The Impact of the Hong Kong National Security Law on the Private Sector

09.15.2020 | Catherine Tai, Cameron Moubray

The situation in Hong Kong has deteriorated dramatically since the passage of the National Security Law on June 30. In the past several months, we have seen impacts ranging from the disbandment of several prominent pro-democracy political groups, the firing of two faculties who are linked to democratic movements, to the arrest of politicians on charges of foreign collusion and the high profile arrest of media tycoon Jimmy Lai. The Washington Post reports that: “Those who have studied the new national security law say its intention is to completely remake Hong Kong, eroding its long-standing freedoms of the press, speech and assembly.”

In Hong Kong, the survival of the Party remains the overriding goal of the Chinese state to the exclusion of all else, and terror remains the Party’s most effective means of ensuring its survival. The National Security Law (NSL) is designed to impose rule by fear on Hong Kong, even at the cost of much of the city’s economic vitality.

Two narratives have emerged surrounding the National Security Law: one optimistic, supported by most city authorities and many local business leaders, supposing that little will change in practical terms for existing business. The other ranges from pessimistic to apocalyptic. Sadly, the latter is far likelier.

As of 2019, Hong Kong hosted 1,344 U.S. firms and 85,000 American residents. Some 300 US firms have their regional headquarters in Hong Kong. In total, there were 7,241 non-Chinese overseas companies in Hong Kong, the largest proportion of which were Japanese, followed by the U.S., United Kingdom and Singapore. In the short term, most of these businesses will stay, despite widespread misgivings about the course of Hong Kong. The long-term outlook, however, is grim.

Historically, overseas firms have rated Hong Kong’s favorable tax code as the most important factor in their decision to locate their offices there. These are unlikely to be affected by the NSL. However, “free flow of information” and “rule of law” were rated second and fourth-most important of 16 factors. Both of these are directly threatened by the NSL, whereas the one area mostly likely to be improved by the NSL – access to business opportunities on the mainland – rated a distant thirteenth.

As of 2019, there were 452 overseas information technology companies with offices in Hong Kong, and a further 107 overseas.

Hong Kong also faces an exodus of talent. Sources for S&P Global reported that, over the past year, there has been a noticeable trend towards emigration among job seekers in the Hong Kong financial sector. One recruitment agency reported that 50% of job seekers were open to moving outside of Hong Kong compared to 20% a year earlier. Likewise, an American Chamber of Commerce in Hong Kong survey found that slightly more than half of respondents were considering personally leaving Hong Kong. The United Kingdom has announced plans to offer up to three million Hong Kong residents a path to British citizenship, which has the potential to greatly accelerate such an outflow.

The NSL poses a serious threat to the finance sector. Some overseas banks fear being caught in a catch-22: if they attempt to comply with U.S. sanctions against Hong Kong or China, they could be subject to prosecution under the NSL. The Financial Times reports it could be construed as endangering national security if “there is proof that the U.S. government is instructing the banks and telling the banks that this way is going to put pressure on the Hong Kong government.” This uncertainty is by design, preventing the public and international observers from fully assessing the ramifications of the law even as the law is put into operation – replacing what had heretofore been a reassuringly solid, rules-based regulatory environment. Meanwhile, the very concrete imposition of U.S. sanctions marks the end of Hong Kong’s unique position as a gateway for American commerce.

The Communist Party has weathered the winds of change to reestablish itself as the ultimate authority in business, politics, media, and even social life in China. This has been happening for decades, beginning in October 1949. Then, with the Kuomintang in full retreat to Taiwan, Mao Zedong proclaimed the People’s Republic of China from Beijing. For many war-weary non-communists, the new regime was cause for cautious optimism. The Kuomintang was a rotting regime shot through with corruption. The PRC promised stability and good government.

In the space of a few short years, these illusions were brutally shattered. The Communist Party consolidated its rule over the mainland through ruthless terror. In 1952, more than 800 business owners committed suicide in Shanghai alone.

This trend is now spilling over to Hong Kong. Under Article 65 of the NSL, it is the central government, not the Hong Kong courts, which have the ultimate authority to interpret the law. The Party has finally overturned the rule of law, which afforded Hong Kong pride of place in international finance, in favor of its preferred norm: rule by law and arbitrary decree.