The Chinese government’s increasingly tight grip on Hong Kong is undermining the former British colony’s position as a regional financial hub, analysts and investors say.
In its latest move to clamp down on Hong Kong, which has been a center of resistance against the ruling Chinese Communist Party (CCP), the Chinese government last month introduced sweeping national security legislation that criminalizes protest and dissent.
While the target of the legislation might have been Hong Kong’s pro-democracy movement, which has been protesting in the streets of the territory for a year, it has also spooked a business sector already nervous about Beijing’s control.
Illustration: Constance Chou
Amid a broader move toward Singapore as a regional hub for multinational companies, money has been quietly leaving Hong Kong since late last year — although the territory’s monetary authority disputes this.
Now, investors are also worried about the reaction of the increasingly belligerent administration of US President Donald Trump, which could put tariffs on Hong Kong or sanction its rulers.
The Australian government is also considering its options, which include canceling a free-trade agreement struck in February and joining with other western countries in accepting refugees from Hong Kong — a move that could turn the territory’s decline in population into a full-blown exodus.
“We have expressed deep our concerns in relation to the security laws and their application in Hong Kong,” Australian Minister for Trade, Tourism and Investment Simon Birmingham said last week.
“We desperately wish to see Hong Kong retain its status as a location where under the ‘one country, two systems,’ the basic law is respected — it continues to be upheld by an independent judiciary, that we want to see those key principles retained because that’s what’s made Hong Kong such an important center for commerce and investment across our region,” Birmingham added.
Hong Kong has been a trade center almost since its foundation in 1841 as a base for British attacks on China to protect the opium trade. Throughout the 1800s and 1900s, its status as a tariff-free free port made it an attractive staging point for companies that wanted to do business with mainland China.
As China industrialized, the territory’s minimalist approach to corporate taxation coupled with the use of British common law to govern contracts helped turn it into the world’s sixth-biggest financial center, thrusting a series of office towers into the skies above its port.
When Britain handed Hong Kong back to China in 1997, the companies that called the territory home were promised the status quo would hold for another 50 years.
However, in the past few years, Beijing’s obvious impatience with the level of dissent in Hong Kong, its push to be able to extradite people from the territory and incidents including the kidnapping of bookshop owners selling anti-party tomes have sapped confidence in the rule of law in the territory.
The national security legislation, which makes it a crime punishable by long jail sentences to agitate against Chinese rule of Hong Kong, adds to those existing concerns.
Last month, rating agency Moody’s said the legislation was consistent with attempts by China to bring Hong Kong’s system of government closer to the mainland, already prompting it to downgrade the territory’s credit rating early this year.
In January, “we noted more significant constraints on the autonomy of Hong Kong’s institutions than previously thought, contributing to a less effective executive and legislative response to the population’s demands,” Moody’s said.
It warned that for Hong Kong’s rating to remain higher than China’s, the territory’s “distinctive institutional framework” would need to remain in place.
“While not our baseline assumption, indications that further convergence in executive, legislative and judicial institutions with those of the mainland over time was materially weakening Hong Kong’s macroeconomic and financial policy making institutions, [and] would have negative implications for economic and fiscal strength and the rating,” it said.
Money has already started leaving Hong Kong, with US$5 billion being withdrawn from the territory last year as Beijing pushed for the extradition bill, according to Bank of England figures.
The idea of “capital flight” has been rejected by the Hong Kong Monetary Authority (HKMA).
In December last year, HKMA Deputy Chief Executive Howard Lee (李達志) rejected this, saying that the territory’s “financial system is just too complex and sizeable to be fully understood from a particular perspective.”
Turmoil on the streets, Beijing’s crackdown and the COVID-19 pandemic have also taken a toll on Hong Kong’s stock market.
Its benchmark index, the Hang Seng, has been wallowing for two years, slumping from more than 32,000 points in February 2018 to around 26,000 this week.
Hong Kongers also appear to have been voting with their feet, as well as their wallets.
The territory’s population was already showing signs of leveling out, or even shrinking, before the legislation came into force.
It shrank by a more than 6,000 people between the middle of last year and the end of the year, leaving Hong Kong’s population at slightly above 7.5 million, according to Hong Kong’s census and statistics department.
The rate of population growth had been slowing for decades, falling from rates of close to 3 percent in the late 1990s, shortly after the UK handed the territory back to China in 1997, to less than 1 percent in the past few years.
“There’s been a brain drain under way for over a year now, since the protest movement started and the underlying democracy deficit here, the fact that the legislative council and the chief executive of Hong Kong are not democratically elected, that is the main grievance,” Hong Kong activist investor David Webb said on Saturday last week.
The CCP did not “understand the damage that they’re doing. They do want to have a international capital market on Chinese soil in Hong Kong because of course the mainland capital markets are behind a wall of capital controls, that you can’t freely move money in and out of the mainland,” Webb said.
“Hong Kong is their only option for that right now unless you were to set up a stock market in Macau. So they do need that, and I don’t think the mainland government appreciates how much these markets depend on free exchange of information and expressions of opinions, good or bad, about how the government is running the country,” he added.
Webb has been in Hong Kong for more than two decades, making a fortune picking stock market winners and a name for himself exposing corporate misconduct through his Web site.
He said that he was staying in Hong Kong, but the national security legislation would make his life more difficult.
“I will probably have to self-censor some of what I might have said because of the new laws,” Webb said.
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