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National Security Law: Spelling the end of Hong Kong's economy?

Authors: Daniel Ho, Ishaan Poddar Region Head: Kathyrn Chong

Editor: Sakshi Sanganeria

Illustration by Jasmine


On 30 June 2020, Beijing passed the National Security Law (NSL) to crack down on the pro-democracy movement in Hong Kong after months of turmoil. The law encompasses a wide range of unprecedented reforms on internal security matters. In this paper, we analyse the economic impacts of the law on the country’s foreign businesses, trade and financial services industry.

1. The National Security Law

After slipping to second place on the 2020 Index of Economic Freedom, Hong Kong faces yet another setback that portends a trend of eroding liberties (The Heritage Foundation, 2020). After months of protest, Beijing passed the National Security Law (NSL) on 30 June 2020 to quell the unrest and regain stability, once again calling the “one country, two systems” model into question.

The law confers wide-ranging power to the Chinese central government to reign in on dissidents. The four crimes laid out are secession, subversion, terrorism and collusion. These terms are vague and broad in its application. Any organisation “imposing sanctions or blockade or engaging in other hostile activities against the Hong Kong Special Administrative Region” (Xinhua, 2020, p. 20) shall be liable for life imprisonment if the offence is deemed to be grave. Similarly, organizations charged with any of the four offences “shall be suspended or its license or business permit shall be revoked" (Xinhua, 2020, p. 22). The ambiguity poses significant challenges to businesses operating in Hong Kong.

While the pretext for NSL is dubious, its constitutional legitimacy is not. Under Article 23 of the Basic Law, Hong Kong’s mini-constitution, Hong Kong must enact its own national security law. However, such an unpopular law never came to pass. Twenty-three years later, China filled that void with the NSL, bypassing Hong Kong’s parliament altogether by listing it under Annex III of the Basic Law, a little-known legal loophole (Tsoi & Wai, 2020).

2. Challenges for businesses

Faced with such uncertainty amidst a depressed business climate, foreign companies are confronted with two choices, either adjust their operations radically or leave Hong Kong altogether. Big tech is one industry where this predicament is most pronounced. Article 43 gives the law enforcement the right to “search … premises … and electronic devices that may contain evidence of an offence” (Xinhua, 2020, p. 27) As the fear of privacy violations loom larger, tech giants such as Facebook, Twitter and Google have suspended requests for user data in Hong Kong (Liu & Chan, 2020). Working and operating in Hong Kong will become more complex. Management may have to renegotiate employment contracts to prevent employees from expressing their political views. Corporate treasuries should also rethink if they want to keep their excess cash balances with local banks as Hong Kong becomes a less stable and predictable environment (The Economist Intelligence Unit, 2020).

Fig 1 (Source: American Chamber of Commerce)

Fig 2 (Source: American Chamber of Commerce)

Those that cannot adapt are forced to leave. According to a survey done by the American Chamber of Commerce (2020), 35% of the business surveyed has considered moving capital/operations away from Hong Kong (see Fig 2). The spectre of intellectual property seizure has made it integral for business to encrypt its data and store it outside the territory. Naver, a South Korean Internet provider, just announced the relocation of its data centres to regional rival, Singapore. (Jung-a, Ruehl, & White, 2020) A large-scale exodus of foreign firms will reduce foreign investments in Hong Kong for data centres and network infrastructure (Bloomberg, 2020).

3. Trade Tensions

The NSL also has a more direct effect on Hong Kong’s economy which is underpinned by four key industries, financial services, tourism, trade and professional service which accounted for 57.3% of the country’s GDP in 2018 (The Government of the Hong Kong Special Administrative Region, 2020). The impact on trade has been the most obvious. Shortly after the enactment, the Trump administration removed Hong Kong’s special trading status and imposed sanctions on individuals or entities linked to the law. With Hong Kong’s autonomy compromised, the U.S. is quick to halt the export of sensitive military and technology products. The move might also expose Hong Kong to higher U.S. trade tariffs or worse embroil Hong Kong in the protracted US-China trade war (Zhang, 2020). Hong Kong’s economy is dominated by re-exports valued at HK$3,940,935 million in 2019 and the U.S. contributes 7.6% to the re-export market. (The Government of the Hong Kong Special Administrative Region, 2020) (see Fig 3 & 4). Raising the trade barrier between the two countries may hurt Hong Kong’s role as the main re-export hub to the U.S. However, the NSL is unlikely to cause a huge dent to trade and logistics as China remains Hong Kong’s biggest trading partner.

Fig 3 (Source: Trade and Industry Department of HK)

Fig 4 (Source: Trade and Industry Department of HK)

4. Financial Impact

Fig 5 (Source: HK Exchanges and Clearing Limited)

Contrary to the apocalyptic predictions, the impact of NSL on the financial sector was modest at best. In a public letter addressed to the Securities and Futures Commission, Mr Paul Chan, Financial Secretary of Hong Kong reassured investors that the NSL will have minimal impact on the operations of the financial markets (Chan, 2020). The initial panic stocked by the law was quickly replaced with a renewed exuberance to take on the additional market risk, leaving little impact on the month-end Hang Seng Composite Index (see Fig 5). Growth of IPOs continued steadily with 22 newly listed public companies in July alone (CEIC, 2020). The hub also has no problem attracting capital, with inflows through mainland exchange links ballooning to US$16.6 billion since early June, more than double a year ago (China Daily, 2020). All these before the much anticipated Ant Group listing in Hong Kong and Shanghai which may top Saudi Aramco’s record of US$29 billion as the largest IPO ever (The Straits Times, 2020).

5. Looking into the future

The dissonance between the political overtones and the economic reality of the NSL boils down two factors. Firstly, despite its criticisms, the NSL was a necessary step in re-establishing law and order which is antecedent to economic growth. The riots and chaos last year has costed Hong Kong dearly, with the GDP shrinking 2.9% in the last quarter alone (Joshua, 2020). Ironically, for all the purported rhetoric on democratic ideals, it was the Hong Kong people who suffered most under widespread property and infrastructural damage. With no more patience left to spare, Beijing acted blatantly but expectedly to secure its national interests. From its perspective, if stability can be maintained, Hong Kong’s appeal to foreign investors will only strengthen.

Secondly, Hong Kong still retains many of its strengths as a financial powerhouse. Proximity and access to the Chinese market are what sets it apart from its competitors. It is no coincidence that China launched the “Wealth Management Connect” initiative on 29 June, one day before the NSL came into effect. The initiative allows Hong Kong investors to buy financial products from the Greater Bay Area, which accounts for 12% of China’s GDP, and vice versa (Weizhen, 2020). China’s economic policies are inextricably tied with its foreign ones and it would be remiss to assume that China has not made provisions to mitigate the economic fallout caused by the NSL. Greater integration between the two markets will serve as a boost to the already colossal financial services industry. Hong Kong’s position as a financial hub will not be jeopardised so long as China has a vested interest in its success.

Although trade and foreign businesses are genuine causes for concern, the fear that Hong Kong’s will lose its status as the key financial gateway between the East and West is exaggerated. Much remains unknown about how the NSL will apply to businesses or if U.S. decisions will affect Hong Kong’s long-term growth. There is no doubt that democracy has backslid after the NSL, it is premature to say the same about the economy.


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