Hong Kong's economic future hangs in the balance

What's happening: Last week, the National People's Congress, China's rubber-stamp legislature, unveiled a new security law that will criminalize sedition, foreign influence, and secession in Hong Kong.

• The NPC bypassed Hong Kong's own chief executive and legislature to impose the law.
• It's not yet clear how the law will be implemented, but mainland China has used its own security laws to crush dissent and dismantle independent civil society.
• "It's hard to see how Hong Kong could remain the Asian financial center that it's become if China takes over," White House national security adviser Robert O'Brien said on May 24.

What's at stake: The new national security law is already creating uncertainty and could undermine other pillars of Hong Kong's status.

Uncertainty: The law will affect whether companies decide to expand their Hong Kong operations, to not open up a new office there at all, or even make plans to relocate to another Asian city.

• Or, firms "could potentially adjust to political uncertainty," said Kyle Sullivan, China practice lead at Crumpton Group, a D.C.-based business intelligence firm. "There’s no doubt that they have been doing that over the past year."

Arbitration: International businesses prefer to conduct arbitration in Hong Kong rather than mainland China because the city has an independent legal system and a strong tradition of transparency.

• If firms begin to see evidence that China's heavy security presence in Hong Kong is interfering with fair arbitration, they could take their arbitrations elsewhere.

Extradition: The U.S. signed an extradition treaty with Hong Kong — but not mainland China — in 1996.

• Hong Kong's independent judiciary provided confidence to the U.S. that its extradition requests would be for legitimate criminal suspects who would receive a fair trial, not political targets who would be summarily imprisoned.
• The intrusion of China's highly politicized and brutal security agencies into Hong Kong would likely change that.

If the U.S. curtails its extradition treaty with Hong Kong for these reasons, the city could become a haven for financial criminals, further eroding its status as a reliable financial hub.

• "Chinese executives who cook the books and steal money away from U.S. investors know that the worst that can happen to them is to never come back to the U.S., but they can continue to live large in China," said Junheng Li, founder and CEO of JL Warren Capital, a New York-based equity research firm.
• "If people were to believe that this is what Hong Kong is to become, Hong Kong is officially dead to global investors," she said.

In the medium term, Beijing's goal is to have its cake and eat it too — to tamp down on political freedoms in Hong Kong while convincing international investors that Hong Kong remains viable as a financial center.

• Hong Kong Chief Executive Carrie Lam, who is close to Beijing, has downplayed the new law, saying that the city remains a "very free society."
• In the long term, the Chinese Communist Party has aimed to turn Shanghai and Shenzhen into alternative centers for international finance.

Beijing may also be seeking to integrate Hong Kong into the Greater Bay Area, the huge mainland metropolis of Shenzhen and surrounding locales just across the border from Hong Kong, says Sullivan.

• "It’s not the death of Hong Kong yet, but there’s no question it’s on life support," said Sullivan.

What to watch: The ball is now in America's court. The U.S. has long granted special status to Hong Kong, where more than 1,300 U.S. companies have operations.

• Preferential trade agreements mean the U.S. and Hong Kong do $67 billion in bilateral trade each year.
• Secretary of State Mike Pompeo has said that erosion of Hong Kong's political and economic freedoms could cause the U.S. to revoke this special status.

But, but, but: It's possible Beijing's leaders may be counting on the reluctance of western countries, especially the U.S., to take any immediate actions that will further damage U.S. trade — along with companies already suffering from an extended trade war and the effects of the coronavirus shutdowns.

• In September, U.S. lawmakers passed legislation that threatens to take away Hong Kong's special status if China further erodes its freedoms.
• "With the new Hong Kong national security law, China has called the United States’ bluff," wrote Wilfred Chan for The Nation.