China’s new national security law threatens Hong Kong’s friendly business climate

On Thursday, China’s parliament, the National People’s Congress, announced that the central government would impose a national security law on the Hong Kong Special Administrative Region. The law would target behavior deemed antithetical to China’s sovereignty.

“National security is the bedrock underpinning the stability of a country. Safeguarding national security serves the fundamental interest of all Chinese,” Zhang Yesui, spokesman for the NPC, said at a news briefing on Thursday.

Although details of the law are still emerging, the proposal is seen as a threat to free speech and political expression in Hong Kong. Since protests over a proposed Extradition Law began last year, Beijing has increasingly viewed unrest in the region as “subversion” of its sovereignty.

Critics argue Beijing’s decision to implement the law itself—rather than leaving it to Hong Kong’s local government—also breaches the legislative divide at the core of the One Country, Two Systems principle that has allowed Hong Kong to flourish as a hub for international business.

“Hong Kong today stands as a model of free trade, strong governance, free flow of information and efficiency,” said Robert Grieves, chairman of the American Chamber of Commerce in Hong Kong. “No one wins if the foundation for Hong Kong’s role as a prime international business and financial center is eroded.”

“One Country, Two Systems” is the guiding principle devised when Hong Kong was returned to Chinese sovereignty in 1997. It maintains that Hong Kong will enjoy a “high degree of autonomy” from Beijing and be responsible for its own governance.

As such, Hong Kong has typically maintained a robust judiciary—as opposed to mainland China’s murky and opaque legal system—which has made the Special Administrative Region an appealing location for businesses seeking a gateway to China. The new national security law puts that position in jeopardy.

“What they’re doing completely undermines the legal system that makes Hong Kong an appealing place for business,” said Jeffrey Halley, senior market analyst Asia Pacific at OANDA. “What’s to stop Beijing from changing other laws? What’s to stop Beijing from changing commercial laws?”

Article 23

Hong Kong is actually long overdue to pass a national security law itself. Article 23 of the Basic Law, implemented in 1997, requires the local legislature to “enact laws on its own to prohibit any act of treason, secession, sedition, subversion against the Central People’s Government.”

The Hong Kong government’s first attempt to do so in 2003 was struck down by widespread protests. Citizens were concerned that the law would undermine their civil and human rights, creating an environment tantamount to that in mainland China where political persecution is rife.

Sales assistants stand behind a store gate during a protest inside International Finance Center Mall in Hong Kong in April. A new law proposed by Beijing is seen as a clampdown on the city’s simmering protests and longtime freedom, perhaps at the expense of its reputation as an international business hub.
Justin Chin/Bloomberg via Getty Images

The chief executive who attempted to introduce the bill, Tung Chee-hwa, resigned two years later, halfway through his second term. Successive governments avoided the hot-button topic, but the current administration, headed by Chief Executive Carrie Lam, has faced pressure from Beijing to push Article 23 legislation through.

Last week, Lam told reporters, “It has been almost 23 years since the handover and [the passing of Article 23] is still not achieved, which is disappointing.”

Beijing’s decision to impose the national security law itself—sidestepping Hong Kong’s government by inserting the clause into Annex III of the Basic Law—shows the central government has tired of the SAR government’s inability to pass the law, too.

“I’m concerned by the procedure being adopted,” said Philip Dykes, chairman of the Hong Kong Bar Association. “What seems to be proposed here is a ready-made law for Hong Kong without any input from the Hong Kong side and that is troubling because you don’t know what they’re going to put in.”

The proposed law will be presented to the National People’s Congress—China’s parliament, which is meeting this week—for approval. Once it is approved, Beijing’s legislature will have to fill in the details on what is to be outlawed and how it will be enforced. Nationalist tabloid Global Times reports the law could be completed within half a year.

U.S action

Last year, the U.S. passed the Hong Kong Human Rights and Democracy Act, which requires the State Department to review the SAR’s relative autonomy from Beijing annually. Hong Kong’s privileged trade status with the U.S. could be revoked if the city’s autonomy is found wanting.

China Holds Annual Two Sessions Meetings Amidst Global Coronavirus Pandemic
Security guards stand inside the Great Hall of the People at the National People’s Congress on May 22 in Beijing. At the meeting, Beijing announced a new national security law seen as clamping down on Hong Kong’s democratic freedoms and jeopardizing its reputation as a hospitable environment for international business.
Andrea Verdelli/Getty Images

Reaction Thursday from U.S. senators suggests the State Department will be under pressure to reach a negative conclusion. Senator Ted Cruz (R–T.X.) called the law an attempt to “end what is left of Hong Kong’s autonomy.”

Meanwhile, Chris Van Hollen (D–M.D.) and Pat Toomey (R–P.A.) said they would introduce a bill authorizing sanctions “on entities that violate China’s obligations to Hong Kong under the Sino-British Joint Declaration and the Basic Law.”

“We would impose penalties on individuals who are complicit in China’s illegal crackdown in Hong Kong,” Van Hollen said. The bill, which was prepared before Beijing made its move Thursday, would also “impose mandatory secondary sanctions on banks that do business with the entities in violation of the Basic Law.”

Stocks tumble

Last year, Hong Kong’s economy was pummeled by nine months of protests that closed roads, shops, schools and even the airport. In August last year, the government released $2.4 billion in stimulus to bolster the economy, but the SAR’s annual GDP contracted 1.2{4bae5313c1ffa697ce99995897f7847f1ebf3bca0fb7c37396bb602eb24323d3} sending Hong Kong into its first recession in a decade.

“The very real threat now, is the return of mass protests to the streets of Hong Kong, a downgrade in trade status with the U.S., and potentially an exit of large companies from the SAR,” Halley said.

Hong Kong citizens already are organizing more protests in opposition to Beijing’s ruling and markets are reacting to the news. Japan’s Nikkei 225 dipped 0.8{4bae5313c1ffa697ce99995897f7847f1ebf3bca0fb7c37396bb602eb24323d3} and Singapore’s Straits Times Index dropped 2.18{4bae5313c1ffa697ce99995897f7847f1ebf3bca0fb7c37396bb602eb24323d3} at the time of writing, while Hong Kong’s benchmark Hang Seng Index tumbled over 5{4bae5313c1ffa697ce99995897f7847f1ebf3bca0fb7c37396bb602eb24323d3} to its lowest level since 2015.

“It’s a time of great uncertainty when all eyes will be upon Hong Kong,” Dykes said. “But the way the law is being pushed through we should have answers very soon.”

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