks — HSBC and Standard Chartered — have backed the law, as they believe it would restore social and economic stability in the territory after massive unrest last year due to a controversial extradition bill.

"We respect and support laws and regulations that will enable Hong Kong to recover and rebuild the economy and, at the same time, maintain the principle of 'One Country, Two Systems'," HSBC said in a Chinese social media post in support of the bill.

Hong Kong is considered a Western-friendly gateway to China, as it enjoys more political and economic freedom from the mainland, but protests last year hurt its image of stability, resulting in less foreign investment. According to a 2020 report from the United Nations Conference on Trade and Development, Hong Kong received $68.4 billion in Foreign Direct Investment in 2019, 34.4% less than in 2018.

As Chinese companies face more scrutiny on Wall Street, they have begun turning to Hong Kong to sell shares, meaning the territory will likely remain competitive as a financial hub. JD.com, a Chinese e-commerce retailer, recently raised $2.7 billion by selling shares for its secondary listing on the Hong Kong Stock Exchange.

“It is true that some Chinese companies are making moves and expanding in Hong Kong, and I think this trend will continue,” Nelson Wong, head of research at commercial real estate service company Jones Lang LaSalle, told the New York Times.

Some analysts believe the law could slowly undermine Hong Kong’s role as a global financial center.

“This doesn’t improve Hong Kong’s status as a financial center, to say the least, coming back from the protests and the virus over the last year,” said Ilan Solot, a currency strategist at London-based Brown Brothers Harriman. “If anything this is a downward slope for Hong Kong’s importance as a global financial hub.”

Rahul Sen, a London-based global leader for private banking at headhunter Boyden, said existing firms will not look at pulling out or reducing their operations in Hong Kong.

“Instead, they will quietly look at increasing their operations in Singapore, Switzerland and London,” Sen said.

“There will not be an immediate reaction, but slowly, over time — if this plays out that Hong Kong will indeed see dilution of its sovereignty over its tax, financial system, law and currency — then we will most definitely see reduced activity in financial services,” Sen said.

One poll by the American Chamber of Commerce suggested that 40% of businessmen would consider leaving the territory due to the law.

The law has prompted a strong reaction in the United States. Secretary of State Mike Pompeo called the legislation “an affront to all nations” and moved to end “controlled” defense exports to Hong Kong. In May, President Trump instructed his administration to “revoke Hong Kong’s preferential treatment as a separate customs and travel territory from the rest of China,” in response to the law.

Hong Kong leader Carrie Lam has backed the law, saying it fills a “gaping hole” in national security. Last year, protesters vandalized pro-Beijing symbols and establishments in Hong Kong, with Beijing seeking greater control over the territory to quash future unrest.