As Beijing forces a sweeping national security law on Hong Kong, the once semi-autonomous city's status as one of Asia's largest financial hubs is at risk.
Why it matters: Political freedoms and a strong rule of law helped make Hong Kong a thriving center for international banking and finance. But China's leaders may be betting that top firms in Hong Kong will trade some political freedoms for the economic prosperity Beijing can offer.
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 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 DC-based business intelligence firm.
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, the city could become a haven for financial criminals.
- "If people were to believe that this is what Hong Kong is to become, Hong Kong is officially dead to global investors," said Junheng Li, founder and CEO of JL Warren Capital, a New York-based equity research firm.
The big picture: In the medium term, Beijing's goal is 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 the city remains a "very free society."
- In the long term, the Chinese Communist Party is aiming to turn Shanghai and Shenzhen into alternative centers for international finance.
What to watch: 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 the 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.
- "With the new Hong Kong national security law, China has called the United States’ bluff," wrote Wilfred Chan for The Nation.