3. Does Hong Kong’s national security regime threaten its status as a financial hub?
Key Point Summary
Xi Jinping’s national security agenda poses new risks for businesses operating in Hong Kong. Legislation passed in the name of ‘national security’ is vaguely defined, broadly interpreted and all-encompassing, creating a restricted and uncertain business environment.
Among new risks emerging for businesses in Hong Kong are the undermining of the city’s once respected common law system, growing uncertainty over national security clauses in land lease contracts, and repercussions for businesses failing to stay within political red lines.
As businesses, capital and workers exit Hong Kong, the city’s status as an international financial centre is under threat. As differences between the city and the mainland become increasingly blurred, Hong Kong is likely to adapt to a new regional role as the financial hub for China’s growing ‘Greater Bay Area’.
Businesses must seek to rebalance their trade and investment activities in the region, mitigating against the growing legal risks in China and Hong Kong. Governments should monitor and advise businesses on risks emerging from legal changes in China and Hong Kong, while seeking meaningful accountability for those undermining the rule of law in Hong Kong.
Hong Kong’s new national security regime
President Xi Jinping repeated the term “security” ninety one times in his keynote speech at last year’s 20th National Congress of the Chinese Communist Party (CCP). Xi’s speech indicated a drastic shift in Beijing’s political priorities. Gone is the era of “reform and openness,” as heralded by Deng Xiaoping in the early 1980s. In its place, a new national security-based agenda has emerged.
In Hong Kong, Xi’s national security agenda is seen most prominently in the direct imposition of the Hong Kong National Security Law (NSL) in June 2020. While in other countries “national security” concerns typically comprise acts such as terrorism and extremism, the CCP’s expansive definition also encompasses “non-traditional” fields such as economy, culture and the information space. As this concept is vaguely defined yet all-encompassing, every aspect of Hong Kong society can come under its jurisdiction and be easily implicated. This includes finance, economic activities and all legal proceedings, whether civil or criminal.
What are the new risks facing businesses in Hong Kong?
Businesses are not left unscathed by Hong Kong’s new national security regime. Once valued by international firms for its open economy and upstanding legal system, today Hong Kong offers businesses very different prospects. Understanding the business risks posed by these changes will prove crucial for companies and individuals hoping to continue their operations in Hong Kong in this new era.
Eroding rule of law
The implementation of the NSL in Hong Kong marks a significant departure from a judiciary committed to fair trials, common law, and international human rights jurisprudence. While Hong Kong’s Court of Final Appeal previously affirmed separation of powers within the legal system, the current Chief Justice has since declined to guarantee its existence.
Notably, when businesses encounter legal issues, Article 47 of the NSL gives the government the overarching authority to intervene in both civil and criminal court proceedings. Once this Article is invoked, the decision is not amenable to judicial review, and overrides any local legislation and court decisions.
As a result, not only do businesses in Hong Kong face an increased risk of entanglement within shifting legal jurisdictions, but also trials and rulings from a judiciary that prioritises Beijing’s political aims. Companies entering into contracts with Chinese counterparts can no longer assume that Hong Kong’s courts will judge their case impartially should a dispute arise. The NSL has eroded the firewall that existed between Hong Kong’s independent judiciary and the Chinese state, with increasing resemblance to the Party-controlled courts of the mainland.
Growing legal uncertainty
One specific area where individuals and companies face uncertainty is within land leases. The Hong Kong government’s Lands Department has inserted a national security clause into tender documents, which effectively enables the government to disqualify land bidders on national security grounds and terminate short term leases, with no judicial remedy. Foreign buyers would be well-advised to take this factor into account. A determination made on these grounds could result in the loss of hundreds of millions worth in investments under the guise of national security, while provisions under the NSL could allow such laws to be applied retrospectively.
The legal uncertainties reach even further. China’s anti-sanctions law empowers Beijing to seize assets from entities that implement sanctions against China or refuse to comply with Beijing’s countermeasures. This law aims to deter economic sanctions similar to those implemented by democratic powers against Russia over Ukraine, in the event of military action against Taiwan.
In this scenario, firms with a large footprint in both China and the West may find themselves caught between requests by democratic governments to freeze Chinese state linked assets, and threats of countermeasures from Beijing should they do so. Along with new updates to an espionage law and Xi’s aim to reduce Chinese dependence on foreign technology by 2025, these legal obstacles may place companies’ assets in the midst of political crossfire.
