Can Hong Kong Survive as Asia’s Financial Hub?

06 Jul 2020

HK flagHong Kong island was ceded to Britain after China’s defeat in the first opium war in the 19th century. The United Kingdom agreed to return Hong Kong to China in 1997 under the “One Country Two Principles” system - a deal initially signed by then Prime Minister, Margaret Thatcher. Under the joint declaration, China guaranteed that all freedoms would remain for at least 50 years, and Hong Kong was to have its own Government and legislature composed of the people of Hong Kong. 

The one country, two principles system, was due to expire on July 1st, 2027.

What has happened since then?

China did not want to wait that long and broke the guarantee. 

On July 1st, 2020, China passed a national security law (on the anniversary of Britain’s handover to China), making “activities deemed subversive” punishable by (up to life) imprisonment. This is seen as directly targeting protesters who have been demonstrating against China’s growing influence throughout the past year. 

The Hong Kong that we know as a leading Asian financial hub is going to change in many ways, and there are growing concerns regarding the new law which could put this status under serious threat. Companies may be incentivised to move away from the city all together. They may even see a brain-drain of talented people who don’t want the restrictions that Beijing will impose. 

For Beijing, a rising wealthy superpower, this is all meant as a show of confidence. But it could also be seen… as the opposite.

More than 1,300 American businesses operate in Hong Kong, and 80% of those surveyed in the territory by the American Chamber of Commerce said they were concerned about China’s new security law – citing “concern for basic civil liberties and mistrust in the current Government.”

Hong Kong’s economic stability was already in question before the announcement of the new security law with the 2019 pro-democracy protests which effectively shut down commerce. That paired with an atmosphere of eroding freedom, sent the economy into a full-blown recession. In the 1990’s, Hong Kong accounted for 27% of the Chinese economy, now however… it stands at less than 3%.

How has Britain responded to the new law?

Prime Minister, Boris Johnson, reacted by saying that he would introduce an escape route for those who are British nationals overseas (BNO), along with their dependents. This would allow them to apply for visas to live and work in the UK, as well as applying for citizenship. And it seems thousands are already hoping to take him up on the offer - as he has proven to have honored his word.

PM Johnson, speaking in the House of Commons stated: “We stand for rules and obligations. That is the basis for our international relations and the enactment and imposition of this national security law constitutes a clear and serious breach of its treaty with Britain and the signing of the joint declaration. And it violates Hong Kong’s high degree of autonomy and is in direct conflict with Hong Kong basic law.” 

Minister, Simon Clarke said, “I will do whatever is required.” Referencing his added support for the people of Hong Kong.

How did China respond to Britain?

China quickly opposed Britain and responded by letting them know that Hong Kong reserves the right to take corresponding measures if the UK pushes forward with its plan to give 3 million Hong Kong residents an “escape route” and the right to settle in the UK. The Chinese Embassy in the UK also stated that, such a move would be in breach of international law, while urging Britain to respect their position and refrain from interfering in their decisions. 

What does this mean for China and its investors?

After word of this new law broke, along with Britain - Australia, Japan and Taiwan also agreed to offer support to the people of Hong Kong. Chiu Chui-Cheng, Deputy Head of Taiwan's Affairs Council, described the new law as "The most outrageous in history." While China condemned the Help of Taiwan, the citizens of Taiwan were subsequently asked to avoid visits to mainland China, Hong Kong and Macau. 

China’s megacities have seen explosive growth in the last few decades. Shanghai’s became a major business hub attracting multinationals from around the world and Hong Kong’s seamless interface with the West, not to mention its massive port, make it an extremely easy place to do business with. And although multinational companies now run out of both mainland China and Hong Kong, international businesses and investors trust Hong Kong’s legal system. 

The city also remains a lifeline to cash from the Western world. With most of the foreign direct investment flowing in and out of China, doing so through the city. Even Chinese companies prefer Hong Kong when it comes to raising and borrowing money. But these key features now appear to be at risk.

Under the terms of the new national security law, experts foresee a deep globalised Hong Kong made up of eroding institutions and freedoms, with a muzzled capital market and an ever-growing dependence on Beijing. An outcome that may not seem all that unpalatable to multinational firms that have already been forced to do business with the Chinese Government in the mainland for decades

Could this mean more companies moving from China to Wall Street?

Trade between the US and Hong Kong was around 26 billion in 2019 and US Secretary of State, Michael Pompeo announced that the Trump administration could no longer certify Hong Kong’s political autonomy from China. This opened the doors for possible tariffs on imports from Hong Kong, visa restrictions or asset freezes for top officials. Before this announcement, China had already warned of retaliation if the US continued to meddle in its affairs. 

If Hong Kong continues with its plans, it could become just like any other Chinese city, and for those companies where data is incredibly important, such as finance, business intelligence etc. a lot of those operations may end up going to Singapore which is seen as untainted  by the threat of the latest Chinese national security laws.

It seems therefore, Hong Kong is losing its position as a guaranteed safe haven for western businesspeople operating in the greater China area. But Hong Kong still has an independent judiciary, and the erosion of its judicial independence would likely be a slow process. Erosion is something businesses can live with unless something dramatic happens which triggers a change in their assessment - so they will continue to soldier on as long as they can. After all, Hong Kong still believes itself to be far better than Shanghai or Chongqing. 

It is not all bad news for Hong Kong, at least in the short-term anyway. It could mean more money from Chinese companies retreating from Asia to Wall Street. But in the immediate short-term, Hong Kong may well benefit. 

In June 2020, online retailer JD.com, became the latest major Chinese firm to carry out a secondary listing in Hong Kong. That meant a fresh injection of cash and potentially an insurance policy for JD.com if the US does end up de-listing Chinese companies from the NYSE. Hong Kong also has the backing of HSBC and Standard Chartered, two of Hong Kong’s largest banks. 

Top Global Financial Centers of 2020

1.    New York
2.    London
3.    Tokyo
4.    Shanghai
5.    Singapore
6.    Hong Kong (Held 3rd place in Sept 2019)
7.    Beijing
8.    San Francisco
9.    Geneva
10.    Los Angeles

The European Parliament voted on June 19th to take China to the International Court of Justice in the Hague, over the new law. Yet the World Trade Organisation still plans to categorise Hong Kong as an independent customs territory. 

The battle over Hong Kong’s autonomy is just the latest flashpoint in what some analysts say, could become a new cold war. One that pits the US against China. But even with America’s strategic advantage in this trade war battle, and widespread condemnation of China for passing the new law in secret, experts warn, both sides have something to lose if the US continues to take overly aggressive steps against Hong Kong.