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Hong Kong security law could damage city's image as a financial center

by SuperiorInvest

Paul Chan, Hong Kong's top finance official, traveled to Paris, London, Frankfurt and Berlin last September to attract foreign investors. Last month he abolished taxes on purchases of real estate in Hong Kong by foreigners. And soon he will be hosting an international art exhibition, as well as conferences for big money funds and advisors to wealthy families.

Mr Chan's fast pace of work represents an attempt to shore up Hong Kong's role and image as Asia's financial centre. But that effort now clashes with a move by Beijing-appointed city leaders to further tighten the crackdown on remaining political freedoms in the city.

Hong Kong's legislature passed broadly worded security legislation on Tuesday. City leaders described the law as necessary to stop foreign interference in local politics, but critics characterized it as a comprehensive effort to muzzle dissent.

Under its top leader, Xi Jinping, China has exerted greater influence over Hong Kong's laws and prosecutors in the past four years. That has raised alarm bells for American and European companies that use the city and its open financial markets as a gateway to China. The mainland's own economic struggles, especially in the real estate sector, have further shaken confidence in Hong Kong as a place to invest money.

Many investors and companies have already begun moving their activities to Singapore, a rival that has the advantage of being an independent country 1,200 miles southwest of China.

“The new national security rules have eroded Hong Kong's distinctiveness for foreign companies and Chinese exporters; its comparative advantage is less clear than before for many companies,” said Mark Wu, director of the Fairbank Center for Chinese Studies at the Harvard University.

Shiu Sin-por, former head of the Hong Kong government's policy review agency and now a senior adviser to Beijing on Hong Kong issues, said the legislation would have no practical effect on trade or financial markets. “It might create an image problem, but it wouldn't make any difference to ordinary investors,” he said.

The crackdown coincides with an already difficult time for Hong Kong's economy and its financial sector. Its close ties to the mainland economy have been the city's greatest strength, and have now become a liability as China's economic activity slows. The city's stock market has lost almost half its value in three years. Dozens of mainland property developers have defaulted on bonds issued in Hong Kong, causing billions of dollars in losses to the city's investment funds and damaging the image of its bond market.

To make matters worse, interest rates have soared in Hong Kong, roughly in line with those in the United States. This is because the city's currency is closely linked to the dollar and is fully convertible into dollars, a monetary policy that is fundamental to the city's role as a global financial center. But high interest rates have hurt the city's huge real estate sector.

Hong Kong imposed lengthy quarantines during the pandemic, eroding its role as an air travel hub. Mainland Chinese cities, such as nearby Shenzhen, have built sprawling, ultra-modern container ports, erasing Hong Kong's lead in logistics.

Beijing has also introduced extensive duty-free shopping on the Chinese island of Hainan. That has eliminated much of the need for mainland buyers to cross the border into Hong Kong to avoid the mainland's combination of high import taxes and high sales taxes.

Banks and consulting firms have already started moving staff to Singapore for politically sensitive activities, such as assessing the performance of mainland China's economy. Hong Kong's new law also poses an additional challenge for the city's once vibrant media sector, which now faces the threat of being prosecuted for sedition for criticism of the government.

Hong Kong was a British territory from 1842 until 1997, when London returned it to mainland Chinese control. The city retains a legal system based on the British common law system.

Many mainland Chinese companies continue to sign contracts under Hong Kong law. The city's courts are perceived as free from political interference in trade matters, although critics warn that the Hong Kong government now appoints pro-Beijing judges.

Hong Kong's legal code since 1997, known as the Basic Law, requires the city to pass laws against sedition, secession, treason, subversion and theft of state secrets, as well as ban foreign political organizations carry out political activities in Hong Kong. City leaders attempted to pass the legislation in 2003, but backed down after a large street protest. Beijing then imposed its own national security legislation in 2020 after a wave of protests the previous year.

Regina Ip, a senior member of Hong Kong's cabinet, said the new law would allow leaders to focus on the economy. “We are 26 years behind and, most importantly, we must focus on driving the economy in the next phase of our development,” she said.

Leung Chun-ying, a senior adviser to Beijing's leaders and former chief executive of Hong Kong, the top government official, echoed Ms. Ip's view. “It's time for Hong Kong, not Beijing, to take action,” she said.

International criticism of the new law has been widespread and fierce.

“It could lead to significant limitations on freedom of expression, freedom of assembly and the right to dissent,” said Nicholas Burns, the US ambassador to China.

Hong Kong leaders maintained that the law was presented as more drastic than it really is. They said what Hong Kong was doing to limit foreign interference was less extensive than recent efforts by countries such as Singapore and Australia, two of the main destinations to which many companies and investors are moving.

Hong Kong law allows the judiciary a broad role in reviewing government decisions on national security cases, Leung said in an interview in Beijing.

Hong Kong businesspeople say many of the activities prohibited by the new legislation could already be considered illegal in some form under Beijing legislation in 2020. So they are watching to see how the new law is implemented.

“It's fair to say that most of the changes are already built in,” said Steve Vickers, chief executive of Steve Vickers and Associates, a regional corporate risk consulting firm in Hong Kong.

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