Political red lines
As a whole, Beijing is sending a clear message to individuals and companies operating in Hong Kong: stay within the political red lines or risk severe financial and legal repercussions. The fate of Jack Ma, once the poster boy for a new wave of successful Chinese tech entrepreneurs, illustrates this case. Following comments Ma made criticising government regulators in November 2020, authorities halted the IPO of Ma’s Ant Group on the Hong Kong and Shanghai stock exchanges, forcing its break up and causing Ma to flee into exile. Similarly, in June 2021, Next Media, one of Hong Kong’s most successful media businesses, had its assets frozen on the demand of Hong Kong’s Secretary for Security. This act forced Next Media to cease operations within days. Beyond the high profile cases, small businesses deemed politically out of line by the government are facing constant official harassment and persecution, with some shutting down as a result.
Of course, the added challenge is that the supposed ‘red lines’ are unclear and constantly shifting. Hong Kong’s NSL is vaguely defined and broadly interpreted, while minor civil infractions in one area can become the basis for further criminal charges. This can be seen in the case against Jimmy Lai, owner of Hong Kong’s then leading independent newspaper outlet, Apple Daily. Lai was recently sentenced to more than 5 years imprisonment in what was essentially a civil dispute over a land lease between his company and the Hong Kong government. However, the wide ranging NSL and the pro-prosecution judiciary ensured that the civil land law dispute was elevated into a criminal trial. Navigating these changing red lines will be a major challenge for any business operating in Hong Kong.
Can Hong Kong remain a financial hub?
As new legal risks emerge for businesses in the current political environment, some have argued that it is time to rethink Hong Kong’s status as an international financial centre. Due to these risks, many Chinese as well as international investors are choosing to relocate their assets and companies, leading to a capital flight out of China and Hong Kong. Unlike before, wealthy mainlanders are no longer putting their private wealth in Hong Kong, but are instead sending their assets and their families to Singapore and beyond, with private wealth management firms following them. A number of American and European companies are looking to reduce their presence in the city by moving their senior posts out of Hong Kong.
This capital flight has corresponded with a brain drain from the city. Hong Kong’s financial regulator admitted that it was suffering from a 12% loss of its staff in 2021, while more than 150,000 Hong Kongers have moved to the UK since the introduction of the BN(O) resettlement scheme. Unless this trend changes, it will have a negative impact on Hong Kong’s future as a leading financial and business centre, as capital and talent flow out of the city.
Writing off Hong Kong’s status as an international hub moving forward would be simplistic. The reality is that its direction is being re-oriented. As Hong Kong’s reliance upon China deepens, its status is shifting from a global financial centre to a regional role focused on the Greater Bay Area (GBA) region. The GBA covers China's prosperous Guangdong region and together has a GDP worth US$ 2 trillion – roughly the same size as South Korea’s entire economy.
Mainland banks and financial institutions have already been playing an increasingly dominant role in Hong Kong in the past decade. Measures such as removing the hard border between Shenzhen and Hong Kong could see even more mainland businesses and professionals relocating to Hong Kong. Although Beijing intends to reduce dependence on US dollar transactions in the long run, the slow internationalisation of the RMB means that the USD-HKD peg will remain as it is for the foreseeable future.
Recommendations
Doing business in Hong Kong today carries far greater legal and political risks than ever before. Hong Kong’s new national security regime does not just have ramifications for political activists and civil society groups, but restricts actions of all those operating in the city. As Hong Kong begins to lose status as an international financial hub founded on the rule of law, businesses and governments must thoroughly assess and mitigate against these risks.
Businesses should avoid over-reliance on Hong Kong and China based trade and investment activities. Instead, businesses should diversify to new markets in the region to mitigate against growing legal risks.
Governments should publish and regularly update business risk advisories for Hong Kong and China. This is particularly important as new laws develop, such as the proposed new national security legislation for Hong Kong to target misinformation, activities of foreign organisations and internet controls.
Democratic countries should actively monitor individuals responsible for the administration of law and justice, utilising mechanisms through the United Nations. Judges in common law jurisdictions should resign from Hong Kong’s Court of Final Appeal to avoid legitimising its eroded independence under the NSL.