Under the US-Hong Kong Policy Act of 1992, the US treats Hong Kong, a semi-autonomous Chinese territory with its own legal and economic system, differently from mainland China in trade, commerce and other areas.
US President Donald Trump has begun stripping away that “special status” to punish China for moves to tighten its grip on the territory after a year of pro-democracy protests. At its most extreme, that could mean the global financial hub being treated the same as the rest of China — a seismic shift that could harm both economies at an already difficult time. China has already begun retaliating.
1. Is the special status gone?
It is going. On May 27, US Secretary of State Mike Pompeo notified the US Congress that the Trump administration no longer regarded Hong Kong as autonomous from mainland China.
On Monday, US Secretary of Commerce Wilbur Ross said that Hong Kong’s special status had therefore been revoked.
2. What has been the impact?
In an opening salvo, Pompeo announced visa restrictions against unspecified Chinese officials. China later did the same against Americans. Pompeo said the US would also cease selling defense equipment to Hong Kong, a largely symbolic act that would mostly affect the territory’s police and corrections forces.
The commerce department made it harder to export sensitive US technology to Hong Kong by suspending special treatment in areas including export license exceptions.
Hong Kong Chief Executive Carrie Lam (林鄭月娥) said the impact would be “minimal.”
More far-reaching measures could follow. The territory is still treated differently from mainland China when it comes to tariffs, for instance.
3. Why so slow?
It is up to Trump to decide how quickly he wants to move while he is also threatening consequences for China over its handling of COVID-19 and its repression of minorities in Xinjiang. Hurting China also carries additional risks for the US economy, including the US-China trade deal that Trump had considered one of his biggest achievements, which could affect his odds of winning re-election. Trump has made harsh comments, but has not threatened specific punishments for the Chinese government.
4. What is at stake for Hong Kong and China?
While Hong Kong remains a key gateway for China to the rest of the world, it matters far less to the country’s fortunes than it once did. Last year, 12 percent of China’s exports went to or through Hong Kong, down from 45 percent in 1992.
China is also far less reliant on inflows of foreign capital and expertise, and has made a much lower priority of making the yuan an international currency. Nonetheless, Hong Kong still matters. The territory’s open capital account and adherence to international standards of governance are unmatched anywhere in mainland China, and make it an important base for international banks and trading firms.
Revoking the special status would be “the nuclear option” and “the beginning of the death of Hong Kong as we know it,” University of London School of Oriental and African Studies China Institute director Steve Tsang (曾銳生) said.
5. And their financial markets?
One worst-case scenario: If the US treats Hong Kong no differently from the rest of China, why would ratings firms and investors not do the same? It is a question posed by Deutsche Bank, which noted that S&P Global Ratings has Hong Kong three notches above China, while Moody’s and Fitch both have Hong Kong one notch higher.
The risk is that China’s rating gets lowered in coming years and drags Hong Kong’s with it.
At the same time, equity index providers might take a fresh look at Hong Kong, which is currently in the MSCI World Index with other developed markets. China is in the MSCI Emerging Market Index, raising the question, whether Hong Kong should be treated the same as Shanghai and Shenzhen.
6. What about for the US?
It has its own reasons for not rocking the boat too much. Hong Kong, the only semi-democratic jurisdiction under Chinese rule, offers US companies a relatively safe way to access the Chinese market and employs a US dollar peg, linking it with the US financial system.
According to the US Congressional Research Service, the country’s largest trade surplus last year was with Hong Kong — US$36 billion. Hong Kong counted 278 US companies with regional headquarters and another 457 with offices in the territory.
Hong Kong’s first secretary of justice after the handover to China in 1997, Elsie Leung (梁愛詩), told the South China Morning Post in May that any damage would be mutual: “We are not just getting the benefits — it’s a free-trade arrangement which is good for both sides.”
7. How has China responded?
Despite the US action, Chinese lawmakers approved the national security legislation for Hong Kong anyway. The Chinese Ministry of Foreign Affairs has promised unspecified retaliation against what it terms foreign interference, insisting that Hong Kong is purely an internal affair.
Last year, China said it would sanction some US-based activist groups, including the National Endowment for Democracy, Human Rights Watch and Freedom House, and suspend port visits by US Navy ships to Hong Kong.
The Chinese state-owned Xinhua news agency has dismissed as “groundless” accusations about the loss of freedom or human rights issues in Hong Kong. It also said that the 2018 Human Freedom Index compiled by the Fraser Institute, a Canadian think tank, ranked Hong Kong at No. 3, well ahead of the US at No. 17.
8. And Hong Kong?
Lam has defended the national security legislation, as has Li Ka-shing (李嘉誠), Hong Kong’s richest tycoon. Lam also said it would be “totally unacceptable” for foreign legislatures to interfere in Hong Kong’s internal affairs, and that sanctions would only complicate the problems in the territory.
Lam was selected in 2017 by a committee of 1,200 political insiders overwhelmingly loyal to the government in Beijing. She has sought to reassure investors that Hong Kong still adheres to the rule of law and has an independent judiciary. She has also defended police actions.
9. Is this what the protesters have been seeking?
As a largely leaderless movement, the Hong Kong protests have made no official request for international assistance, while some prominent activists including Jimmy Lai (黎智英) and Joshua Wong (黃之鋒) called on Washington to hit China hard with sanctions, even to the point of revoking the territory’s special trading status.
Wong testified last year in the US Congress in favor of sanctions, seeking to put pressure on China. On the streets of Hong Kong, some protesters have made clear their interest in US support by waving US flags, singing the US national anthem and calling on Trump to “liberate” Hong Kong.
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