China's security law reins in private equity hopes in Hong Kong

The romance between private equity and Hong Kong may be over, before it even had a chance to begin.

The state of play: Hong Kong officials in February announced plans to introduce a new carried interest tax scheme that is expected to be one of the world's most generous. This came on top of Hong Kong's existing effort to implement a limited partnership fund regime — all of which could make the city a more viable alternative to the Cayman Islands, particularly for Asia-focused funds.

• This week, Beijing passed a new security law for Hong Kong that effectively eliminates many of the civil rights that local residents have long exercised. It also increases the likelihood that foreign nationals, including fund managers, could be arrested for vaguely defined offenses, and sent to mainland China to stand trial.
• As Axios' Bryan Walsh wrote yesterday, the law "casts doubt on the future of the place that has long branded itself as 'Asia's World City.'"

What's next: We're still awaiting specifics of Hong Kong's new carried interest tax treatment. In the meantime, expect rival jurisdictions like Singapore, and maybe even Japan, to wine and dine private equity executives.

The bottom line: Private equity isn't a full-fledged avatar for global business, but it may become one of the first to loudly signal whether the new security rules overwhelm the city's financial benefits.